A customer satisfaction makeover.

Author:Clancy, Rocky
Position:Consumer Research - Report
 
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As mortgage lenders negotiate one of the most difficult environments in decades--one in which capital, credit and cost-cutting are dominating C-suite agendas--the presumably "softer" and more discretionary customer satisfaction imperative is in danger of being put on the back burner. Financial institutions are asking themselves the question that only a few years back would have been unthinkable: Does customer satisfaction really matter?

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At J.D. Power and Associates, we say those tempted to put such "niceties" as customer satisfaction aside need to seriously question whether potential cost savings from reducing customer focus are worth the risks to both reputation and revenue at this critical juncture.

For starters, now is exactly the wrong time for financial institutions to make ends meet on the backs of the customers they serve. Doing so will further exacerbate the public ill will and political headwinds the industry already faces.

When 84 percent of respondents "somewhat" or "strongly" agree that financial institutions were responsible for the current financial crisis, as they did in an October 2008 survey by J.D. Power and Associates, it is a clear indication the industry faces an image crisis unlike anything seen in generations. In particular, as reflected in the 2009 Retail Banking Satisfaction Study, ratings for bank brand image dimensions such as "customer vs. bottom-line-focused" and "personal vs. impersonal service" continue to plummet.

Adding to the challenge is the wave of consolidation sweeping the industry. Already-fragile customer loyalties are further threatened when current relationships are merged into a new institution.

An April 2009 J.D. Power and Associates study of several large-scale mergers currently under way revealed that customers of the newly acquired institution were two to three times more likely to switch to another institution than they were a year ago, when they were customers of the legacy institution. Not surprisingly, the image ratings for the acquiring institutions are substantively worse than already-low industry averages.

For mortgage customers in particular, we have seen a longstanding trend in the Primary Mortgage Servicing Study of lower satisfaction levels among those whose mortgages are not being serviced by their originating lender.

Whether real or perceived and whether at the public or individual level, any lapse in focus on the best interests of customers, empathy for customer tribulations or flexibility in helping customers solve problems threatens not only to serve as flashpoints for the next congressional hearing or bank-bashing headline, but also further erodes customer loyalty and advocacy.

But does it pay?

Yet mending tattered brand images and cementing fragile customer loyalties can have the hollow ring of platitudes that leave many bankers continuing to ask: But does higher satisfaction really impact my bottom line?

Fortunately, the answer is a resounding "Yes." J.D. Power and Associates 2008 Primary Mortgage Servicing Study demonstrated that modest advances in the customer experience could lead to significant enhancements to the shareholder experience.

We estimated that for a l-million-loan portfolio, improvements in customer satisfaction--and resulting higher retention, more word-of-mouth recommendations and lower-cost interactions--could lead to a pre-tax revenue gain of $30 million (see Figure 1). It is important to note that the majority of that gain derives from higher customer-retention levels. The key here is getting repeat business.

Figure 1 Impact of Improvements in Mortgage Servicing Per 1 Million Loans Serviced Description Profitability Impact Shift to electronic billing $1.5 million Adoption of electronic payments $1 million Reduction in incoming calls $1.5 million Improvement in retention $17.2 million Increased acquisition from word-of-mouth $8.4 million SOURCE: J.D. POWER AND ASSOCIATES 2008 PRIMARY MORTGAGE SERVICER SATISFACTION STUDY It is also important to note that getting repeat business, rebuilding financial stability and restoring public standing are not mutually exclusive. Improving reputation and increasing revenue are not in conflict. We estimate that customer perceptions of brand image carry approximately half the weight (with satisfaction accounting for the other half) in determining customers' overall commitment to an institution and their willingness to do repeat business. The steps involved are not terribly complex, but rather require a return to the following basics--the blocking and tackling of consumer lending and customer service:

* Understanding and executing against the drivers of retention;

* Providing empathy and flexibility to those in trouble; and

* Communicating early and often, particularly during periods of uncertainty and change.

The balance of this article will expand on each of these steps.

The building blocks of repeat business: Drivers of retention

Whether the economic environment is encouraging or inhibiting refinances or new-purchase mortgages, the key to retention efforts is to ensure that any borrower paying off a loan first looks to and then selects his or her current servicer as the lender for a subsequent mortgage. So while market conditions and attitudes toward the industry at large are outside the control of individual servicers, the ability to deliver the type of experience that will engender loyalty is certainly within it.

While there are many marketing strategies for increasing retention rates, J.D. Power and Associates data suggest that strategies designed around satisfying customers and/or meeting their needs present a great opportunity to impact retention.

According to data collected by PricewaterhouseCoopers (PwC), New York, retention rates among mortgage servicers are surprisingly low at an average of 14 percent. Telling a similar story, approximately 22...

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