Plugging the deposit drain: sometimes outright customer defection is not as big of a problem as incremental deposit erosion. One way to hold on to dollars is to develop a steady stream of new products that appeal to customers as their financial behavior evolves--and they make the transition from one life stage to another.

• Author: Bernstel, Janet Bigham
• Position: Cover Story

Editor's Note

In this issue, we present a special two-article section on the topic of "Customer and Deposit Retention." The first article discusses how new financial products can help financial institutions to hold on to deposit accounts. The second article discusses the importance of improved customer service in achieving a similar goal.

While banks are busy spending time and money to stem customer defection, a bigger threat, known as account diminishment, could be corroding the balance sheet. Acknowledged by experts as the "silent killer," diminishment is the slow, painful erosion of deposits caused by a change in customer behaviors.

Take the case of one retail bank, as repotted in the 2002 McKinsey Quarterly report, "Customer Retention is Not Enough." Records showed an annual 5 percent defection rate of checking account customers that resulted in the loss of 10 percent of the bank's checking accounts and 3 percent of total balances. However, the 35 percent of customers who reduced their balances every year cost the bank 24 percent of its total balances.

"Two-thirds of your economic loss is a diminishment loss, not defection loss," agrees Jim Thomas, vice president, Information Solutions Group, MasterCard Advisors, Purchase, N.Y., formerly the managing director of banking at Alpha Financial Services Consulting. "When people talk about attrition problems, they're talking about diminishment."

Thomas notes that customer accounts diminish because account holders are dissatisfied with service and product offerings. The authors of the McKinsey Quarterly report echo that sentiment, citing that "downward migrators" have one of three reasons for directing their money elsewhere: They are very dissatisfied, often due to one bad experience; they have found a better option, after constant re-evaluation of their existing options; or, they have experienced a lifestyle change, like the birth of a child or the start of retirement, and the financial institution is not meeting their new needs.

Build a better product

The changing needs of the customer and how they affect buying or spending behavior can be addressed, according to the authors of the McKinsey report, specifically if the company invests in a new product or channel. One way to manage this changing needs dilemma is to First identify when a household migrates from one life stage to another, then connect that information to financial product usage.

Consider, for example, the dynamic state of the U.S. market place. According to statistics generated by Acxiom Corp., an Arkansas-based data products provider and makers of fhe household-level segmentation system, Personicx, more than 4.7 million people marry each year in the United States; 1.5 million are having their first child; 1.9 million divorces take place; and there are over 2 million first-time home buyers. All these life events have a tremendous impact on consumer behaviors and financial needs.

"You can extrapolate these patterns of migration across your customer relationship to identify which of your products they're likely to need and enjoy at a particular life stage," exclaims Josh Herman, product manager for Personicx. "Then make...