Increasing Focus on Customer Retention (The) - UK - February 2004

SUMMARY

Introduction and Abbreviations

• Understanding why consumers switch is essential
• Global information and research
• Consumer research
• ACORN

Abbreviations

Executive Summary

• Customer retention strategy is now at the top of the agenda
• Financial providers are keeping customers satisfied
• Satisfied customers are happy to defect for lower costs
• Lower rates are the key switching trigger
• Inertia is a characteristic of the financial services industry
• Men, 25-34s and ABC1s are the most likely to switch
• Lower prices will continue to get consumers moving

Background

• Consumers win in an intensely competitive marketplace
• Figure 1: Declining loyalty in todays competitive financial servicesmarketplace
• A loyal customer base is the key to long-term profitability...
• ...however, many customers are not interested in pledging allegiance
• Providers look to leverage the lifetime value of customers
• Figure 2: Customer
profitability life cycle
• Providers must not encourage loyalty among the unprofitable
• Customer centricity is the key to fostering loyalty
• Figure 3: Customer centricity, loyalty and retention

Market Factors

• Deregulation injects significant new competition
• Established providers face a barrage of competition from new entrants
• Traditional providers have had to rise to the competitive challenge
• Selling a cradle to grave range of products is getting harder
• Sub-brands are created to appeal to the Internet generations...
• ...and help raise the service bar
• Non-traditional providers position themselves as consumer champions
• Bargaining power switches from suppliers to buyers
• Figure 4: Shifting bargaining power in the financial services industry
• Even switching bank accounts has got easier
• Price reflects quality in the eyes of many customers

The Impact of the Internet on Loyalty

• Rising Internet usage will inevitably lead to increased switching activity
• Figure 5: British Internet penetration, March 1999-October 2003
• The population is split by a digital divide...
• Figure 6: British Internet penetration among those who use the Internetat home/work/place of study or elsewhere, 2001-03
• ...though it is closing across some socio-demographic groups
• The current Internet population is attractive to financial providers
• Consumers are increasingly likely to purchase financial products online
• Figure 7: The evolution of the e-consumer
• Financial products are the most complicated online purchases
• Aggregator sites make shopping around for the best deals easy
• Internet channels are differentiation destroyers

The Consumer - Switching Behaviour

• Research aims and objectives
• Structure of the consumer research sections
• Product penetration across the seven areas examined
• Figure 8: Financial products owned (either in own name or with apartner), December 2003
• Customers are largely satisfied with their financial providers
• Figure 9: Satisfaction with current financial services provider,September 2002 and December 2003
• Consumers pile on the praise for insurance companies
• Current account providers dont enjoy such warm praise
• Complacency among borrowers is only too clear
• Customer satisfaction does not guarantee customer loyalty
• Figure 10: Respondents who would consider switching to another financialservices provider, December 2003
• Satisfied consumers will see no reason to switch
• Which consumers are most likely to switch?
• Figure 11: Financial arrangements that consumers would considerswitching to another company in the next two years, by socio-demographiccharacteristics, December 2003
• Home insurance and mortgage switching are clearly linked
• University and first jobs get consumers thinking about switching
• Millions of consumers consider switching provider
• Figure 12: Respondents who would consider switching to another financialservices provider, by product ownership, December 2003
• Inertia will remain a feature of the industry for some time to come
• Figure 13: Attitudes towards switching financial arrangements to anothercompany in the next two years, by socio-demographic characteristics,December 2003
• Apathy exists across the whole socio-economic spectrum
• Millions have already switched financial provider
• Figure 14: Financial product/arrangements changed to a different companyin the last two years, December 2003
• Loyalty or inertia clearly exists
• Premium disparity leads the young to shop around for motor insurance
• Figure 15: Financial product/arrangements changed to a different companyin the last two years, by socio-demographic characteristics, December 2003
• Almost one in five ABs have switched their home insurance
• Credit card switching is concentrated amongst the young
• Some 18% of ABC1 families have remortgaged
• Young and affluent are most likely to have reviewed their providers
• Figure 16: Financial product/arrangements changed to a different companyin the last two years, by socio-demographic characteristics, December 2003
• Few look to switch savings accounts and personal loans
• Customer inertia or customers satisfaction?
• Putting switching into context
• Figure 17: Switching activity over the last two years, by productownership, December 2003
• Millions are living beyond their means by overstretching on plastic
• Churn is a fact of life for insurers

The Consumer - General Insurance

• Motor insurance premium income rises steeply over the past few years
• Figure 18: Domestic motor and home insurance (annual business), by grosswritten premiums, 1998-2002
• In 2002 the average motor insurance premium was ｣410
• Figure 19: Average motor insurance premium rates, at current andconstant prices, 1996-2002
• Advertising aims to present intangibles more tangibly
• Car insurance advertising increases significantly in 2003
• Figure 20: Motor insurance advertising expenditure (｣000), by top10 spenders, 2002 and 2003
• Advertising expenditure is primarily split between TV and direct mail
• Figure 21: Motor insurance advertising expenditure (｣000), bymedium, 2003
• Low quotes will have the greatest impact on satisfaction levels
• Figure 22: Satisfaction with motor insurance provider, December 2003
• Implied dissatisfaction peaks among younger men
• Figure 23: Satisfaction with motor insurance provider, December 2003
• Home insurers benefit from a buoyant property market
• Insurers differentiate in order to both win and retain customers
• New channel preferences make switching easier
• Figure 24: Distribution breakdown of total household insurance premiums,by channel, 1999-2002
• Home insurers invest millions in order to deal with churn
• Figure 25: Home insurance advertising expenditure (｣000), by top10 spenders, 2002-03
• The lions share of advertising budgets are spent on
direct mail
• Figure 26: Home insurance advertising expenditure (｣000), bymedium, 2003
• Millions feel that they are getting a good deal on their home insurance
• Figure 27: Satisfaction with home insurance provider, December 2003
• Implied dissatisfaction is highest amongst the young
• Figure 28: Satisfaction with home insurance provider, December 2003

The Consumer - Current and Savings Accounts

• The current account market is dominated by five banking groups
• Figure 29: Estimated market shares of current account providers, 2000-04
• New providers failed to live up to their expectations
• Traditional providers had to act quickly to close the innovation gap
• Banks satisfy the vast majority of their current account customers
• Figure 30: Satisfaction with bank or building society which holds yourcurrent account, December 2003
• ABs are least likely to admit to being fully satisfied with their bank
• Figure 31: Satisfaction with bank or building society which holds yourcurrent account, by socio-demographic group, December 2003
• Banks must keep their most profitable customers satisfied
• Banks benefit from being alike
• Banks invest ｣35 million on advertising
• Figure 32: Current account advertising expenditure (｣000), by top10 advertisers, 2002 and 2003
• TV accounts for half of total adspend
• Figure 33: Current account advertising expenditure (｣000), bymedium, 2003
• Consumers are complacent as far as savings accounts are concerned
• High street banks offer measly interest rates on instant access accounts
• Figure 34: Sample rates available on high street instant accessaccounts, January 2004
• Direct savers get the best deals
• Figure 35: Best rates available on instant access accounts, January 2004
• Opening a notice account will often net savers a better deal
• Figure 36: Best rates available on notice accounts, January 2004
• RBS has some ｣220 billion in personal deposits
• Figure 37: Deposits held by MBBGs (demand and other accounts), 2002
• Most consumers are happy to be satisfied with less
• Figure 38: Satisfaction with company/companies that hold cash ISA orsavings/deposit account, December 2003
• Implied dissatisfaction is highest amongst those with most to lose
• Figure 39: Satisfaction with company/companies that hold cash ISA orsavings/deposit account, by socio-demographic characteristics, December2003
• Savings accounts are often marketed alongside current accounts
• Figure 40: Savings account advertising expenditure (｣000), by top10 spenders, 2002 and 2003
• Banks invest over ｣8 million on press advertising for savingsaccounts
• Figure 41: Savings account advertising expenditure (｣000), bymedium, 2003

The Consumer - Mortgages

• Figure 42: Total mortgage debt, 1986-2002
• Mortgage lending hits a record high in 2002
• Figure 43: Net and gross lending secured on dwellings, 1995-2002
• Remortgage activity has rocketed in the past few years
• Figure 44: Gross advances, by type of loan, 1997-2002
• Consumers can make substantial savings by switching mortgage
• Mortgage providers invest millions to attract the attention of consumers
• Figure 45: Mortgage advertising expenditure (｣000), by top 10spenders, 2002 and 2003
• Press advertising accounts for over half of all adspend
• Figure 46: Mortgage advertising expenditure (｣000), by medium,2003
• One in ten mortgage holders are not satisfied with their current provider
• Figure 47: Satisfaction with mortgage provider, December 2003
• C1s are most likely to infer dissatisfaction with their mortgage provider
• Figure 48: Satisfaction with mortgage provider, by socio-demographiccharacteristics, December 2003

The Consumer - Credit Cards and Loans

• Credit and loan competition has been fuelled by new market entrants
• Credit cards in issue double as consumers embrace the credit culture
• Figure 49: Credit cards in issue, 1995-2002
• Consumers can choose from some 1,400 credit card providers
• Millions could be better-off by switching credit card
• Figure 50: Satisfaction with credit card company/companies, December2003
• Switching is likely to occur across the socio-demographic spectrum
• Figure 51: Satisfaction with credit card company/companies, bysocio-demographic characteristics, December 2003
• Credit card companies spent almost ｣330 million on advertising in2003
• Figure 52: Credit card advertising expenditure (｣000), by top 10advertisers, 2002 and 2003
• The vast majority of adspend is invested in direct mail campaigns
• Figure 53: Credit card advertising expenditure (｣000), by medium,2003
• Millions turn to their bank to arrange a personal loan
• Figure 54: Unsecured loans as a proportion of total consumer credit,gross lending, 1998-2003
• Few consumers are likely to switch personal loan provider
• Figure 55: Satisfaction with personal loan(s) provider, December 2003
• Younger consumers are least satisfied with their loan provider
• Figure 56: Satisfaction with personal loan(s) provider, bysocio-demographic characteristics, December 2003
• Credit frenzy leads loan providers to invest millions in advertising
• Figure 57: Personal loan advertising expenditure (｣000), by top10 spenders, 2002 and 2003
• Mail is the promotional channel of choice
• Figure 58: Personal loan advertising expenditure (｣000), bymedium, 2003

The Consumer - Switching Triggers

• Price is the main factor that encouraged consumers to switch provider
• Figure 59: Factors encouraging consumers to switch financial provider,December 2003
• Bad service is simply not tolerated
• Seven in ten 35-44s have switched provider for lower costs
• Figure 60: Factors encouraging consumers to switch financial provider,by socio-demographic group, December 2003
• Low prices are an unstable platform for building loyalty
• Better all-round service is a draw for millions of consumers
• CRM systems called in to help identify potential switching triggers
• Moving home will trigger switching
• ABC1 families are least tolerant of bad service
• Low prices and high investment returns will get people moving
• Figure 61: Factors that would prompt consumers to switch financialprovider, December 2003
• Men are far more likely to switch to a provider with better products
• Figure 62: Factors that would prompt consumers to switch financialprovider (top 4 reasons), by socio-demographic characteristics, December2003105
• Further analysis

The Future

• Loyalty can be fostered by continuously improving product quality
• New distribution channels create a more level playing field
• Traditional providers will be able to exploit their old advantages
• Consumers will continue to weald the power

Forecast

• Scenario 1
• Figure 63: Forecast of the number of switchers in 2007, by product type,Scenario 1
• Scenario 2
• Figure 64: Forecast of the number of switchers in 2007, by product type,Scenario 2
• Scenario 3
• Figure 65: Forecast of the number of switchers in 2007, by product type,Scenario 3