The 2012 Customer Experience Index

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Since 2007, the Customer Experience Index (CEI) has helped to elevate the awareness and recognition of the term “customer experience”

Michael Ruckman,
Founder and President, Senteo, Inc.

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For the fifth straight year, Senteo has conducted a market study of retail banks in Russia to rate how appealing banks are to their customers based on five key elements that make up the Senteo Customer Experience Methodology. Since 2007, the Customer Experience Index (CEI) has helped to elevate the awareness and recognition of the term “customer experience” among retail banking executives, and many bankers have thanked us for the insight and value they have received from our study. For some banks, their scores in our index have even become key performance indicators for the teams managing their retail businesses. This careful consideration of the customer represents a significant change from the mentality of retail bankers I met when I first moved to Russia in 2001.

Today’s retail banking market is undeniably different, and even with continued pressure, both from internal sources and external (e.g.the European financial crisis), the development continues.

Russian bankers have recognized that the Russian customer has continuously and steadily gained more influence. The choices that consumers make about their financial services providers continue to require more effort from retail banks in order to acquire, retain, and grow customer relationships. With this in mind, most Russian bankers today are worried not only about how to attract new customers, but also how to keep them. This indicates an important evolutionary change in the Russian retail banking market and illustrates a new focus on building relationships with customers and, ultimately, loyalty.

While the CEI was designed mainly to measure a bank’s appeal to potential customers, we have included some additional measures in this year’s study to recognize this transition. As well, in the near future, we wil launch new research components to illustrate the strength of Russian consumers’ relationships with their banks and the overall effects on the banks’ financial performance.

As a result, we have placed more focus on the quality of commentary and depth of analysis in this fiveyear anniversary CEI study. With the data that we have collected over the past five years, we are able to make several interesting conclusions and identify trends in the market or even within individual banks in the market. We are able to see the results of those banks that are striving to improve and the lack of results for those banks that have not made a concerted effort to become customer-centric.

In past versions of the study, Senteo outsourced the mystery shopping portion of the study to other consultancies, such as PwC and KPMG. This year, however, we chose to make the investment of using our own consultants to do the mystery shopping to maintain tighter quality standards and guarantee the accuracy of the mystery shopping scores. As well, this year we have chosen to expand the report with various articles outlining key developments and trends along with our forecasts for the future development of the Russian Retail Banking Market.

We are sure that this year’s Customer Experience Index report will be both interesting and insightful.

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As I write in “Beyond ‘Products & Services’ in Banking,” my full article for this publication, we are shifting the world to an Experience Economy where goods and services everywhere are being commoditized – and no more so than in financial services. What banks must do therefore is stage financial experiences atop their unexciting services.

Few companies understand that better than Senteo and few people better than its CEO, Michael Ruckman. I first met Michael at the BAI Retail Delivery Conference almost a decade ago. I introduced him to the benefits of the Experience Economy, while he introduced me to the joys of hookah and to the work he and Senteo were already doing to design and implement wonderful banking experiences.

I got to know Michael further as he became Certified Experience Economy Expert #012 out of now hundreds of such Certified Experts around the world, and I learned even more about Senteo’s many fruitful experience projects and design methodology. No company has better taken the concepts that I have written about in The Experience Economy and my other books and applied them to the banking industry. The results of its many clients demonstrate how they have successfully designed, implemented, measured, and now manage compelling financial experiences.

I have also followed Senteo’s work on the Consumer Experience Index (CEI – although, I might personally prefer “CXI” as a better acronym) over the past five years. This index provides a clear reading of how potential consumers view their experiences with banks – something that you ignore at your peril. The CEI’s focus on banking customers’ experiences and its standardized methodology enable you to compare yourself to your peers in a way you cannot get anywhere else.

This year’s CEI adds even more value to what Senteo has provided in the past, with its added content, analysis, and opinion pieces, all geared to helping banks understand the research itself and to expand their view of their relationships with customers. These great new additions will further help you realize what the results mean for the development of banking in general as it shifts further into the Experience Economy, and what it means for your bank in particular.

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What is Customer Experience Index, What is New in 2012 and What is Coming Next?

The Customer Experience Index (CEI) creates a new benchmark for retail banks and a tool for measuring the quality and consistency of experiences created for potential new customers to the bank.

https://youtu.be/l7jhyCI8Jvs

The CEI measures the performance of banks based on key areas that are of particular importance to potential customers, such as:

Brand

• How appealing is the brand and its positioning directed at customers? How well can customers identify with the brand’s perceived values?

Communications

• How effective are set advertising and promotional activities at generating customer interest?
• How clearly are values and benefits communicated to the customer?

Environment

• How accessible, intuitive, easy to use, and consistent are customer touch points?

Offering

• How well does the offering meet the needs of the customer?
• How well is the product packaged to create value for customers?

Culture

• How efficient is the organization in creating an internal customer-centric culture?
• How well do bank employees interact with customers?

These five elements are very important in appealing to any potential customer considering initiating a relationship with a particular bank. During this process of considering one bank, or many different banks, each customer goes through a number of steps that ultimately help to make a choice “to buy” or “not to buy” the products offered. It is extremely important for banks to measure their effectiveness in appealing to potential new customers. After all, the ability to attract new customers directly affects the overall growth and profitability of the bank’s retail business.

In reality, customers have the right to “choose” the bank that they will use on a daily basis and the bank (or banks) that they will use to help them solve their problems or realize their goals. Therefore, we have to acknowledge that customers will choose the bank or banks that they need based on a shopping process, just like any other good or service they buy. When a customer experiences a bank for the first time, they go through simple stages of discovery.

They will first see the brand and communications and form an opinion about potential benefits if they contact that bank. Then they will make contact through one of the customer touch points (environment). This could be a physical channel, such as a branch or point of sale, or it could be through one of the virtual channels, such as the call center or the Internet. And if that initial contact is pleasing, they will move on to understand the offering of the organization and experience the culture of the people with whom they are interacting. Only then will they make a decision to purchase or not to purchase from that bank.These areas of discovery for the customer also represent distinct areas in which a bank can lose those customers; therefore, measuring the effectiveness of these elements provides a very valuable indicator for banks. We have found, through using this study in multiple countries, that the banks that are more effective and advanced in these five elements are generally more effective at attracting new customers and rely much less on price as their main tool to attract those customers.

In other words, banks that create a better initial experience for potential customers are able to attract more customers that are willing to pay a higher price for a better quality experience overall.

What Is New In 2012?

As you may already know, Senteo has been conducting the Customer Experience Index study in Russia since 2007. Usually this study was performed in partnership with audit firms such as KPMG (in 2007) or PWC (2008- 2010). The role of the partners was mostly limited to information gathering in the form of mystery shopping visits to bank branches. However, due to such partnerships, we were often limited in the content that could be presented in the final report and in the methods we publicly communicated the study’s results to the market and the press.

Due to these and a number of other reasons, we have decided to conduct this year’s study independently and, for the first time, offer it in the form of a publication that resembles a business magazine in its style and look. The magazine features “thought leadership” editorial articles, expert commentaries, mystery shopper commentaries, key facts, and study findings. We hope that this publication will offer readers a more engaging and interesting material in a format that is more enjoyable and experiential.

Another change from all previous years is that we have added additional elements to the publication. Since this year’s study marks the 5th year anniversary of the CEI, it presented a perfect opportunity to provide a historic look at some of the banks’ customer experience performance. By doing this we were able to observe performance consistency and make appropriate conclusions. The CEI study is limited only to top retail banks in the country, based on the size of their assets, credit portfolio, and branch networks. Due to volatility in these criteria, in addition to other factors such as mergers, market exits, re-branding, etc, the composition of the study participants naturally changes from year to year.

What Is Coming Next?

If you are a regular reader of our publications, you may already know that the Customer Experience Index is based on mystery shopping visits in which people act as potential customers who come into contact with the bank for the first time. This naturally presents a certain limitation, because this approach does not allow us to assess the quality of the experience for existing customers. Nor does it provide us with data about how do the banks develop customer relationships in the long term and, as a result, how do they profit from it.

In the coming years, we plan to expand the scope of the study to rates the strength of relationships with customers. The methodology for this type of rating is currently being tested and applied on a pilot scale in multiple countries. The preliminary results of our testing in Russia has provided very useful insight as to how the Russian consumers value their current relationships with a banking provider and what they seek from that relationship in the future.

This would provide a significant added value to banking professionals who follow our research, because the relationship strength model would offer a better analysis of the factors that influence customer loyalty and retention. In addition, we would like to integrate profitability statistics into our research methodology, which would then give us the ability to measure and assess the intricate links between:

• The experience of potential customers before the purchase
• The banks’ effectiveness at developing strong relationships with customers
• The effect of the above on the banks overall profitability

The combination of these three key elements will help us to further enhance the value of our study to banking executives and stakeholders and hopefully guide them on a path to future success. 

Key Proofs of Concept

Over the past 8-10 years, the term “Customer Experience” has become a popular buzz phrase in businesses around the world. Companies love to proclaim their devotion to customers and pack their marketing campaigns with luring promises of an excellent experience. But when we pose the question, “How would you define ‘customer experience’?” we are often met by silence.

At Senteo we define Customer Experience as “a positive, engaging and fulfilling contact with a provider”. This seems simple, but to build, measure, and manage a business that is designed to consistently deliver positive, engaging, and fulfilling contacts is still a bit of a perplexing task for most companies. Many companies have tried cosmetic tactics to make their businesses more experiential, and, after much investment and flaccid rewards, finally made holistic and systemic changes to their operating models.

Banks are no different. We have seen many “experiential” innovations in the past several years. Unfortunately, most of these attempts have been mainly cosmetic. Some of the most visible examples of that trend were seen in Deutche Bank’s Q110 concept, Washington Mutual’s Occasio branches, ABN-AMRO’s Financial Centers, Umqua Bank’s Community Centers, ING’s Direct Cafés, Jyske Bank’s branches, etc. Even Sberbank has recently introduced its own rendition of a “Branch of the Future”.

The variety of the so-called “experiential” elements that we have seen in banks around the world includes many things that were once unheard of in a bank setting:

• Branch sound systems with different content schedules in different zones
• Sound domes and Panphonic Sound Signs to isolate sound to specific small areas
• Digital merchandising systems with local messaging and information
• Touch-screen video walls, interactive projection walls, and video façades
• Coffee, cookies, candies, popcorn, and even water bowls and dog biscuits for people that bring their dogs into the branch
• Lifestyle and life stage themed product packages and zones in branches
• Childrens’ play areas complete with Playstations, Wii game consoles, and Lego play tables
• Touch screen tables and kiosks with interactive content, streaming video, and even internet café areas
• Smell generators capable of generating different smells in different zones and at different times.
• Beautiful, innovative, even futuristic design of the environment and communications
• Experiential (sometimes even controversial) communications, such as human billboards, “random acts of kindness”, and “WooHoo moments” (Washington Mutual)

But the real question is: “Are such innovations financially justified?” Obviously, it is impossible to imagine that such costly endeavors can be rolled out through entire distribution networks. Therefore, these experiences, although they certainly do create a “wow” effect, cannot be replicated for all customers. Oftentimes, they simply serve as showrooms to illustrate technological advancements and set the ground for disappointment when customers return to visit the “regular” branches.

True or False?

The experiential innovations that we have seen to date have not generated financial results sufficient to justify the investment

Answer: Both

It is, indeed, true that customers do appreciate the positive experiences after witnessing such innovations. When customers come into contact with a bank that features cool technological gadgetry, pleasant surroundings, a nice smell, and even a comfortable place to just sit down and have a coffee, while surfing the bank’s interactive web portal on WiFi, it generates a certain “Wow” effect and the potential to create a positive and a memorable experience. But, do those customers buy more? Are they less price sensitive? Are they more likely to choose their primary bank based on a positive initial contact with a bank?

Obviously, there is a lot of skepticism about whether the investment in “experientialinnovations” is really justified financially – and rightly so. Many of the innovations that we listed above along with their “experience centers” failed to generate the expected results, and, therefore, were never rolled out to their corresponding network of branches.

At the same time, we do know that people have a choice, and, in most cases, customers will choose an appropriate match of quality and price. We also know that a percentage of the population (not a small percentage, either) is willing to pay more for a consistently better quality of contacts with their bank. For that reason, we would like to offer a couple of proofs of concept, based on facts and publicly available statistical data.

Proof of Concept #1: Pricing and Sensitivity

Throughout the last six years, we have studied the Russian banking market in an attempt to prove the link between those banks that score well on an initial customer experience and the level of price sensitivity from their customers. During that time we have made a number of very interesting observations that we would like to expand upon here.

Each year, since 2007, we have compared the pricing practices of Russian banks that have scored at the top and at the bottom of our annual Customer Experience Index. As a basis of comparison, we used standard offerings like the Visa Classic and MasterCard Standard debit cards that are commonly classified as a “mass market” product. When comparing the annual fees that the top-5 performing banks charge their customers to the fees charged by the banks who placed in the bottom 5 positions of the CEI study, we’ve always discovered a notable difference in pricing. This observation led to the conclusion that better performing banks can charge higher fees for standard products and still be successful in sales. The same holds true this year. Banks in the top 5 have maintained pricing levels 61% higher than the lowest 5 banks in the study.

This year, we also chose to look at the mass affluent segment, which seems to have become a special interest to all bankers in the past 12 – 18 months. When we make the same type of price comparison in the mass affluent segment – we observe the same scenario. The customers in this segment are generally more demanding, while at the same time less price-sensitive.

In 2012, the price differentiation among the same group of banks, but for the mass affluent segment, indicates a notable price premium advantage for the top5 performing banks in the CEI study (see graph on next page). Using the Visa and MasterCard Gold debit cards as the basis of comparison, we see that the annual commission fees (in U.S. dollars) at the top5 performing banks are 1.62 times higher than in banks that placed in the lowest 5 positions in the study.

This observation suggests that mass affluent customers are also willing to pay higher fees at those banks that offer additional value emanating from a better overall customer experience. So, in response to the question, “are customers sensitive to price” – the answer is absolutely “yes”! But are they willing to pay more in return for better experience? The answer is also “yes”. People will always have some level of sensitivity to price, but there is a large portion of the population that is willing to pay a bit more to have a more pleasant experience with their bank. The banks in the top 5 in the study have recognized this and tailored their business to that particular segment of the population. 

Proof of Concept #2: Share of Demand Deposits

Most bankers today use Demand Deposit Account (DDA) balances, in combination with some other key performance indicators, to identify those customers with a primary banking relationship (i.e. those customers that use the bank to manage their day-to-day finances). DDA balances are usually interest-free or lowinterest accounts. So, generally, customers will keep DDA balances in the amount that they need for management of their day-to-day financial obligations. Other amounts, not needed in the immediate future, would usually be moved to higher interest and/or longer term financial instruments. We tend to believe that the dynamic between demand deposits and term deposits reveals interesting truths about how customers choose their primary bank relationship (the bank that they use for day-to-day money management).

Using the same approach as last year, we’ve analyzed the volumes of demand deposit balances in proportion to term deposit balances at each of the banks in the top-5 positions in the CEI study; and compared these figures to banks that have placed in the bottom of the ranking. The data used for this analysis was obtained from official Central Bank sources for the fiscal years of 2010 and 2011 (according to the latest available information). 

As in the last CEI report, we were able to confirm that banks with a better customer experience rating outperform their colleagues from the opposite side of the rating chart, showing a 24% higher share of demand deposits vs. total deposits (please, refer to the next graph).

In addition, the gap in DDA balances has significantly widened since 2010, indicating that the top 5 banks in the CEI have experienced a 12% growth in DDA balances, while the lowest performers in the CEI study have shown only 3% growth in DDA balances.

This indicates that customers are more likely to keep their day-to day financial relationships consolidated in those banks that provide a more positive experience, which represents a significant advantage for those banks that score high.

Statistically, those customers that keep higher demand balances in a bank (generally indicating a day-to-day banking relationship) are also likely to be better at re-paying loans with that bank. Also, customers that are happy with their day-to-day banking relationship are also less likely to shop for solutions from other banks when they have additional needs.

As a result, they may begin to consolidate their financial relationship with one provider, which will represent a higher number of products per customer, lower credit risk, and more overall profit. The benefits are definitely interesting to most bankers today. 

The Top-10 in 2012

The Senteo Customer Experience Index (CEI) was not designed to rate banks based on their size or financial performance. To the contrary, the CEI was designed to measure each bank’s performance among the elements that generally increase its appeal to potential customers.

Therefore, understanding that there are many things that are important for the proper function of a bank internally (funding structure, anti-fraud systems, transfer pricing, CRM systems, core banking systems, risk management, etc.), we have chosen to focus this study on the elements that would make a bank more or less interesting to a potential customer seeking a new banking relationship. 

Mindful of this context, let us take a closer look at this year’s top-10 list in search of answers. This year’s leader group is crowded with new members; six to be exact. The composition of this group is quite interesting because it represents a number of contrasts. There are government-owned banks and private banks; Russian banks and foreign banks; giant banks and relatively small banks. The top-10 has never been so diverse during all five years of the history of the CEI.

#1 Alfa-Bank

Alfa-Bank is still the leader in the CEI, consistently since 2007. The bank’s performance strength can be attributed to its keen customer oriented focus, simplified branch processes, appealing product offerings, attractive branches, friendly service culture, and smart marketing that continues to attract customer attention. However, it seems that Alfa-Bank has somewhat slowed its innovative practices that have once helped to set it far apart from the rest. Its competitors are at the very doorstep and only a breath away, evidenced by the fact that in this year’s Index Raiffeisenbank performed better than Alfa Bank in the Communications and Environment categories and trailed closely behind in Brand, Offering and Culture.

#2 Raiffeisenbank

Raiffeisenbank consistently appears in the top10 in the CEI since 2007. It is customer-oriented, provides a solid level of service to customers, has a well-recognized international brand, has overall nice and conveniently located branches, friendly branch employees, and is quite competitive. The only reason why it has not been rated as number one in the Index is because of Alfa-Bank’s strong hold on the top position in the rating, confirmed each consecutive year.

#3 Home Credit

Although a well-recognized retail bank in Russia, Home Credit has never been a consistent performer in the CEI. This year, Home Credit moved up by 19 spots (the highest level of gain in 2012) in order to earn the third position. The only bank that has ever demonstrated such a remarkable year-on-year gain is MDM Bank in 2008 (gain of 22 positions). Home Credit Bank historically has been known for its strong POS lending business. Its branch network, therefore, has never been used as the primary channel for establishing customer relationships. However, in recent times, the bank has shifted towards more active deposit taking through its branch network. It is safe to assume that it is due to this shift that Home Credit’s performance in CEI has started to improve. Yet, the bank still shows quite a low level of demand deposits (DDA) in comparison to its overall deposit portfolio (3%). This would indicate that Home Credit is still not viewed by most customers as a “day-to-day” bank (please, refer to page #55).

#4 UniCredit Bank

While one can probably argue that UniCredit naturally belongs in the top-10 due to its international brand and the appealing design of its branches, its performance over the years would raise a few concerns. This year, UniCredit has regained its standing in the top10 (3rd spot in the overall rating) by gaining nine positions since the last CEI study. UniCredit Bank improved in all five categories of the Index (Brand, Communications, Environment, Culture and Offering) and also demonstrated a high level of day-to-day relationships in its retail business thanks to a 56% DDA ratio (top-3 in Russia). It would be interesting to observe UniCredit’s future performance in the CEI in order to conclude whether it can be consistent.

#5 Promsvyzbank

Promsvyazbank is making notable progress on the banking market in Russia. It has also been showing a steady, although somewhat slow, improvement in the CEI since 2007. The bank now places a keener focus on retail customers according to its public statements over the recent years, creating further diversification from its traditionally core business concentration in corporate banking. For the first time, Promsvyazbank enters the CEI’s top10 group with commendable results shown in most categories and a few innovations, such as Wi-Fi zones in its branches. However, it continues to lag behind in the sophistication of its offering and culture, areas that can probably help build longer term stability in the bank’s bid to maintain a formidable position in the CEI rating.

#6 VTB24

VTB24 is no stranger to the top-10, but it is noticeably giving ground to the competition. The bank’s performance in CEI-2012 demonstrated drops in all but one category in the rating: Environment. As a governmentowned bank, VTB24 benefited during the crisis from the common perception that it is a stable bank and place where customers can safely keep their savings. However, during the period of economic recovery, one of the bank’s main sources of concern was customer retention and loyalty. While VTB24 consistently shows a respectable level of performance, we believe that its future fate will be closely related to the bank’s ability to establish and sustain a strong relevance to retail customers; specifically, why should people keep their financial relationship at VTB24, and not somewhere else, beyond the fact that they are obviously a governmentbacked institution.

#7 Citibank

Citibank has long history, a bright brand, and a solid reputation. But despite these things, it has never been at the very top and it has proven to be rather inconsistent for a bank of such stature. Citibank demonstrated negative dynamics in all categories of the study, except Offering, and as a result lost five positions, clutching to seventh place in 2012. Most notably, Citibank’s branch staff Culture was hit the most, causing the bank to lose ten positions in the Culture rating at #16, the worst score among foreign bank brands. This is quite a negative development for a bank that traditionally prided itself on customer service and relationship building.

#8 Nomos-Bank

Among the newcomers to the top-10 is Nomos Bank. In direct contrast to Citibank, Nomos-bank improved in all categories, and especially in Culture (up by 10 positions in Culture, placing 3rd overall). Since the last study was released in 2010, Nomos Bank has been in development mode, widening its retail business and introducing a number of significant improvements. The most visible upgrade is perhaps felt through the Bank’s redesigned retail branches. But at the same time, the courtesy of the branch staff has given the Bank a new bulwark to be proud of.

Hopefully, this positive trend will continue in the coming years. History shows that even such impressive leaps forward can be momentary if unsupported by a long term commitment to the type of things that boost customer experience.

#9 Renaissance Credit

Renaissance Credit made a surprise entrance into the top-10 list, showing outstanding results for someone who is new to the study, and beating out its rivals OTP Bank and Russian Standard Bank. The Bank captured the 9th overall spot in the rating, and showed top-10 scores in all but one category – Environment. Perhaps, the most telling story about Renaissance Credit’s CEI-2012 score is its performance in the Culture and Offering categories, the toughest of the five categories. If the bank continues on the same path, it wouldn’t be hard to imagine Renaissance Credit firmly rooted among the best banks in the country. However, in order to show visible improvements, it really needs to focus on the consistency of its retail branches. The gap between the best and the worst performing branches was so vast that it placed Renaissance Credit in the 27th position, near the bottom of the branch consistency ratings.

#10 Sberbank

Probably the most significant addition to the group of leaders in the CEI-2012 is Sberbank. Forget everything you know, or you think you know, about Sberbank. The fact is: Sbrebank is changing and the bank’s massive efforts to reform and transform is finally starting to bear fruit, at least in Moscow. While it is hard to underestimate the giant, Sberbank is still the underdog in so many ways. Its branch inconsistency suggests that the bank still has a long way to go to truly entrench itself in the top- 10. But considering its steady progress over the last three years and the speed with which Sberbank was able to turn around, one has to recognize its notable accomplishment. If Sberbank manages to earn a genuine reputation in the market as a customer-friendly bank, it will generate tremendous competition.