Share of Wallet for Banks at Risk from Invisible Attrition
Alternative financial providers are gaining popularity among consumers and small businesses, impacting the growth potential of banks and credit unions. The competition for existing customers has intensified as fintech firms, big tech companies, and major financial institutions offer personalized and easily accessible digital services.
Traditional banks may not realize that their customer relationships have become fractured as customers can open new accounts without closing existing ones. In this scenario, financial institutions must address customer attrition seriously to identify gaps in their customer experience.
Neobanks, Fintech and Tech Giants Pose a Genuine Threat
Some Neobanks have developed banking platforms that attract many primary checking account users, putting them on par with traditional banks. They appeal to a mix of younger, lower-balance customers and older, more affluent customers. In addition, they do so without branches, ATMs, or banking licenses. They offer no fees, early direct deposit, easy money movement, and a fast account opening process. The top two reasons customers might leave their bank are high fees and unattractive rates, leaving traditional banks and credit unions vulnerable to share of wallet attrition. These Neobanks have higher satisfaction ratings and are more likely to be recommended than legacy banks.
According to projections, the largest US Neobanks will have approximately 34. million customers by 2025, increasing substantially from two years ago.
Fintech firms are expanding their services beyond checking accounts, including payment services, lending, and small business accounts. This increase in financial options is causing existing customer relationships to break, putting loyalty and customer lifetime value at risk.
The increased presence of P2P payment platforms further diminishes traditional banks and credit union’s share of wallet. Of 280,000 consumer interviews conducted in 2023, Rivel found 48% of the respondents use at least one P2P service. Furthermore, big tech giants are entering the financial services industry with a reputation for innovation and some with names that consumers already recognize.
Churn Levels
Traditional banks and credit unions often overlook the impact of non-traditional competition on customer relationships. They tend to focus on lost accounts rather than changes in activity, balances, and other indicators of lost share of wallet.
Banking defection often occurs when customers obtain credit cards, loans, or other products from different providers without closing their original bank account. This factor can mask the reality of a declining share of wallets. To address this issue, financial institutions need to identify leading indicators of churn and use models to predict potential defection on an individual level. By prioritizing customer needs and increasing the value proposition of their services, they can reduce churn and maintain a healthy base of primary customers.
Life Events, Age, and Transition
Banks must adapt to the changing needs of households during different life stages. These major life events may include births and deaths that impact customers. While they cannot control these changes, they can control how they respond. Banks can take real-time action and review their value proposition to minimize the risk of losing customer relationships during these transitions.
Most consumers need financial advice, be it savings strategies, retirement planning, or budgeting, it would be in a bank’s interest to proactively identify these needs and prepare them for their changing needs. Take for example Gen Z, some of them are in college, some are newly entering the workforce, they are at a great stage for banks to get involved and help them build the financial literacy needed to build good financial habits. The top advice Gen Z needs help with are budgeting, savings strategies, maintaining a good credit score, and tax planning.
For people who have newly given birth, banks can proactively inform them of savings account such as 529 and ESA or partner with a tax educator to inform and prepare them for the changes in their financial situations and how that impacts their filing.
Reduced Activity and Engagement
A decline in activity and engagement is a significant sign of churn in financial institutions. When customers start using a product or channel less frequently, it indicates a high likelihood of future churn. Based on this, banks should measure each customer's activity against their historical patterns, especially considering the automation of transactions. Surprisingly, even a decrease in customer support calls can indicate potential attrition if a customer has lost interest in settling their issues.
Declining Brand Appeal
Banking competition is fierce, with more diverse offerings than ever before. Therefore, banks should watch the market for new players with better rates, personalized services, fee elimination, streamlined engagement, and more focus on customer care. Banks can discover the most popular competitor offerings by following the money and using analytics to track transfers.
Why Share-of-Wallet is Necessary for Banks
Our Rivel Benchmark research indicates only 3% of banking institutions capture over 80% of their own retail customers' share of wallet, which is crucial for long-term loyalty and profitability. Despite access to customer data, most banks use a generic approach that yields low success rates and reduced returns. Therefore, banks should identify the unique customer attributes and needs and tailor their approach accordingly.
Steps for Banks to Expand Their Share of Wallet
1. Create a new model: Create a customer insight framework using various data sets. This step will allow you to identify customers who are more likely to be interested in additional products and services.
2. Identify and target: Determine the customers and segments with higher priority, then offer suitable products.
3. Design campaigns: Design campaigns that incorporate precise solutions. This approach will assist you in formulating a marketing plan and a structure to focus on and engage potential customers.
Final Thoughts: Recapture Customer Relationships, Increase Brand Value, and Become Proactive
Making intelligent decisions with limited resources requires analyzing customer data and leveraging technology. Redirecting marketing investments from acquiring new customers to nurturing current ones can lead to faster and more profitable growth but requires a strategic approach.
Banks must focus on nurturing existing customer relationships for revenue growth. They should invest in loyalty programs and personalized experiences to create a loyal customer base that acts as brand ambassadors. The current economic landscape is rapidly evolving, and banks must adapt to stay ahead of the curve.
Sources
- https://www.insiderintelligence.com/content/chime-no-1-neobank-us
- https://www.insiderintelligence.com/topics/category/aspiration
- https://corporatefinanceinstitute.com/resources/wealth-management/share-of-wallet-sow/