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.

Customer engagement reinvented through the crowd?

There is a real trend at the moment about empowering the crowd.

Back in 2012, UK Deputy Prime Minister set out his vision for a "John Lewis" economy - making reference to the popular UK department store which is owned by it's employees.  

It was reported that:-

Mr Clegg will demand that the era of “crony capitalism”, in which wealth and economic interests have been “monopolised by the few” comes to an end.  "I want this to be the decade of employee share ownership. We need more individuals to have a real stake in their firms, more of a John Lewis economy."

This aim has been further backed up by the recent announcement that employees at the Royal Mail in the UK will be issued with shares when it is privatised and the governments plan to allow firms to offer reduced employee rights in exchange for giving employees a share in the company.  Whilst all of these plans have their detractors, they do point to an increasing trend to get the individuals, the employees, more closely linked to the fortunes of the business.

Over the pond, there has also been a movement to empowering the individual.  

Google for example announced back in May 2013 that it had taken a $125m stake in crowdfunding firm Lending Club, while at the same time investing in funding startup CircleUp, a crowd funding platform for small businesses to sell equity to investors.  These platforms are linking individuals directly through peer-to-peer lending/investment tools to allow ideas, products and businesses to be more easily funded.

Interestingly, recent changes slated for the US market via the Jumpstart Our Business Startups Act (JOBS) look to introduce this crowd funding ideology wider into the small business investment market.  By enabling small businesses to have a greater number of shareholders before they must be registered with the SEC, allowing these shareholders to be normal people (i.e. non-accredited investors)  and the direct encouragement of equity based crowd-funding platforms, the US government is really trying to break the strangle hold of financial institutions and encourage peer-to-peer lending.

In discussing crowdfunding and its potential impact on financial institutions, the Spanish bank BBVA stated:-

Crowdfunding is a disruptive innovation that commercial banks cannot ignore.[..] They currently serve the “bottom of the market”, but that doesn’t mean they cannot reach upper segments. In fact, by the time crowdfunding platforms appeal to mainstream consumers it will be too late for banks to catch up with the new trend.

So whether its employees gaining a greater stake in the business they work for or consumers having a direct stake in the products they buy or the businesses they frequent, there is definitely an increasing appetite to directly link the beneficiary to the benefactor; taking out the middle-man.

One really great example of empowering the crowd and how this is changing the way people transact and consume is that of Collaborative Consumption which is described as:-

A new economic model [and] named by TIME as one of the "10 Ideas That Will Change the World", collaborative consumption describes the shift in consumer values from ownership to access.

This is about connecting people directly with other people to exchange goods and services, whether it's borrowing a car for the day or a room for the night (think Airbnb).  By cutting out the middle-man in terms of a retailer, these start-ups are providing a way to solve the problem (getting a hole drilled by borrowing a drill) rather than forcing you to actually buy the product in the first place.

So what could this mean for loyalty?

Well I've previously discussed the thought about businesses more directly linking a customers loyalty with a share of the business.  Whether this is a UK Co-Op style share of profits programme or a more direct programme that gives actual shares in exchange for loyalty as done by US hotel chain Jameson Inns.

I do think however that there may be more innovative approaches to loyalty based on these crowd funding models.  Whether it's involving consumers more in product innovation/selection (Kickstarter style product ranging), linking the consumer more directly to the manufacturer (taking out the middle-man), linking consumer spend more tightly to business results or completely changing the way consumers buy (Collaborative Consumption).

Disruptive technologies, solutions and ideas are happening all the time and as BBVA stated, when these become mainstream it's too late to catch up.  Connecting individual consumers more directly to the opportunity, need or product and utilising online, real-time platforms with social tools is going to provide interesting opportunities to create and deepen customer engagement.

What do you think?