Retail banks are realising that effective customer service centres are a business generation tool that they cannot do without. Yet a recent survey finds service quality has improved little, says Remus Brett.

In the past three years, European banks have invested hundreds of millions of euros in their branch networks in the hope of transforming ageing cost centres into effective sales outlets. Many have borrowed the techniques of leading retailers like Walmart and Tesco to create colourful, well-furnished branches equipped with sophisticated customer relationship management (CRM) systems and features like plasma screens. Judging by their recent revenue and record profit growth figures – and the fact that branches continue to account for 70% of sales – it would appear that these transformation efforts are paying dividends. But, as sales of products like mortgages and loans have grown, what has happened to the quality of customer service? According to a recent study conducted by benchmarking specialist Finalta, the answer is very little. In the first half of 2004, Finalta conducted a benchmarking and best practice study to assess the branch service capabilities of 17 leading European banks and building societies. It found that, on average, the customer satisfaction indices of the banks had improved by a compounded annual rate of just 0.1% per year since 2000 (see chart one).

Despite this lacklustre performance – or perhaps in recognition of this problem – targets for improvement are extremely high. Finalta asked the same set of banks to disclose their satisfaction index goals for 2006 and, for those with targets, found expectations for improvement to be almost 60 times greater than recent years’ performance. The question a number of banks continue to raise however is: does customer satisfaction really matter? For decades the banking industry appears to have prospered without offering great service. But this complacency is rapidly subsiding as retail banking markets mature, customer acquisition rates fall and attrition rises. The financial costs of poor branch service are severe. Customers become less likely to buy their next financial purchase from their current bank, less likely to make a referral or, even worse, they defect altogether. Service quality drivers So where do banks’ service capabilities stack up today and how can they achieve their targets for improvement? Answering this question was the first objective of Finalta’s study. To find out, in conjunction with the study’s sponsors, Finalta developed a branch service scorecard to understand the key elements of branch service quality. Five drivers were identified:

  • branch staff and management;
  • branch innovation and design;
  • effectiveness of core service processes (for example, complaints handling);
  • cross-channel integration; and
  • the systems and processes used to measure branch service quality.

Each capability driver comprises a set of sub-criteria so that, in total, Finalta assessed 17 elements of branch service quality. These scores were weighted to reflect each driver’s relative importance. The analysis demonstrates that no single participant can be classified as being ‘high capability’ – or best practice – overall. However, against this backdrop of mediocre scores, there are reasons for optimism. At least one participant scored four or more in each driver indicating what is possible with appropriate focus and investment. Furthermore, there is no geographical bias to the ranking nor is size a factor. This means that best practice is achievable by all. Interestingly, those that performed best were either from a mutual heritage (where traditionally a stronger service culture exists) or had experienced some form of service crisis in recent years, which had triggered an increase in management focus on service. Difficult to quantify The second objective of the study was to examine the relationship between service quality and business performance. Common sense says better service leads to improved financial performance but proof is notoriously hard to find. To answer this and to identify the relationship between the two, Finalta also gathered data on three key performance indicators (KPIs) during the course of the research (see below). To assess the relationship, a methodology was developed based on two inputs. First, KPI data was gathered from participants that had undergone a step change in service capabilities (for example, moving from low to medium) before and after this change. Second, KPIs were compared across like-for-like organisations but with different capability scores. The results were conclusive: organisations with higher branch capability scores achieve superior attrition, cross-sell and referral rates (see chart 2).

Participants reported the most profound impact on customer attrition. Medium service capability peers reported a 20% reduction in attrition compared with their low capability peers and forecast a further 25% improvement by moving to high capability. Similar benefits were reported in referral rates. The benefit to cross-sell rates was less pronounced. Steps to best practice So what actions should European banks prioritise to kick-start service improvement? Based on observed best-practice, Finalta believes that banks should:

  • prioritise front-line staff and local management above all else. Best practice banks consistently view the branch manager as being the kingpin of service quality. To improve the service skills of local managers, banks must implement effective and far-reaching service leadership training programmes. Also, actively managing out underperformers was recognised as being of critical importance. Ongoing recruitment of outside service specialists to complement front-line staff is an effective way to accelerate cultural change.
  • implement local-level service measurement and align incentives. Here the old truism applies: you can’t manage what you can’t measure. Only 60% of the banks in the Finalta study were able to measure service quality at a local branch level. The rest relied on imprecise, group-wide surveys, which made it impossible to identify areas of under-performance. Only by implementing regular, local-level reviews of service quality (typically combining survey work with, for example, mystery shopping) can banks identify weaknesses and set appropriate targets for local and regional managers.
  • fix process flaws. Basic accuracy errors – like correct name and address records – remain a root cause of customer dissatisfaction. To address this, banks should first implement ‘error’ audits to measure how accurately branch staff enter customer data. Second, they should ensure customer complaints are accurately recorded, classified and reported. To achieve this, effective systems must be complemented by a ‘no blame’ culture between management and front-line staff. Third, banks should try to optimise the ‘moment of truth’ interactions that have an exponential impact on customer satisfaction. Lost and stolen cards, first-time mortgage buying and the bereavement process are ideal places to start.

For a real-life example of the benefits of service quality, take Sweden’s Handelsbanken, which regularly beats its competitors on an annual Swedish quality index by seven to eight percentage points. Not only is its cost/income ratio best in class but the stronger loyalty generated through consistently high levels of service affords it firmer pricing on its core products. Creating sustainable advantage in the rapidly maturing world of retail banking will require wholesale improvements in service quality. While the need for service excellence applies to all channels, the branch – as the principal cause of dissatisfaction – must take priority. For those that seize the initiative, the rewards of reduced attrition, better cross-sell rates and greater referrals await. About the study With a combined total of 12,000 branches and 67 million retail customers, the study peer group included leading banks and building societies from the UK, Ireland, Sweden, Netherlands, Germany and Belgium. In-depth interviews were conducted with heads of retail banking, operations and strategy under non-disclosure between March and June 2004. For further information on the study or any related matters, please e-mail: Key performance indicators

  • Customer attrition rates. We defined this as the average annual proportion of customers that defect due to natural (for example, emigration) and/or voluntary (for example, poor service) factors across all products.
  • Cross-sell rates. This covers the average number of product groups held per customer (for example, current accounts, investments and non-life insurance).
  • Referral rates. This refers to the percentage of new customers that are acquired directly as a result of encouragement or a recommendation from an existing customer.

Remus Brett is a director of Finalta


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