Is the NPS emperor naked?
The 2019 results of the J.D. Power Canada Retail Banking Satisfaction Study came out in early May, and again Canada’s Big 5 banks are largely undifferentiated. The variability between the best (TD) and worst (Scotia) is 22 points on a 1,000 point scale, i.e. only 2.2%.
A quick glance at recent investor presentations by Canada’s Big 5 banks reveal that for all of them Customer Experience is a top priority. However, they are all vague about what exactly this means and about setting concrete targets. None of them has reported publicly on progress in Customer Experience. The best it gets is pictures of loyalty awards.
Most of us thought that Fred Reichheld had solved this problem in his 2006 book “The Ultimate Question.” There are “good profits” and “bad profits.” The former leads to promoters and the latter to detractors.
Customer loyalty is measured by the simple question, “How likely is it that you would recommend this company to a friend or colleague?” Your score, the Net Promotor Score (“NPS”) is simply the percentage of promotors minus the percentage of detractors. The 2006 book as well as the 2011 sequel provide ample case studies that show how focusing on this one metric can drive healthy growth in customers, profits and company valuations.
This raises 2 questions:
Given that most of the Big 5 banks have experimented with NPS or some version of it, why has no bank shown how it has improved NPS over time? After all, as Reichheld writes, “Many of the companies that have generated impressive results with NPS regularly report their scores externally.”
Has a focus on NPS driven improved financial results in Canadian Retail Banking?
My hypothesis on question 1 is that no Big 5 bank has felt sufficiently confident that its performance on NPS is predictable and positive enough to talk about it publicly.
NPS for Canadian Retail Banks is unpredictable, partly because it’s a relationship metric, and the customer answers based on how he or she feelsabout the bank. It’s difficult to predict public sentiment towards banks.
More so than in other industries the media opines on banks e.g. the 2017 CBC reporting on sales practices.
In addition, the measurement method of NPS has changed over the years, from phone calls to email to mobile or in-app, and in some cases to hitting a green or red button as you leave the branch. Results under these various methods of measurement are not directly comparable. Add to that growing “customer fatigue” as customers are now being interrogated by every organization they do business with.
It’s time consuming to move NPS upwards for a Retail Bank. Millions of customers interact infrequently with thousands of employees doing hundreds of different types of transactions. Changing behaviours of frontline staff and improving a myriad of processes take time. Customers actually have to interact with the converted banker or experience the improved process (probably multiple times) to change his or her mind. All of this could take years. Digital banking may seem to offer an easy way out, but customers are already accustomed to seamless digital experiences from non-banks so the bar is higher.
My view on question 2 is that for Canadian Retail Banking the link between improving NPS and growing Net Income has not been clearly established.
This is highly anecdotal, but I suspect there is actually an inverse relationship between ROE and NPS if you compare the Big 5 as a group to some of the smaller banks, credit unions or fintechs. I believe there are a few reasons for this:
Retail Banking customers are extraordinarily sticky. One of the transmission mechanisms of NPS into profit is via customer growth. There is a difference between choosing a different car rental company next time you’re in Florida and moving your mortgage.
There are still quite a bit of “bad profits” in Canadian Retail Banking (and I mean things like a $45+ fee for NSF). Improving NPS requires replacing “bad profits” with “good profits” from improved retention and growth. However, if retention is already sky high, there is nothing to replace the “bad profits” and banks are stuck with it.
NPS is democratic. The view of a customer with negative lifetime value counts as much as the view of a highly lucrative customer. In Retail banking, more so than in many other industries, there’s a wide dispersion in profitability.
To conclude, in 2019, in the age of digital disruption and with open banking hovering in the wings, Customer Experience and Loyalty is vital for Canadian Retail Banks. NPS is a seductive and elegant way to measure Customer Loyalty, but it’s probably not the best tactical KPI to track progress on Customer Experience or to incent employees. It may also not be the easiest metric to show to investors and analysts.
For Retail Banks, NPS is simple, measurable, visible and relevant but it’s not predictable, timely or actionable. Different “types” of NPS like “journey NPS” and “transaction NPS” have cropped up to fill the gaps, but I’m not sure these are really in the spirit of the “one number” Reichheld so eloquently described in his books.
Imagine a Canadian Retail Bank that kicks off every quarterly investor call by citing a few - maybe 2 or 3 - numbers that show the progress they made in the last three months to make their customers happier and then imagine that these numbers are directly correlated with profitability.
I would invest.