The Consumer Trust Imperative:
Understanding—and acting on—trust as a key performance driver
Since 2008, AlixPartners has conducted the biannual Financial Services Franchise Health Study, which focuses on the issue of consumer confidence in financial services providers and how the underlying drivers of consumers’ perceptions of transparency, financial soundness, and the fairness of policies and procedures drive that consumer confidence. More importantly, we have been monitoring and studying how these drivers of consumer confidence influence the share of wallet captured, the ability to acquire customers, and deposit flows.
Our analysis clearly shows that consumer trust is directly tied to a bank’s ability to grow its business. Short-term revenue can be maximized through aggressive fee income strategies, but this increase may come at a long-term strategic cost. Our consumer trust analytics focus a bright light on how large banks’ historic fee income policies and practices have undercut the goforward health of their retail franchises.
- The level of consumer trust achieved fundamentally drives the share of wallet captured (figure 1). A bank cannot capture more consumer deposits/assets than it has earned through credibly performing on consumer trust.
- Consumer trust is primarily driven by consumer perceptions of “transparency” and “fairness in pricing” (figure 2). This dynamic is true across all consumer segments. Equally important, consumers have begun to scrutinize bank practices closely. Our research results suggest that consumers have become quite discerning across providers.
- Consumer perceptions of financial soundness also dramatically influence deposit outflows. This dynamic was particularly evident in 2008 and 2009 during the height of the financial crisis. In a case study analysis of several leading banks at that time, we captured the ongoing shifts in the relationship between financial soundness and deposit flows that reflected market attitudes (figure 3): if you are not perceived as financially sound, you will face challenges, even if you perform well on consumer trust.
Over the past decade, large banks may have end-gamed their earnings and mortgaged future growth by pursuing pricing (and business practices) that undercut consumer confidence. The fee income-producing design of checking account products historically generated significant revenue streams, but it undercut consumer trust and the ability to make share-of-wallet gains.
If you are not perceived as financially sound, you will face challenges, even if you perform well on consumer trust.
At the same time, there is a creeping reality that perhaps, in today’s highly regulated environment, the high return on equity and earnings levels generated by retail banking in the recent past are unsustainable. As a esult, there may be great opportunity for future growth for banks that are willing to commit to straight-forwardness and transparency, and seek revenue lift through innovation rather than fee optimization.
We see banks needing to pursue three steps:
- Redesign and repackage products to increase transparency and “straightforwardness” delivered to consumers. Pricing and product design need to be simplified and moderated. From our ongoing analysis, we have identified specific operational drivers that impact consumer trust performance.
- Once “new” products are ready to be marketed, launch marketing and communication efforts aimed at simple and straightforward positioning. Consumer advocacy-driven scrutiny of fees and business practices continues to amplify the oversight and disclosure required by regulators. The products and practices that contributed “excessive” retail revenue are going to have to be reduced in importance. Our analysis of consumer behavior and marketshare dynamics suggests that banks that move first to reposition will capture the greatest share gains.
- New delivery channels and tools should be explored as potential solutions to reposition on the trust front. Mobile banking capabilities are providing exactly that type of opportunity. Driven by powerful demographics, mobile is being mainstreamed into consumer shopping and, ultimately, financial services behavior. Mobile and online both provide the ability to empower consumers to better manage their bank accounts and fees—and help consumers to achieve the transparency and control they desire.
It is highly ironic that what ten years ago was hailed as a great idea by industry analysts (e.g., check-posting order changes and other transaction fee income practices) is today viewed as a point of vulnerability.
There may be great opportunity for future growth for banks that are willing to commit to straight-forwardness and transparency rather than fee optimization.
Nevertheless, the train has left the station regarding the increasing level of consumer expectations around the degree of transparency, control, and even advocacy (e.g., are you acting in your customers’ best interests?) required.
Going forward, financial services providers will experience increasing pressure to understand how they are performing on consumer trust, how that performance translates to economic impact, and what operational trust drivers need to be addressed to grow and retain share in an increasingly transparent and consumer-empowered marketplace.
Look for a deeper discussion on this topic next quarter when we explore the operational drivers of trust.