Understanding Consumer Choice in Banking

Michael J. Wilberding: OPTIMideas, LLC.


Understanding how and why customers choose as they do, is at the heart of successful business. Unless you know how customers make the choices they do – you can’t be confident that your investments in product development, marketing, advertising, and distribution will yield customer preference, win new market share, improve margins, or grow customer loyalty over time.

The first step to understanding the dynamics of customer choice, is simply in a solid understanding of who your customer is.

The world’s leading marketers understand their customers at a tremendous level of detail:

Coca-Cola knows that their customers put 3.2 ice cubes in a glass, prefer cans to bottles out of a machine, and enjoy the beverage most when served at 35∞.

The managers of the Charmin brand know that 60% of customers prefer to fold toilet tissue, while 40% prefer to crumple it. And that 8 of 10 prefer the tissue to unwind from over the top of the spool, rather than behind and under the spool.

Levi’s knows that its customers most typically put their jeans on left leg first.

And, Starbucks knows that their customer’s enjoyment of the coffee begins with the aroma upon walking into the store. They also know that to assure the optimal aroma, the coffee must be served at precisely 180∞ F.

Understanding customers is the central and foundational component of growing consideration, preference, and loyalty over time.

And, while most bankers have a rather precise understanding of the number of customers the bank has, the number of accounts they hold, the average revenues from each account type, and the trends in customer business – how many bankers truly understand who their customer is, and what drives their customers’ choices?

The greatest market opportunity is in being recognized as of unique and superior value – by a specific customer segment, for a specific product.

That recognition is achieved by tailoring specific products – to meet specific and significant needs.

The greatest opportunity then, begins with an understanding of customer needs.

Choice, in financial services, is the result of a fairly complex set of decisions. The decision-making path begins with recognition of a problem, want, or need, and ends with a conscious (or sub-conscious) evaluation of the experience of consuming what you chose.

That path or chain of decisions is simplified greatly, in cases of genuine loyalty: When a customer has consciously evaluated a given product or service as doing an excellent job at fulfilling his or her wants or needs – the path of decisions to make for the next purchase, becomes geometrically shorter, and geometrically easier.

Commodity markets too tend to be a simple decision chain – greatly because both the supplier and the consumer have allowed a perception that there exists no real difference between alternatives or alternative choices.

Banking has sadly slipped into what is widely perceived as a commodity. That is, both bankers and customers have slowly slipped into an accepted belief that there exists no real difference between banking alternatives. A sad state, first, because it need not be the case; and second, because commodity businesses are forced to compete on the very expensive planes of either price or convenience (with convenience being the costly plane of bricks and mortar, and the expense of increased wages and operations.)

The greatest risk of such a commodity market structure is the risk of a genuinely low cost leader entering the market – with very little to stop them. (Banks face such a situation now with Credit Unions.)

Banking however need not be a commodity.  Consider –

  • the coffee business by example:  Coffee as a category, until the early ‘90s, was very genuinely considered as a commodity – with fractions of a cent driving dramatic swings in share at the grocery store. Starbucks however, has been able to grow at 20% per year for over a decade; with the average customer driving 2.8 miles, to stand in line for almost 4 minutes, and then pay as much as 3x the average price.
  • In soft drinks, Coca-Cola and Pepsi have long been in a pitched battle for consumer preference – despite the fact that the average customer can not recognize one vs. the other in taste tests;
  • Consumers also demonstrate amazing preference in selection of bottled water – despite the fact that water is controlled by law for purity, and available for free in virtually any public place or building.

Why even other financial services are not treated as commodities: Charles Schwab consistently outperforms Ameritrade – with more customers, doing more business, at higher prices; and exhibiting significant levels of satisfaction and loyalty.

It begins by understanding the dynamics of choice.

Choice is a decision-making process. It is the process of selecting one alternative over another.

For example, in the mortgage lending business, at its simplest level, the ladder of choice involves five basic decisions:

  1. The decision to move. Vs. stay at the present location.
  2. The decision regarding if and how much to borrow.
  3. The decision regarding which and what types of alternative lenders to consider.
  4. The decision as to which type of loan / loan package to purchase; and,
  5. The decision as to which lender to select for the loan.
* It is fair to note that not all borrowers go through all steps, in the same sequence, or at the same level of involvement; but the illustration is fairly typical, and instructive.

The opportunity for differentiation and recognition as being of superior competitive value, is in understanding the decisions, and taking a unique stand in driving one or more of the decisions, at a deep level of influence. (Today however, most banks participate only at the final level – and even then, only on a very superficial basis.)

This case example is also a good one, because a recent survey by the ABA makes clear that bankers are not today recognized for a consultative type value… but, could be:

The 2002 annual customer survey of the American Banker Association makes clear that bankers are faced with both a tremendous threat and a tremendous opportunity –

  • When asked their financial goals, second only to retirement, customers report the desire to have a sound financial plan; though less than 20% credit banks with being “skilled” in helping them meet that goal.
  • More broadly, when asked if banks are “committed to helping the customer deal with their financial needs”, just over 20% respond in the affirmative. (Conversely, almost 80% believe banks are NOT committed to helping with consumers with their financial needs.)
  • On the other hand, banks are uniquely suited to step into this highest rung of customer want and need: In measure of trust, banks are far and away the leader – registering almost twice the level of trust as that afforded Credit Unions, over 7x the level afforded insurance companies, 6x the level afforded Mutual Funds, and almost 10x that afforded stock brokerages.

This year, Business Week magazine again noted financial services as being the most competitive category of business. Understanding and managing the dynamic of choice is perhaps the most important investment a bank can make to assure continued success, as that competition continues to grow.