Why a bank analyst found no payoff in customer experience

A recent article in the New York Times by Nathaniel Popper presents what looks like a tricky problem for customer experience experts. The article “Bank Analyst Sees No Payoff in a Customer-Friendly Focus” tells the story of Richard X. Bove, a noted bank analyst, who pulled his money out of Wells Fargo Bank (among the top 25 largest companies in the USA) and then used his highly visible public position to tell his thousands of clients about the poor experience he received. That is exactly what is predicted from a customer experience point of view. A customer receives a poor experience that falls well below the customer’s minimally acceptable expectation level and the customer complains to those the bank values, other current or potential customers increasing their sensitivity to poor experience whether perceived or real. This is the basis of Net Promoter Score® and the use of the “likelihood to recommend” question. This reality of customer behaviour in an age when it is easy for customers, especially those with a pulpit, to spread the word via social media is in part fuelling the customer experience focus in business.

So what’s the problem? The very same Richard X. Bove who trashed the bank as a customer, had this to say in one of his recent analysts notes about that same bank, “I am struck by the fact that the service is so bad, and yet the company is so good”. So, we have a guy who knows intimately well what customers do when their expectations are not met – they take their money and run AND they try to influence others to do the same. Yet, the financial evidence in front of him suggests that the bank does not yet see the ill effects of its poor treatment. Bove recommends the bank as a safe investment despite the fact that Bove himself would not keep his own money in that bank as a customer.

How can we interpret Bove’s conflicting behaviours? Essentially, we have a behavioural equation which does not seem to compute… Bove’s customer behaviour  Bove’s analyst behaviour. There is only one Wells Fargo Bank which says negative things to the “customer Bove” but positive things to the “analyst Bove”. The situation looks confusing because there is not two Wells Fargos to account for this. How can one bank produce such contradictory reactions in one person? The answer is that there are effectively two different Boves at play here.

The “customer Bove” does what we all understand to be reasonable customer behaviour once we, as customers have determined that the experience is no longer worth the trouble. The “analyst Bove” also does what is reasonable looking at all of the data before him according to GAAP , NPV calculations and related financial analyses. Therein lies the problem, forward looking financial analyses do not as yet have an accepted way of incorporating customer behaviour… meaning it has no real way of incorporating current knowledge of bad customer experience.

Bove concludes that catering to customers may actually distract from the pursuit of making money and that banks should be focused on pushing product and managing risk. In other words, customer experience is hype and not related to the bottom line in a significant way as the analysts look at things – perhaps especially in financial services. However, it does not take a Wall Street wiz to understand the negative bottom line implications of a large group of valuable customers doing exactly what Bove did when he had his customer hat on.

I as a proponent of customer experience find truth in Bove’s point of view. Although I don’t like Bove’s choice of words, I can see the merit of “pushing product and managing risk”. These are not different from the aims of customer experience. Customer experience is after all a business concept, not an academic exercise in “making customers happy”. However, whereas Bove’s analyst toolkit effectively takes customers’ likely future behaviour out of his line of sight, customer experience proponents would seek to include it and make it central.

Thus there is a need to further develop accepted customer centric analytical tools which can be input into cash flow analyses and the like. Ravi Dhar and Rashi Glazer wrote an interesting HBR article called Hedging Customers in which they outline an approach to managing risk doing just that. Their approach is centred on something they call risk-adjusted lifetime value (RALTV). RALTV notes a customer’s expected return in each period and the degree of those return’s deviation from the customer’s mean return. They were able to calculate a customer efficient frontier which shows optimal customer risk-return ratios. Dhar and Glazer were focused on M&A type analysis but a similar approach could be used by analysts if the data were available. At least it points to a type of approach that could be used.

So, in essence, I can agree with Bove’s sentiment… A bank perhaps should be concerned with pushing product and managing risk. If banks do so in a manner that meets or exceeds valuable customer expectations, then they will be in a better position for sustainable financial health. As Dhar and Glazer point out, using methods like RALTV, would show that companies like retail banks view their customer as their fundamental source of value. Banks which do so would have the opportunity to optimally manage their risk, maximise the pushing of their products and prevent the “customer Boves” of the world from 1) churning and/or 2) becoming detractors.

Indeed, there is plenty of evidence out there to demonstrate the financial benefit of a customer focus. Zhecho Dobrev highlights one such recent study and in so doing sums things up nicely in his blog post “Customer Satisfaction leads to higher stock prices: New evidence”…

The CFI Group created a stock portfolio in 2000 to examine the relationship between customer satisfaction and financial success in the short and long term, using data from the American Customer Satisfaction Index (ACSI), and the National Customer Satisfaction Index UK (NCSI). According to the study, “the cumulative return of a $100 investment in the ACSI fund from April 2000 to April 2012 was $490, a gain of 390 percent. By comparison, the S&P 500 returned only $93, a 7-percent loss. In the United Kingdom, the NCSI portfolio earned a return of 59 percent from April 2007 to June 2011, and the FTSE 100 had a negative return of 6 percent.” In addition, higher levels of customer satisfaction are tied to high levels of positive cash flows with low volatility, and positive earnings surprises.

University of Michigan professor and ACSI founder Claes Fornell attributes the correlation to the influence customer satisfaction has on retaining customers and driving loyalty. Investors hate risk, and a company with strong customer retention is one where risk is diminished. “Companies with highly satisfied customers generate superior returns because customer satisfaction is critical for repeat business, and that type of business is usually very profitable,” Fornell said in a press release.