In this blog post, we look at the main challenges of the financial services sector, and how operators overcome these. We’ll also throw in some real life examples of loyalty innovations used by financial institutions and sub-sectors to assess their outcomes.
Customer loyalty in financial services has the potential for exponential growth. Most see the lack of loyalty-building strategies in the financial services industry as a problem. We see it as a great opportunity to innovate.
Those that adopt and implement customer-centric programmes will see a boost in customer retention. Whereas continued decline awaits those companies who refuse to adapt to a changing landscape in customer expectations. Not to mention the new Consumer Duty regulations starting on 31 July 2023.
"The average customer retention rate for financial services is 78%. While the retention rate for the banking industry is a fraction lower at 75%.
This means that financial service organisations lose between 22% - 25% of customers per year.
- Make a Point of Loyalty
Why Customer Attitudes Changed Towards Financial Services Companies
External macro factors
External factors beyond our control turned the global economy on its head. In the past fifteen to twenty years, we’ve seen a series of financial disasters. These range from the 2008 financial crisis and the Covid-19 pandemic of 2020.
Today in the UK, the cost-of-living crisis due to high inflation, continues to intensify the pinch for so many people.
All of these historic and current issues collectively erode the trust that people have in traditional financial institutions. This of course is an issue because the loyalty of customers depends entirely on how much they trust brands.
Historic low in consumer trust
A 2021 survey of 1000 consumers showed that 81% of them considered trust a major factor in their buying decisions. Yet, only 34% actually trusted brands they used. This chronic consumer mistrust is just as bad for banks and insurance companies too.
GFT, a German-based IT service management company, released their Q3 2022 Banking Disruption Index (click the link to Google and select the top result to download the PDF). In it, they found only 48% of consumers trust their banks to help them through a recession.
Similarly, BritainThinks and The Association of British Insurers discovered in their co-authored report, customers felt frustration towards price increases in premiums. In addition to this, 86% of customers felt concerned about how insurance companies handled their data.
Trust is the bedrock of loyalty. Without solid foundations, customer loyalty in financial services will never improve. Retail banks and insurance conglomerates held sway over the markets and up until the pandemic, got away with just delivering their advertised services.
However, things are changing. New competitors are strong-arming their way into these monopolised markets, offering alternative options with much more attractive incentives. What's more, the FCA's Consumer Duty seeks to reverse bad habits within the industry. Price walking causes high attrition as customers are never rewarded for loyalty. In fact, the acquisition strategies used by financial service providers, condition customers into constantly finding services with the lowest prices as opposed to best value.
Different expectations and perception of value
Companies who want to increase customer retention need to adopt the same strategies used by new competitors. Value has never been under more scrutiny than it is today. Due in part to the aforementioned macro factors; the global economic crisis, the pandemic and today’s high inflation markets.
So it comes as no surprise why higher customer expectations and stricter perceptions of what’s considered “valuable” are beginning to take hold. Consumers are more cautious than ever when spending. Couple that with market diversity, the amount of financial service providers available to them, and you begin to see why consumers are becoming increasingly picky.
But this change of attitude is not the problem. Rather, it’s companies who either refuse or do not know how to adapt. And it’s they who suffer from symptoms of poor customer loyalty such as low customer retention.
Current challenges to improve customer loyalty in financial services
Responses to the changing landscape of consumer expectations in the financial sector highlight the current challenges many companies face. These range from: omnichannel preferences, technical overhauls, differentiation in a highly competitive market, a hunger for hyper-personalised experiences, compliance with new regulations, and accurate data collection.
Here’s just a few examples of what companies in the financial sector are up against.
A need for new tech
Banks and insurance companies are notoriously slow at adopting new tech. Or at least they were. The pandemic forced us all to adapt our lifestyles and innovate our businesses. If anything good came from the pandemic, it was the acceleration of digitisation in sectors stuck in their old ways. They had no choice.
But investing in tech is not a single wave of a magic wand. Issues from implementation still arise. For example, security risks, data regulations and a need for improved efficiency and operability. When bank apps experience digital disruption it leads to 60% of consumers abandoning them…
…And since most banks are closing branches, the majority of customers rely on apps to access their accounts. If the tech is insecure or doesn’t work properly, that will do nothing to increase customer loyalty in financial services. It’ll just cause frustration and a sharp rise in lapsed customers who’ll find solutions elsewhere.
Highly competitive market
Many of the new competitors emerging on the market are extremely tech-savvy. Crypto exchanges, challenger banks and FinTech companies are leading the way in innovative user experience.
Digital currencies promote financial liberty from the constraints of traditional banking institutions and offer generous interest rates. Challenger banks differentiate themselves by specialising in underserved areas of finance, whilst operating completely online.
As for Fintech companies, they continue to design technology that facilitates the digital transition of banking services. Even developing in-app rewards and loyalty schemes for the traditional big four UK retail banks.
Is traditional finance services switching to digital enough, though? Goldman Sachs predicted that FinTech start ups would syphon $4.7 trillion in revenue. Since then, the Fintech sector has firmly placed itself as the go-to solution provider for traditional financial services. Yet, so too have crypto exchanges and challenger banks. Both of which offer enhanced customer experiences.
Demand for hyper-personalised experiences
Consumers are calling out for hyper-personalised experiences. Banks have answered by giving monetary rewards to shoppers of selected brands. Insurance companies on the other hand, with a greater opportunity to personalise their offers, are sorely lacking in this department.
Let’s not kid ourselves. Insurers understand perfectly well the importance of customer loyalty. It’s just within the sector exists a mini-ecosystem of rotated customer bases. The main driver of revenue is tipped heavily towards acquisition through use of low premium offers. It’s become a norm for customers who’ve stuck it out with insurers to expect a higher price at the end of their tenure. Leaving them no choice but to look elsewhere.
But now consumers are savvier. Their personalised experiences from other businesses in other sectors influence their attitudes and behaviours. Collectively, insurance companies could keep operating the same old way. However, in the long term, it’s just unsustainable. Insurance providers lost $3 billion in 2020 due to lapsed customers.
If they want to see better customer loyalty in financial services they’ll need to start getting personal.
FCA's new Consumer Duty standard
What's the connection between the FCA's consumer duty and customer loyalty programmes, we hear you ask? One of the four main points of the new standard is price and value. Providers of products and services must demonstrate fair value. Providing a reasonable relationship between the price customers pay and the benefits they receive.
A member benefits and rewards programme supplements your compliance efforts with the FCA consumer duty. Think of it this way; the industry as a whole sorely lacks innovative methods of rewarding loyalty. Yet many firms will resolve the main issues of consumer duty in accordance to the guideline they've been given. For example, reversing price walking strategies to acquire new customers.
Sure, this mitigates the price of products or services but does it offset the cost-of-living crisis? Or lead to highly personalised and hyper-relevant customer experiences? Not really. The fact that the new standard applies to all firms also means those who simply follow the guidelines fail to position a compelling point of difference. That's bad news in a highly competitive market.
Opportunistic and business-savvy firms will have already spotted the opportunity to offer more and exceed expectations come 31 July 2023. How that will effect financial service providers too late to offer great rewards and benefits remains to be seen.
Customer loyalty requires a lot of data. This gives businesses vital information as to when they should approach customers with the right messaging. Banks and insurance companies, as well as other financial services, handle substantial data for their main services to function.
For insurance companies, they rely on multiple sources of data for a few reasons, such as internal and external communications between customers, policymakers, partners and teams, as well as product design, pricing and claims handling. Departmentalised data however, creates information silos.
That’s why there’s a case for insurance companies and banks to adopt data driven strategies into loyalty nurturing efforts. Lagging data sets, low levels of data maturity and inconsistencies across different departments only results in a fragmented, frustrating experience for customers.
Strategies to Improve Customer Loyalty in Financial Services
In this section, we’re going to show you some ways financial services nurture customer loyalty. We’ve picked each of these strategies because they restore customers’ trust. Plus, they help you overcome the challenges we mentioned earlier.
Hyper-relevant reward and partnership programmes
Insurance providers should improve customer loyalty in financial services through a partner network of discounts and vouchers on products related to their service. Unfortunately, they’re sorely lacking in this area.
For example, content insurance providers could offer vouchers on homeware. Customers reassured with their new home insurance policy would instantly snatch up smart-home technology discounts. And it goes without saying what benefit prepaid fuel cards have for car insurance policyholders.
Such rewards could be offered to returning customers. Lower the cost of the premium. Make sure they’re paying less for car insurance next time for example. But incentivise them to participate in upsells relevant to them. Things like windscreen protection, or free tyre replacement for particular car makes. Simply offering cheaper insurance might win you customers in the short term. But once their policy expires, they’ll look for another vendor. So it’s a good idea to start implementing some hyper-relevant cross-sell and upsells. Relate them to the product you're covering to make a lasting impact.
Use rewards that make sense
An effective approach of nurturing loyalty is embedded in acquisition strategies. The way you attract customers through messaging gives them a hint at what to expect from you. Promoting powerful incentives is a proven acquisition tactic. Seems obvious. Yet, so many companies get this first crucial step wrong. Case in point, how insurance providers use low cost premiums time and again.
For financial service companies, acquisition tactics should include rewards and offers that are informed. These vary from reward programmes, cash back, buy now pay later (BNPL) and additional help with mortgages and loans.
Cashback has seen significant rates of adoption in recent years, due to its effectiveness of fostering loyalty in banking. Bear in mind that it’s not so much about the amount that counts. It’s how much sense the offer makes to customers.
Take for example this table. It lists customers’ scores of accounts with cashback rewards from various banks. Santander’s Edge account which targets household bills and shopping expenses scored 73. Can see why it resonated with so many during a cost of living crisis. Yet, compare that to the current account with Chase which scored 85%, you can begin to decipher the point of difference.
Firstly, there’s no monthly fee! Secondly, there’s more flexibility in spending choices, as opposed to rewards going on household expenses. There’s additional perks too like no ATM withdrawal fees even whilst abroad. Value. Value. Value.
Buy now pay later
BNPL adds flexibility to the point of sale. Making it a serious contender for improving customer loyalty in financial services. It’s the fastest growing payment method in the US and UK. Precisely because it works around the customer. Offering them generous interest rates usually based on soft credit scores, in addition to other payment parameters and risk assessments.
As a result, BNPL boosted traffic to participating insurers and lenders. Not surprisingly, it’s also been a hit in the e-commerce market. More than likely this is due to the popularity of its flexibility and self-service model with Millennials and Gen-Zers.
Pay mind to areas other than transactional rewards, discounts and other incentives when building loyalty. The way you shape your customer experience is also important. Think why BNPL is growing so fast in popularity; flexibility, ease of access and self-service.
Flexible omnichannel communications make any interaction with your brand seamless and frictionless. It's a great way of showing customers that you work around them whilst providing great customer service. It also helps your business because it captures leads, swiftly resolves queries before customers lapse, and encourages consistent engagement between purchases.
Chatbots and live support
The latter is particularly important for customer loyalty in financial services. Banks, funds and investments holders, business banking and accountants, all handle money, and must inspire trust in their customers to do so. Using live customer support and 24/7 chatbots reassures people that you’re listening.
Yet, many customers felt banks just about met their expectations or failed miserably during the pandemic. A poll showed 29% agreed their expectations were just about met. The largest proportion of those asked (39%) felt dissatisfied overall.
Which begs the question: what is customer loyalty in banking ‘banking’ on? It’s something we’ve already mentioned; reassurance. And that goes for most financial services. People want to feel reassured. Especially during difficult financial times. It’s not just the way you communicate with customers, it’s also about how.
Train your team to sympathise with potential and existing customers for increased loyalty. The key to successful sales is compassion. During strenuous financial times people want to feel reassured and backed up, listened to and looked out for.
In too many businesses sales regard customers as targets instead of humans. But by listening to customers we actually provide a better service, because it forces a change in tact and our approach to certain situations.
Take the Bank of America. They’ve created excellent customer service that’s uplifted their acquisition numbers through the stratosphere! A thorough approach to their omnichannel strategy has helped them refine communications.
For example, their Life Plan initiative sees specially trained relationship managers guide customers through significant financial decisions. Offering one-to-one advice to first time buyers about mortgages and short term and long term saving goals.
Consistently engaging customers in a way that lands on human touchpoints has yielded huge dividends in terms of loyalty in banking. In fact, it’s a great way of increasing customer loyalty in financial services as a whole too.
Make a point of loyalty
When all these strategies are brought together, you create a robust loyalty-building strategy. You meet the demands of new tech to deliver innovative services such as digital wallets, cashback, and BNPL terms. All of which help you stand out from the competition.
What’s more, the best way to blow competition out of the water, is through consistent engagement. Setting up omni channel support so that no matter where your customer turns, you’re already there with an answer. This enhanced, seamless and frictionless customer experience positions your financial service as reliable.
Together, all of these strategies support each other, and help you to overcome the challenges we’ve discussed. It’s time for traditional financial services to turn things around for customers. To give them something to shout about. You need only look at a successful crypto exchange like Swissborg to see why advocacy is important.
Their referral programme helped them become one of the leading exchanges in Europe. Together with a user-friendly platform and robust security measures has propelled Swissborg’s popularity amongst crypto enthusiasts.
Ultimately, customer loyalty in financial services requires a multi-pronged approach. You’ll find these strategies feed into one another. A successful loyalty programme works like a single organism. Every facet and feature works in tandem to keep nurturing loyalty.