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Banks: Get Your Customers to Go Digital
Business Journal

Banks: Get Your Customers to Go Digital

by Daniela Yu and John H. Fleming

It's a big ongoing discussion among bankers: How to move customers -- especially less profitable ones -- from more expensive person-to-person service channels to less expensive digital ones. Gallup's recent nationwide retail banking study shows how customers might react when banks try to implement these changes.

Half of all customers will look for another bank if fees are imposed.

The study explored the channels customers preferred to use -- and the channels they wound up actually using -- for 14 of their most common banking needs. Our analysis suggests that migrating customers from channels they prefer to channels they don't may lower their engagement with their bank and their satisfaction with the channel.

While bank executives may be less concerned about a drop in engagement among customers who are less profitable to the bank, they might be seriously concerned about lower engagement among more valuable customer segments, such as affluent and mass affluent customers. Channel migration and an ensuing decline in channel satisfaction and customer engagement among these customers could result in loss of revenue, profitability, and customer retention.

There are actions bank executives can take to coax customers into changing their banking channels, such as using incentives, setting positive defaults, and providing a technology concierge. But before banks can begin migrating customers to new channels or guiding them to a desired set of default channels at the start of a relationship, they must first determine the optimum channels that will meet the customers' service needs and the bank's need to provide that service effectively and profitably.

Defining an optimal channel use strategy

Defining a channel use strategy requires a thorough understanding of customer channel preferences, the bank's desired channel(s) for specific types of transactions, and the consequences of channel mismatches. Gallup's extensive work in this area reveals that if banks don't define a channel use strategy, their customers will define it for them by making their own channel choices.

Unfortunately, customer-defined channel preferences are almost always more complex and expensive than the channels the banks would prefer customers to use. In one recent study, we found that in a randomly selected sample of about 3,000 retail banking customers, customers used more than 750 unique combinations of channels to accomplish their banking needs.

It is far more difficult to move existing customers away from expensive channels after their preferences have been established; it is much more effective to help them choose the optimum channel at the start of the relationship. Once banks have set their optimal channel use strategy, they can use these three tactics to move customers to those channels:

Tactic 1: Offer positive -- or negative -- incentives

One approach banks can use to motivate customers to change their transaction behavior is to provide positive incentives that encourage customers to engage in a desired behavior, such as moving their activity to digital transaction channels. Banks can also provide negative incentives (or disincentives) to discourage an undesired behavior, such as using more expensive channels to transact their banking business.

Some banks have tried a disincentive strategy, such as adding a teller-use fee or charging for calls to a call center. But Gallup's analysis suggests that using disincentives can have severe negative consequences. A more effective approach is to provide positive incentives to reward desired behaviors.

Among the various types of incentives we studied, for example, results showed that more than half of customers would be willing to switch to low-cost digital channels if they were given positive fee-based incentives -- such as increasing interest rates on current deposits by 0.25% or decreasing interest rates on current loans by 0.25% -- or positive incentives that enhance the functionality of digital channels -- such as ATMs that allow live video interaction with tellers. Given a choice between these two types of incentives, customers prefer fee-based incentives. More than 70% of customers would be willing to switch to digital channels if offered fee-based incentives, while incentives that enhance functionality were less effective.

Imposing charges and restrictions to move customers to digital channels that they don't prefer, in contrast, is unlikely to yield positive results. Our analysis showed that half of all customers will look for another bank if fees are imposed (for example, if the bank increases interest rates on current loans by 0.25%). More than one-third of customers will look for another bank if their bank imposes procedural restrictions, for example, shortening operating hours for branches or call centers. Again, customers react more strongly -- and in this case, negatively -- to fee-based disincentives than to other types of disincentives.

Tactic 2: Set positive defaults

Another approach banks can use to move customers from more expensive to less expensive channels comes from research in behavioral economics, specifically the concept of positive defaults. In general, people are more likely to engage in desired behaviors when they must "opt out" of a particular course of action than when they have to "opt in." Employers often use this method to encourage workers to participate in their 401(k) program, for example. They automatically sign up new employees for a 401(k) contribution, and many employees continue to contribute rather than making the effort to cancel enrollment.

Automatically setting the optimum defaults for channel use when customers open or adjust an account is an effective way to encourage them to try and then embrace using less costly channels to meet their banking needs. Banks could reinforce this use by providing incentives or rewards for customers who continue to use the bank's desired channel. For example, banks could provide a pricing menu similar to that used in the wireless industry in the U.S. This menu could offer different pricing for a range of channel use options, from pay-as-you-go plans that include unlimited digital transactions, a limited number of teller transactions, and a limited number of call center calls per month to unlimited access to all channels ("anytime, anyhow, anywhere"). The key is to allow customers to select their own optimal channel use plan and pay appropriately for it.

Tactic 3: Provide a technology concierge

In addition to using incentives or positive defaults to change customer behavior, banks can provide customers with a technology concierge. This approach has its roots in the airline industry and its move to self-service kiosks. In 1995, Continental Airlines became the first airline to deploy self-service check-in kiosks. Like all digital customer touchpoints, Continental's kiosks promised greater efficiency, lower costs, and better allocation of live agents' time to more complex customer requirements. Unfortunately, customer acceptance of the kiosks was much lower than initially expected because passengers still preferred to line up to see a live agent.

Migrating customers who have already established their own channel preferences has a number of downside risks.

To increase passenger acceptance and use of their kiosks, Continental began staffing the kiosk area with concierges whose job was to demonstrate the kiosks' functionality and to help passengers check in using the machines. Customer acceptance of the kiosks skyrocketed. By 2004, more than 70% of passengers were checking in using the kiosks. Today, Continental and United have merged, and more than 80% of customers check in digitally, avoiding lines and completing the process more efficiently both for themselves and for the airline. But the key to wide acceptance of the new technology was the concierge.

Banks can use a similar approach to motivate customers to move to digital channels. Providing an in-branch technology concierge -- outfitted to support the latest smartphones and other mobile devices -- could produce the same kind of results as those Continental experienced. The concierge could approach customers who are waiting in line and demonstrate the ease and simplicity of using digital tools to complete their transactions. Once customers learn how to use their existing devices to execute their tasks, they are more likely to use them to do their banking.

Beware of unintended consequences

Defining an optimal channel use strategy is crucial for banks that want to encourage customers to switch channels. But there can be unintended consequences to an increasing reliance on digital transaction channels, and it's important for bank executives to understand them.

One unintended consequence is the technology paradox. When customers begin using digital technology to perform simple tasks and transactions, such as checking balances, changing account information, or transferring funds, they tend to rely on human channels like branches and call centers to conduct more complex or difficult transactions.

Bank executives who assume that increased customer use of digital channels will allow them to reduce branch headcount and costs may discover that this strategy has had the opposite effect: Front-line employees must now spend more of their time addressing complex or difficult activities. If banks don't take steps to ensure that staff members are armed with the tools and the talent to address their customers' most challenging problems, they won't realize any significant cost benefits from moving customers to digital channels -- and they'll likely see substantial declines in customer engagement.

Another unintended consequence, the remote user paradox, is related to the technology paradox. The remote user paradox occurs when customers begin to prefer using digital channels over in-person channels to conduct their banking business. Once this preference is established, each in-person interaction with a bank employee can have a disproportionate impact on that customer's relationship and engagement with the bank.

Let's say that a customer prefers to interact with her bank almost exclusively through online, mobile, and ATM channels. One day, she has a critical need to visit a branch to address a problem with her account. That one interaction, our analysis suggests, will have a disproportionate effect on how she perceives the branch experience -- and it could determine the future of her relationship with the bank. On the other hand, another customer generally prefers to conduct his banking business in a branch. Because he visits the branch regularly, any one interaction to address a problem with his account will have less impact on his overall relationship and engagement with the bank because it is buffered by a large number of other interactions over time.

It's important for bank executives to be wary of these paradoxes when they begin encouraging customers to use digital channels. What looks initially like a benefit could become a liability very quickly if the switch causes customers to become less engaged -- or to switch their business to another bank.

What bankers can do

Migrating customers to digital channels has become a mantra of sorts in today's retail banking environment, and doing so is an economic imperative for most retail banks. But migrating customers who have already established their own channel preferences has a number of downside risks. Chief among these are reduced channel satisfaction and decreased engagement with the bank, which could ultimately result in greater attrition, reduced deposits, lower profitability, and the unintended consequences that can result when customers begin relying on digital channels rather than human channels to transact their banking business.

Though there are viable tactics for migrating customers to less expensive digital channels, bank executives must approach this task with care. Understanding how customers are likely to react to these impending changes is a critical first step -- and one that can help them avoid a drop in customer engagement, revenue, profitability, and customer retention.


Daniela Yu, Ph.D., is a Senior Researcher, Predictive Analytics, at Gallup.
John H. Fleming, Ph.D., is Chief Scientist -- Marketplace Consulting and HumanSigma at Gallup. He is coauthor of Human Sigma: Managing the Employee-Customer Encounter.

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