Friday 16 August 2013

Loyalty vs Lock-in (Current Account Switch)


In September there will be a big shakeup in the UK personal banking market.  The launch of the Current Account Switch Service will enable consumers to more easily move their current accounts from one bank to another - for free.

The switch has a low porting time - just 7 days, no porting charge and all existing automated payments such as standing orders and direct debits are moved as well as incoming payments such as salary credits.

There are obviously likely to be winners and losers when this launches and some fierce marketing from both existing banks as well as new entrants to attract customers to move.  A survey last year indicated that up to 75% of respondents would trust UK department retailer John Lewis if they moved into banking and 80% said they would consider moving to a non-traditional banking provider.

Presently, UK banks enjoy strong levels of loyalty, with very few customers moving banks.  However this is partly due apathy with the industry - "they are all the same" - and partly due to the high switching costs - "I can't afford for my bills not to get paid".

With the introduction of this new scheme, the high switching costs barrier has been reduced - it will be interesting then to see if banks and new entrants start to address the first barrier - apathy.

There is precedence as to what happens when high switching costs are reduced.  

Within the mobile telco industry, the introduction of Mobile Number Portability (MNP) made it easier for consumers to change provider without having to change their mobile number.

A research report by Cho, Ferreira and Telang entitled "The Impact of Mobile Number Portability on Price, Competition and Consumer Welfare" showed that, on average:-

  • Market price fell after the introduction of MNP
  • The market power of the incumbent was reduced and the price gap became smaller
  • Consumer surplus increased - that is the gap between the maximum price the consumer would pay and what they actually paid

For those large companies (historically having a monopoly position), the impact of reducing switching costs can be large.  

In India for example, local provider BNSL lost a large number of mobile subscribers (lost 47.7k) at the expense of new entrants like Vodafone (gained 50.7k).  In the UK, with the privatisation of utility companies, British Gas initially fared well.  However the market entry costs were high for utilities and so it was only when the deregulation of utilities in other markets was introduced that true competition followed - from this point on, British Gas was losing 40k customers every month.

This is where it gets interesting from a loyalty vs lock-in perspective.

Once switching costs are reduced and customers are able to move more easily, they will start to compare the products and services may closely.  Customer apathy will reduce and increasingly it won't just be price that customers are focused on, it will be service and benefits.  Disjointed customer communications, unhelpful staff and punitive fees will all become trigger points for defection and churn.

Once the lock-in is removed, the only thing left is loyalty

British Gas managed to turn this around.  Back in 2008 they attracted 2.2m new accounts (almost 4% of the market), but lost 2.6m back out the same door.  Just to stand still they needed to reduce churn and they did this by focusing on their customers.  With joined up communications and increasingly joined up systems, British Gas began winning back their customer's loyalty.

Between 2008 to 2010, British Gas managed to shift the needle from a net annual loss to an annual gain - winning 2m new accounts in 2010 versus a loss of 1.8m.

Based initially on a communications idea around the concept of "Your home is your world", brought to life through campaigns such as "Planet Home", this has extended over time to include British Gas joining another popular UK brand as a partner within the Nectar loyalty programme.

This had a further positive impact on results with a Net Promoter Score (NPS) increase of 6%, churn down by 5% and within just 8 weeks, British Gas was 2nd only to Sainsburys as the most associated Nectar partner.

This shows both the potential issues that a reduction in switching costs can bring as well as the benefits that a focus on reducing customer apathy can attract.

The challenge then that UK banks will face from September is one of loyalty vs lock-in.  Customers will be free to choose and as competition increases, which it no doubt will, the banks will only retain their customers if they're actually focused on their customers.


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