During the 20+ years I spent in the newspaper industry, customer attrition was a metric that was constantly monitored and managed. In fact, it played a major role in establishing marketing plans and budgets. Unfortunately, that is not always the case in the banking industry. A percentage of institutions do pay attention to attrition levels – though that percentage is small. This creates a big opportunity for institutions that want to engage a strategy to incorporate attrition metrics into their strategic planning and marketing budgets.
From my point of view, a majority of institutions either 1) ignore this important metric, or 2) neglect to develop a plan to address the issue even when attrition is considered or monitored in some form. Having worked with over 1,600 financial institutions over the past 17 years, I see two recurring themes as to why there is a disconnect when it comes to attrition. First, there’s an absence of standard measure the banking industry employs to monitor account attrition. The other factor at play is that most institutions haven’t taken the time to calculate, or try to understand, the cost of attrition for their institution.
Spending quality time with clients while fundraising for the Grand Valley State Athletic Department in Grand Rapids, Michigan. From left to right: Brad Kessel, CEO at Independent Bank, Russ Daniel, SVP Mortgage Division at Independent Bank, Tricia Raquepaw, EVP Marketing Director at Independent Bank and Craig Simmers, Founder of Stellar Strategic Group.
Recent studies suggest the replacement cost of account attrition can be staggering. Here’s a quick and simple calculation to demonstrate: let’s assume the acquisition cost of a new checking account is $150 and your attrition rate in year one is 20% for those new accounts. With a starting base of 20,000 checking customers, the loss of 4,000 accounts carries a replacement cost of $600,000. Now, let’s utilize your attrition data to further reduce that loss to just 3,000 accounts – saving $150,000 in replacement costs. This is not an insignificant number!
In short, if you can reduce the attrition rate from 20% to just 15% in the first year, your institution will realize a significant savings. Plus, marketing dollars spent for new checking account initiatives will have a much better return on investment as you decrease attrition rates in the first year. Understanding and addressing this “silent killer” on your existing accounts will add much to growing market share long term.
In our fall edition of Stellar Insights, we’ll detail a real-life example of how attrition can directly impact a financial institution, and what can be done to reduce that impact. In addition, we will show how tracking attrition can identify other opportunities by understanding the difference between “Uncontrollable Attrition” and “Controllable Attrition” – the latter of which usually stems from product and service issues.
Besides the checking account, let’s consider your auto loan portfolio as an example of what may be “Controllable” attrition. Start with analyzing past patterns in the data and determine at what point in the life cycle of an auto loan do most disappear from your books?
And, what can you do to try and keep that account? Understanding product-specific patterns with attrition can help you better communicate to secure that account before it’s gone.
An important note, the user experience with your website and online tools is becoming more critical than ever with both new and existing relationships. If your online applications for new accounts, or online banking portal for existing accounts, are not user friendly/mobile friendly, you may be losing opportunities in your market with consumers. This will play an ever-increasing role in attrition as more and more people utilize online banking application.
As you probably know by the tone of this article, this is a topic I’m passionate about. I will be sharing more details about these issues in our fall newsletter. In the meantime, please feel free to give me a call or email me if you would like to discuss your institution’s specific situation regarding account attrition. No cost and no obligation!
Craig Simmers is Founder of Stellar Strategic Group, LLC. Craig can be contacted via email at craig.simmers@thestellarfinancialgroup.com or call 410-990-0172.