Consumer trust drives share of wallet
Consumers’ trust in their primary bank is a major driver of share of wallet capture according to a study by Mercatus, a financial services strategy consulting and investment firm.
The study reveals that the average share of wallet captured by financial institutions increased by 18 percentage points on a scale of 1-5, from 34% at a trust score of 1 to 52% with a trust score of 5. For a large bank with more than one million retail customers, the revenue differential is estimated to be as much as US$100m.
“The Mercatus 2008 Financial Services Franchise Health Study demonstrates a decisive link between the level of consumer trust that banks develop and business results,” said Bob Hedges, Mercatus managing partner. The study of more than 3,200 customers focused on attitudinal, behavioral and decision-oriented questions related to how consumers choose their primary bank, which products they utilize, how often and why they change providers; and the role of trust, and the drivers of trust, in the consumer decision-making process.
The research findings show that while trust in an institution does not impact new customer acquisition performance, it is a major driver of success for cross selling, capturing share of wallet, and customer retention.
Key factors affecting the level of trust that consumers have in their banks include:
– Transparency of banking costs such as deposit service charges and nuisance fees such as over limit and late payment fees on credit cards
– Clarity of operational processes
– Employees’ preparedness to go “above and beyond” to meet customers’ needs
In recent years, a significant amount of consumer research has documented consumers’ declining trust and confidence in banks. The Mercatus study is the first to quantify the impact consumer trust has on key financial metrics such as share of wallet captured as well as the impact specific business practices and processes have on consumer trust.
“A direct, quantifiable connection exists between how banks deliver their services to their customers and the level of business and share of wallet they are able to capture,” said Hedges. “Understanding this connection will allow banks to make the right investments to gain and maintain consumer trust in order to grow their business.”
Share of wallet
According to the Mercatus analysis, each incremental step up in consumer trust directly translates into share of wallet gains across all consumer segments. Within the Mass Affluent segment, the impact is the strongest with the share of wallet captured doubling as trust scores range from 1 to 5.
“Consumers are quite discerning when it comes to assessing the performance of their bank on the primary elements that comprise trust,” said Teresa Epperson, Mercatus partner. “The primary trust elements are reliability – consistent dependable banking experience; transparency – clear and accessible information regarding pricing, rates, fees, product features; engagement – the quality of their interactions, and championing the customer through relevant products and services that are in the best interests of the consumer. The challenge that banks face today is that other financial services competitors such as brokerages and credit unions are outperforming the banks in these areas.”
With increasing pressure from non-bank competitors, in particular leading brokerage firms like Schwab and Fidelity, banks must address their trust and transparency challenges if they are to achieve their ambitions for growth, according to Hedges. “We believe the Mercatus research study provides the insights for creating a definitive roadmap for addressing the consumer trust imperative,” he said.
The study of 3,204 US consumers over the age of 18 was completed by Mercatus LLC from April 24 to May 6, 2008. The survey was fielded to an online panel managed by Market Tools. The results are representative of the US population. Mass Affluent consumers are defined as those consumers with investable assets greater than US$50K, not including 401(k) plans or real estate. Trust score represents the percent of respondents who mostly or completely agree with the statement “I trust my bank”.
Transparency score represents the percent of respondents who mostly or completely agree with the statement “My bank provides clear and accessible information regarding products and services (i.e., product features, prices, rates, new account process, fees, investment returns.)”