Is Customer Service Worth The Cost?
I’m a skeptic when it comes to customer service. All you have to do is visit a cavernous retail outlet with an abundant supply of everything but informed and courteous staff to realize that your average consumer is more than willing to trade service for a lower cost. I know that some people switched to credit unions out of disgust with banks, but I still believe that most of the disgruntled will end up going where they can get the best accounts and cheapest loans.
I’m bringing this up because it’s that time of year when senior staff and Boards gather to peer into their crystal balls and plan for the coming months and years ahead in an attempt to position credit union resources. In an ideal world your credit union could be all things to all people, providing great customer service, the cheapest loans in town and the most reasonable fees but the world is not ideal; No business of any size can survive doing all things for all people. Having put on my Captain Obvious hat, it follows that a planning session that doesn’t funnel staff and resources towards the areas where your credit union is most likely to see the greatest return is not a plan at all but a glorified wish list that leaves it up to staff to make the really tough decisions.
Against that backdrop one of the questions that most intrigues me is: Is customer service really worth it? This morning’s Liberty Street Blog contains an intriguing bit of research that attempts to answer this question in quantifiable terms. I would love to see someone apply a similar analytical framework to credit unions.
The researchers hypothesized that banks that spend more on customer service by, for example, maximizing the number of ATMS or hiring more staff at the branch level, do a better job of attracting core deposits than other banks, To measure this premise they divided the noninterest expenses of community banks with under $1 billion in assets in by their total assets. They found a clear correlation between the amount of money community banks invest in their service infrastructure and the amount of their core deposits. Specifically “a higher noninterest expense profile is associated with more core deposits, lower funding costs, and fewer liquid assets.” They suggest that one possible explanation for this finding is that “a bank that provides better services attracts more core deposits, lowers its funding costs, and, because it faces lower liquidity risk, holds fewer liquid assets.”
Does this mean that customer service should always be a top priority? Not necessarily. The research also suggests that there is no such thing as a free lunch. For example, those banks with higher operating costs also tend to have riskier lending portfolios. The researchers suggest that one possible reason for this correlation might be that the more “sticky” a bank’s deposits are as a result of customer loyalty the more aggressively a bank feels it can use these deposits. I would suggest that another possible reason is that these banks end up having more members precisely because they have lower lending standards not because of great customer service.
Don’t get me wrong. I understand that Banking is a customer service business and it doesn’t cost you much to expect your employees to politely deal with members. What I am suggesting is that a primary emphasis on a strong customer service infrastructure isn’t without some very real risks and may be a distraction from a discussion of the types of initiatives that really would increase your credit union’s growth. After all, there are many struggling credit unions that are beloved by their members.
Here is the research