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March 2000 Volume 1.09
Bank Profitability
by Rodger Gallagher
Do different levels of satisifaction impact bank
profitability?
In the previous article, we saw how the work done by James DiConstanzo
a senior vice president at the PNC Bank in Pittsburgh, had found
that highly satisfied bank customers have higher account balances.
Work in the telecommunications and manufacturing industries has
found that business units with greater percentages of highly satisfied
customers have higher profits. But does the same relationship hold
for banking? DiConstanzo investigated profitability by looking at
the household revenue per employee for each branch of the PNC bank.
Many banks have found that the total household revenue to the bank,
consisting of a customer's total loans and total deposits, provides
an easy to calculate metric that is directly related to profitability.
Branches with large percentages of customers with high household
bank revenue and small numbers of employees are the most profitable
ones. The researchers at the PNC Bank checked for a relationship
between high customer satisfaction levels and total household bank
revenue per employee for each branch.
Bank branches with highly satisfied customers are most profitable
The researchers found that 15% of the bank branches had excellent
percentages of highly satisfied customers. Another 70% of branches
had good levels of highly satisfied customers, while in the remaining
15% of branches only a fair percentage of customers were highly
satisfied. When the household bank revenue per employee was calculated
for the bank branches in the top segment of highly satisfied customers,
it was found to be 23% higher than the average profitability for
all branches.
Where the percentage of highly satisfied customers was only good,
branch profitability was 3% below average, and where the percentage
of highly satisfied customers was only fair the branch profitability
fell to 9% below average.
So bank branches that are most profitable have excellent percentages
of highly satisfied customers. A link has been proven. The question
must be asked as to whether the link is causal. i.e. Do high levels
of customer satisfaction cause customers to give a bank branch a
greater share of their total loans and deposits, or do banks provide
higher levels of customer service to customers who have high levels
of business?
To answer this question we would need to know the demographic breakdown
of the customers for each branch in the PNC research. Are we comparing
like with like? If the data was broken out by branches serving customers
with the same levels of affluence, then we could be more confident
of a causal link if the same relationship was found. But if the
data indicates that only customers in high affluence areas are highly
satisfied, then clearly the bank is consciously or unconsciously
providing inferior levels of service in areas that are less affluent.
Perhaps branches are further apart and waiting times for tellers
are higher at branches in less affluent areas? So although the service
delivery processes may be identical in each branch, bank managerial
decision-making may influence service levels.
An important customer need is for banks to stand by customers in
bad times as well as good times. Banks are faced with hard decisions
when customers run into hard times. What is the right balance between
protecting the bank's loan portfolio and continuing to provide superior
service to a customer in difficult times? Requiring a customer to
reduce the level of a loan when they look risky will obviously result
in both a reduced level of satisfaction and a reduced level of total
loans. So although a link would exist between the level of satisfaction
and the level of profitability, the causal factor would be the drop
in level of profitability and the customer experience associated
with it.
Perhaps the causal effect occurs in both directions. In some situations
high levels of satisfaction are driving customer to give banks a
larger share of their business, while in others the actions of the
bank associated with low customer profitability are causing low
customer satisfaction.
The banking industry is one that is constantly changing. While
branch service continues to be important for many customers, other
people are able to receive all of the services they require over
the phone from Call Centres or from Automatic Teller Machines, or
using the Internet. These customer interactions are equally important
as the service provided by traditional bank branches. There is much
work still to be done in determining the drivers of Customer Value
in the changing banking industry. The work of James DiConstanzo
at PNC Bank is an important step forward in determining these drivers
and their relationships. In the next article we look at what the
PNC Bank found happens to the total bank revenue over time for highly
satisfied customers and for customers whose satisfaction level decreases.
WHAT'S YOUR FIRST NAME?
 Well you
can't spend all of your time at Raglan looking at beautiful Moonlight
Bay. At times you need to eat and at those times one of my favourite
places is Vinnies.
Colin Chung and his Vinnies team reflect the friendly air of Raglan.
The restaurant is in a building that has been added to over the
years and the different sections all have a different character
yet fit together. Paintings and other artwork by local artists lines
the walls and are available for purchase.
You usually order at the counter and you tell them your first name
so they can find you when the meal is ready. Vinnies is not known
for speed of service so be prepared to wait a while for your meal.
But the meals are worth the wait.
I especially like Escabeche of fresh Raglan Snapper. The marinaded
fish is steamed and served with new potatoes and salad. While Vinnies
isn't licensed the Super Liquor outlet immediately opposite has
a good range of wines, so this is a productive way to spend the
time while you wait for your meal to be prepared.
And after the main, Vinnies has a range of desserts including fresh
seasonal berries and pecan pie. Then there is a choice of freshly
ground coffee blends.
Phone Vinnies on +64 (7) 825 7273 or email them at vinnies@raglan.net.nz
or at Wainui Road, Raglan. You need to book at weekends.
Regards,
Rodger Gallagher
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