» INSIGHTS Satisfying Customers and Regulators: Five Imperatives Focus on customer experience to increase compliance and relationship value Regulators and consumers both want more from banks. While regulatory guidelines and consumer rants in social media may use different language, they’re both aimed at the same thing: improving customer experience. There’s abundant evidence that falling short on customer experience is costly—from press headlines about compliance penalties to rising numbers of consumers switching banks or turning to alternative lenders. But there’s also growing evidence that focusing on improving customer experience is rewarding. Banks that do it well benefit from an early warning system for compliance risk exposure. And studies show that customer experience is also a powerful driver of financial performance, including substantial gains in share of wallet, revenue and profitability. This paper is about the new competitive ground in retail banking: delivering impeccable treatment and outstanding customer experiences to increasingly savvy and selective consumers. It’s based on FICO’s work with banks moving to put customers at the center of their operations— some undergoing massive organizational reinvention, some taking small incremental steps. We examine five imperatives—from the customer’s point of view—for delivering a better customer experience: 1. “Treat me fairly” 2. “Understand me and show it” 3. “Make this fast, easy and secure” 4. “Don’t interrupt me unnecessarily” 5. “Assist and reward me” The paper discusses the implications of these imperatives for originations, customer management, collections and fraud management. Number 75—February 2014 www.fico.com Make every decision count TM Learn how a leading bank boosted customer profitability by 9%
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satisfying Customers and Regulators: Five imperativesFocus on customer experience to increase compliance and relationship value
Regulators and consumers both want more from banks. While regulatory guidelines and
consumer rants in social media may use different language, they’re both aimed at the same
thing: improving customer experience.
There’s abundant evidence that falling short on customer experience is costly—from press
headlines about compliance penalties to rising numbers of consumers switching banks or
turning to alternative lenders. But there’s also growing evidence that focusing on improving
customer experience is rewarding. Banks that do it well benefit from an early warning system for
compliance risk exposure. And studies show that customer experience is also a powerful driver
of financial performance, including substantial gains in share of wallet, revenue and profitability.
This paper is about the new competitive ground in retail banking:
delivering impeccable treatment and outstanding customer experiences
to increasingly savvy and selective consumers. It’s based on FICO’s work
with banks moving to put customers at the center of their operations—
some undergoing massive organizational reinvention, some taking small
incremental steps.
We examine five imperatives—from the customer’s point of view—for
delivering a better customer experience:
1. “Treat me fairly”
2. “Understand me and show it”
3. “Make this fast, easy and secure”
4. “Don’t interrupt me unnecessarily”
5. “Assist and reward me”
The paper discusses the implications of these imperatives for originations, customer
management, collections and fraud management.
Number 75—February 2014
www.fico.com Make every decision countTM
Learn how a leading bank boosted customer profitability by 9%
www.fico.com page 2
Satisfying Customers and Regulators: Five Imperatives
» insights
The need to avoid financial and reputational damage from the consequences of noncompliance
is causing many banks to change how they operate. As global consulting firm KPMG points out,
“regulatory reform is perhaps the biggest driver of change” for European banks. In the Americas, “new
rules can lead to huge fines and successful compliance to great profit.” In Asia Pacific, increasingly,
bank “business models are being impacted by regulation.” 1
But regulatory pressure and the soaring costs of meeting it are not diverting the
savviest institutions from another operational transformation: becoming customer-
centric. Leading banks in markets around the world have put customer centricity at
the top of their agendas—some as the result of CEO mandates.
In fact, it’s becoming clear that these two efforts are complementary and most
effective when joined. Consulting firm PwC said in an August 2013 report that
banks need to expand the focus of their compliance efforts.2 “We see leading
banks shifting from a narrow, rules-based, technical focus to one that extends
to business acumen, improvement of the customer experience, and operational
understanding.” Without this more integrated approach, the PwC report concludes,
“many banks will continue to face high costs and losses in the form of escalating
litigation, penalties, and staffing needs.”
Case in point: Consider the misstep some US banks made in 2011 by trying to
charge fees for debit card transactions. In her article, “Why Customer Experience
Management Is the Antidote to Risk,” Patricia Sahm, of Carlisle & Gallagher
Consulting Group, says that if these banks had paid attention to data showing that
consumers abhorred such fees, they could have avoided the ensuing damage.3
“Within days, there were very public and loud outcries from consumers. In the end,
many banks retracted the fees, but at a significant reputational loss and regulatory
scrutiny.” Better customer experience management, says Sahm, “could have
prevented the introduction of risk to the system in the first place.”
Apart from the benefits for reducing compliance risk and costs, improving customer
experience is more important than ever for retaining and building valuable
relationships. Today, consumers can easily search for and compare banking products
and services from an expanding universe of possibilities. Habits and attitudes that
used to keep consumers with their banks year after year are falling away.
In fact, Ernst & Young’s 2012 Global Consumer Banking Survey found that the proportion of
customers planning to change banks had grown by 70% in just one year. The top reason, according
to the survey, was dissatisfaction with fees and charges; other reasons cited included more
personalized products and services, and better mobile and online technology.
» Two Winds Moving Banks in the Same Direction
1 Evolving Banking Regulation 2013, KPMG2 “Let’s Make a Difference: Managing Compliance and Operational Risk in the New Environment,”
PwC, August 20133 “Why Customer Management Experience Is the Antidote to Risk,” Patricia Sahm, n>genuity Journal, summer 2013
“For most of our clients, the current state of compliance has led to inconsistent application of compliance rules and a customer experience that is anything but seamless.”
Let’s Make a Difference: Managing Compliance and Operational
Risk in the New Environment, PwC, August 2013
“We expect firms to put their customers at the heart of their business…”
Martin Wheatley, Chief Executive, Financial Conduct Authority, UK,
Satisfying Customers and Regulators: Five Imperatives
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Also, as shown in Figure 1, more customers than ever had accounts
with multiple banks. According to the company’s 2013–14 Global
Banking Outlook, these trends are persisting.
Moreover, banks may not be realizing the full value of the customers
they retain. The 2013 Bain & Company Customer Loyalty in Retail
Banking report warns: “Most banks currently miss a significant
opportunity for cross-selling to their existing customer base.” This global
study of consumers found that while the percentage of current banking
customers purchasing a new banking product over the past year was
50% (developed countries) and 84% (developing countries), 35% of
these purchases globally were not with the customer’s primary bank.
Viewed by country, that figure, a low 19% in Denmark, rises to 54% in
Germany and a whopping 60% in the UK.4
How well a bank is likely to do in cross-selling, both currently and in the
future, can in part be predicted by customer loyalty, as measured by
the Net Promoter Score (NPS). The Bain study reports that customers
who are promoters of their primary bank buy more (14 % in developed
countries; 9% in developing) than detractors do.
Moving to more customer-centric operations can help banks improve customer loyalty. The Bain
report noted that the US bank with the highest product win rates (share of products bought by
customers at their primary bank) has been working to “consolidate customer data and build a unified
view across all locations and business units.” The US bank posting the biggest NPS gain in 2013 has
been making “a deliberate effort to become more customer-centered” and that the shift “has paid off
with gains in loyalty, new relationships and share of wallet.”
The power of customer engagement is further underscored by the
Gallup CE metric5, which captures emotional attachment as well as
rational commitment. The research and consulting firm, which has
applied the measure across a variety of industries and target audiences
(B2C and B2B), finds that it “has consistently demonstrated a powerful
link to key business outcomes.”
At a summary level, as shown in Figure 2, Gallup has found that
fully engaged customers (emotionally attached and rationally loyal)
“represent an average 23% premium in terms of share of wallet,
profitability, revenue, and relationship growth over the average
customer.” Actively disengaged customers (emotionally detached and
actively antagonistic) represent a “13% discount on the same measures.”
Clearly, the customer experiences a bank delivers can impact both
its success with consumers and its standing with regulators. How do
banks improve quality of experience? Here, from the customer’s point
of view, are five imperatives.
4 Customer Loyalty in Retail Banking: Global Edition 2013, Bain & Company, Inc.5 Customer Engagement as a Core Strategy: What’s Your Engagement Ratio? Gallup, 2009
87
99
107
123Fully Engaged
Engaged
Not Engaged
Actively Disengaged
Average = 100
Figure 2: The financial impact of customer engagementIndexed performance (share of wallet, profitability, revenue, relationship growth)
Source: Customer Engagement as a Core Strategy: What’s Your Engagement Ratio? Gallup, 2009
Figure 1: Percentage of retail customers with one vs. multiple banking relationships
3 or morebanks
2 banks
1 bank
2011 2012
21%
38%
41%
32%
37%
31%
Source: Global Consumer Banking Survey 2012, Ernst & Young
Satisfying Customers and Regulators: Five Imperatives
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FICO also recommends ongoing analysis of unstructured data from customer interactions. Today’s
speech analytics, for example, can instantly monitor 100% of collections phone conversations. As
shown in Figure 3, the analytics can prompt agents to make required disclosures, immediately
alert supervisors to use of inappropriate language or misleading statements, and automatically
flag and report on any areas of concern.
People want to do business with banks that understand
them and value their business. When they initiate a contact,
they expect the bank to know who they are and respond
with some knowledge of the context of what they are trying
to accomplish (open an account, refinance a mortgage, etc.).
When the bank contacts them, customers don’t appreciate
being subjected to conflicting or uncoordinated treatments
and offers.
Speech analytics, which can monitor every conversation with customers, enables supervisors to know if agents are making required disclosures, using proper language and abiding by other bank interaction policies. Viewing statistics and alerts on a constantly updated dashboard, supervisors have the visibility to coach agents or even to intervene during a call. The data from this process also provides an audit trail, and it can be used to identify new predictive variables for analytic models and segmentation.
Figure 3: Making sure every conversation is compliant
#2 “ Understand me
and show it”
“Service stands as the dominant cause of loyalty in most markets. To delight customers these days, the banking experience must be consistent and seamless in person, online, on mobile and on the phone, because customers increasingly hop among channels to complete a task.”
Customer Loyalty in Retail Banking: Global Edition 2013, Bain & Company, Inc.
A South American bank used customer-level analytic segmentation to
set pre-approved limits (cash, revolving, installments). Results:
� +9% profit � –18% attrition � –60% probability of default across all products
A North American bank used customer-level analytic segmentation to
set pre-approved limits for its unsecured personal lines. Results:
� –40–50% credit loss rates compared to account-level segmentation � +30% revolving account approvals � +14% credit line approvals
www.fico.com page 8
Satisfying Customers and Regulators: Five Imperatives
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Consumers don’t have much time to spend on banking, Moreover, their service expectations are
being set by other online and mobile experiences, such as shopping on Amazon and getting
driving directions from Google. Banks need to meet consumer expectations for fast, easy and secure
banking, whether an interaction is taking place electronically or at a branch. Banks also must ensure
that how they interact with customers across all channels, as well as store information from these
interactions, complies with security regulations, such as the Federal Trade Commission’s Safeguards
Rule in the US.
Customer-centric operations increase speed and ease by making data and other necessary decision
inputs available to business processes, which can occur through any channel or mix of channels. In
originations, for instance, existing customers applying for additional credit shouldn’t have to fill in
data available from internal systems. A good first step to move toward customer centricity, therefore,
is to determine what information is needed to make an origination decision and where it might
already exist. This visibility is also essential for ensuring that consistent security controls are in place
to protect customer information.
Banks also benefit from adding additional data sources and analytics. In customer-centric
originations, for example, the aim is to eliminate the traditional trade-off between process speed
and accuracy by increasing the concentration of analytic insights brought to bear on rapid and even
real-time decisions.
In this way, banks can provide an application approval process that seems almost instantaneous,
but which nevertheless accommodates a very precise underwriting decision to minimize credit risk
while detecting fraud risk. Application fraud models enabled one banking client to improve fraud
detection at originations by 92%, reducing post-book fraud by 62%. Analytics aimed specifically at
detecting first-party fraud enabled another bank to achieve a 70% reduction in losses.
In the span of the same quick process, banks can also make sophisticated pricing and initial credit
line decisions. Employing mathematically optimized strategies that balance credit risk with customer
retention and profit potential—and bank capital management objectives—they can set the stage
for a successful, mutually beneficial relationship. A European banking client used this approach to
increase profit by 46% on loans to applicants with no previous relationship with the bank.
#3 “ Make this fast,
easy and secure”
www.fico.com page 9
Satisfying Customers and Regulators: Five Imperatives
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When an instant decision isn’t possible, applicants
shouldn’t be left hanging. Making them wait—without
providing status updates—opens the door to competing
lenders. As shown in Figure 7, banks can employ intelligent
communications management to stay in touch via the
applicant’s channel of choice. They can request additional
information, help applicants submit it and inform them of
next steps.
Automated communications can be leveraged to improve
regulatory compliance. An email or SMS exchange, for
example, can confirm and document that the customer
understands the amount and key terms of a loan or credit
limit extension, and has explicitly accepted them.
For a European banking client, 78% of customers receiving
such automated communications said it improved the
overall level of service they were experiencing. The bank
also saw a 23% rise in ticket value per debit card spend.
Figure 7: Keeping customers engaged when instant decisions aren’t possible
Thank you!We value your business. We’ll let you know about your loan today.
There’s just one more piece of info we need.
Your loan is almost ready. We’ll be in touch before noon.
Congratulations! Your loan is approved. Please check your email inbox for the documents. Meanwhile, here’s a handy mobile app you can use to make and track payments.
Jane applies for loan on website
8:10 am
ReceivesSMS
9:30 am
Calls backwith info
ReceivesSMS
10:00 am
ReceivesSMS & email
11:30 am
$
While relevant contacts from banks improve the customer experience, contacts that lack purpose
and coherence, or occur too frequently, are counterproductive. They add friction to a relationship
that should be flowing smoothly toward ever-greater mutual value.
FICO research on thousands of smartphone users around the world underscores both the
opportunity and the peril for banks reaching out to customers via mobile channels: 53% of
respondents said they liked being contacted with relevant information; 71% disliked irrelevant
contacts.
In customer management, therefore, customer-centric banks are using more analytics to pinpoint
the right offers as well as timing for other relationship-building contacts. They’re coordinating these
communications across product lines (which we’ll examine further in imperative #5 next).
Satisfying Customers and Regulators: Five Imperatives
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As shown at the top of Figure 10, the journey begins with pre-qualification or origination of a new
customer’s first account. By incorporating customer-level data, predictions (e.g., attrition, lifetime
profit potential) and decisions (e.g., exposure) into this account-level decision, banks lay the
foundation for subsequent steps.
Throughout the relationship, those working in customer management have access to all these
originations inputs and outputs. If exposure has been set at the customer level, it’s automatically
recalculated upon events such as missed payments. Such actions ensure regulatory compliance and
clearly demonstrate fairness to both new and existing customers.
At the same time, by fully capturing and analyzing data from customer interactions, they can make
highly refined decisions about how to best allocate available customer exposure. They can use
these advanced analytics with a centralized decision engine to identify the best next action—given
portfolio and strategic capital management objectives—for building value in the relationship journey:
• What additional service would be most helpful to this customer at this time?
• How can we package this service to best meet this customer’s needs/preferences?
• Can we offer pricing and added value features that reward the customer for taking this next step
with us?
Once the best next action has been identified, a centralized customer interaction management
engine should be used to orchestrate execution of the action across channels.
As depicted at the bottom of Figure 10, the foundation for a relationship plan is customer-level
segmentation. The primary purpose of this kind of segmentation is to organize customers for
purposes of identifying and understanding ways to increase their value to the business.
Figure 10: Customer-level segmentation and planning
Planned customer relationship journey toward increasing mutual value
OPENDDA
ACHDEPOSIT
ONLINEBANKING
MOBILEAPP
ACHWITHDRAWAL
STUDENTLOAN
MORTGAGE
WELCOMECONTRACT &
SURVEY
PERSONALALERTS
SAVINGSACCOUNT
AUTOLOAN
PAYMENTPLAN
PREDELINQUENCYTREATMENT
Reward customer with exclusive or discounted features
Reward customer with free additionalservices
Agility to respond tounplanned challengesand opportunities
RELA
TIO
NSH
IP P
LAN
NIN
GSE
GM
ENTA
TIO
N
Purposeful decision makingapply additional analytics and optimized strategies to identify how to best provide personalized service and build relationship value
Value-based innovationorganize customers based on potential for increasing their value to the business
Customer-level core segmentationdifferentiate based on demographics, transactional analytics and behavioral risk/reward predictions
Younger customerswho want low cost, high rates, fast service