Just how important are bank rates?
Bankervision analyzes customer feedback about overall bank satisfaction and comes up with some interesting clues. Of particular interest:
- Customers care most about good rates - People who rate their bank well also rate the prices well.
I think James’ analysis is correct, but I draw different conclusions. In experience with more extensive data, some customers (and deposit products) are more rate-sensitive than others, but many customers barely care about rate. How can the data sets be resolved?
- Customers may care most about service, but falsely remember a poor rate when surveyed. This may be because interest rates are the most easily quantified component of customer value. I suspect a low correlation between rate satisfaction (and perceived rates) and actual interest rates.
- Poor rates may be a problem customers live with (much like certain cancers are often discovered after people die of old age). The majority of reviews are from current customers, so they are describing issues they would like changed, but not enough to switch for.
- Customers lie. They (correctly) view rates as easily modified and service, convenience as nearly immutable. Customers get better service quickly only by switching banks and better rates by convincing bankers to give better rates. Banks can only change service and convenience levels through glacial change.
Bank customers hope that if they say they care most about rate, all banks will give better rates. In reality, customers are best served in the long term by matching prices to true rate sensitivity. This rewards banks which have dropped their depositors’ rate sensitivity (through convenience, service, etc.). Ultimately, customers that care about rates get good rates. But everyone receives maximized value.
No matter what your customers’ price sensitivity, it’s important to correctly measure and then build into correct equations for total long-term profitability. If bank customers are very price-sensitive, your prices should approach the wholesale alternative cost of funds. If customers don’t care, rates should approach the “embarrassment” rate.
Update: Financial services marketing guru Ron Shevlin advances the argument that bank customers are only inadvertently misleading (in comments).
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One thing that I should have mentioned in the post you refer to is that the products are a mixed bag from retail, including mortgage as well as deposits. I’m not certain whether that would change your analysis of things, since I’d imagine that rates would be extremely top of mind in the former case.
In any case, your points are excellent, and I’ll go back and update my original post with a pointer back here.
Good point.
My direct knowledge is limited to deposits, but my gut says that loans work very differently from deposits. I barely cared which bank I borrowed money from when I arranged a home equity loan. I shopped almost purely on rate.
I believe loans are more purely financial (and can be truly commoditized) for the customer. Service and convenience are a much smaller portion of the value equation. Could be that many of these customers are loan-takers and are honest rate shoppers.
Mike –
Your comments are spot-on. It’s just a shame that not enough financial services marketers understand the points you’re making.
There is one point I would quibble with, though. I don’t think customers “lie” (intentionally or maliciously) — more often, they’re ignorant or simply unaware of what the actual rates or prices are.
– Ron
Ron -
When I wrote the article, intentional customer fudging was the smallest effect in my mind.
But you are the bank marketing guru. If you think this effect is inconsequential, I have to agree.
Either way, the biggest point is that we can’t accept customer surveys on rate at face value, but need to look deeper at real behavior.
—–
Common lore in financial services marketing is that price is everything.
I’ve been told by extremely smart retail execs that customers will cross the street for 5bp. I believe this is due to the limited data (customer surveys) they have accessed. I think we’ll shortly see accepted lore change.
SOME customers will cross the street for 5bp. Some customers who are fiercely loyal to a provider (loyalty driven more by their experience than by price/rate), wouldn’t think of going across the street for 5bp.
And some of the customers who go across the street for 5bp, will come BACK across the street if the experience across the street is horrendous. And some won’t.
Over the course of the six years I spent at Forrester researching consumers’ financial behavior, I came to one conclusion anyone will have trouble convincing me of otherwise: That banking customers have a predominant, preferred relationship need: some value interpersonal connection above everything else, some value price/rate above everything else, and some value convenience and ease of doing business above everything else.
It’s just not helpful for a bank to wash over these differences by saying “customers value price/rate over everything else.”
Some customers do, but other customers don’t.
With you 100%. Some customers do walk for 5bp. The bank needs to figure out what proportion of customers in each addressable segment is highly rate-sensitive (or find the average rate-sensitivity in the segment).
I think the cheapest way for banks to build up cheap deposits is with good service and convenience. And slowly building a healthy branch culture that values interpersonal connections.
These changes take time. When maximizing profits right now, banks can only work with rate. Clarifying how customers think is an important step towards a big change on the bottom line.