Drop in Loyalty and Impact of Premiums Should Concern Bankers

According to the 2010 U.S. Retail Bank New Account Study released by J.D. Power yesterday, large banks captured a higher proportion of prospective customers compared with regional banks. Based on responses from 3,770 consumers who shopped for a new banking account or a new financial institution during the past 12 months, larger banks acquired 70 percent of prospective shoppers while regional banks secured only 59 percent of these shoppers.

According to the study, the higher capture rate by large national banks was significantly impacted by the use of promotional gifts and attractive short-term interest rates, with 24 percent of those opening an account with a large national bank saying that was the primary reason for selecting the bank (compared to only 13 percent for regional bank customers).


What should be concerning for those banks that are using premiums or short-term rates as an incentive for new customer acquisition is that almost one quarter of these customers say they "definitely will" or "probably will" switch banks again in the next 12 months. This was almost twice as likely than for those customers who opened an account for another reason (convenience, referral, safety, etc.).

"While offering a promotional gift, cash award or attractive short-term interest rate may lead to increased selection by customers, it is important to keep in mind that the increased selection rate doesn't necessarily lead to an increased retention rate," said Michael Beird, director of the banking practice at J.D. Power and Associates. "The short-term boost in acquiring customers can become a retention challenge in the long run."

The study also found that when customers decided to avoid a particular financial institution, brand image was the key driver, with larger banks experiencing the highest avoidance rate. This correlates with the J.D. Power and Associates 2010 U.S. Retail Banking Satisfaction Study released last month that found that the likelihood of switching was significantly higher for customers of larger banks as opposed to smaller banks (only 32 percent would definitely not switch from a larger banks compared to 41 percent for smaller banks).

These two studies should be a bit of a wake-up call to banks interested in acquiring new customers. Not only is it more important than ever to improve the customer experience and customer advocacy, but there should be a stronger emphasis on acquiring a potentially a higher quality of customer as opposed to simply a higher quantity of customers.