Protecting the futureCanadian Retail Banking Survey 2013

Executive summary

2

Survey context 1

Executive summary 3

Key findings on improving the customer experience 9

1. Get the basics right 13

2. Putting the “personal” in personal banking 17

3. Changing channels on the customer 21

Implications for Canadian financial institutions 23

Methodology 23

Contents

1

Survey contextCanadian banks are not immune to continued global economic uncertainty. Intense margin pressure, slow balance sheet growth, an uncertain economic outlook and a highly competitive market are forcing banks to focus on their most important asset — their customers.

In this environment, understanding customer behaviour, attitudes and requirements are key contributors to deliver improved share of wallet and profitability.

In our first Canadian survey of retail banking customers, which follows on our 2012 global banking customer survey, we explored the views of over 2,400 Canadian banking and credit union customers.

Our survey looked to provide insight on the following topics:

• How satisfied are customers with their primary banking relationship?

• How likely are customers to switch from their primary bank — and if so, why?

• What are customers’ channel preferences?

• What are the drivers of customer satisfaction?

• How can Canadian financial institutions enhance customer loyalty and build customer advocacy?

We hope you will find this report insightful and a helpful support for your customer-focused strategies and welcome the opportunity to discuss our findings in more detail. Please do not hesitate to contact your EY advisor or one of the professionals listed at the end of this report.

Paul Battista Partner, Canadian Financial Services Advisory Leader

Executive summary

2

“They do everything well... except for the high fees. I trust the service they provide.”

“I think they are doing a superb job in the branch that I deal with and I wouldn’t suggest any changes. Just keep up the good work and the feeling that customers come first.”

Executive summaryRetail banks around the world are increasing their focus on their customers, and Canadian banks are no different. This focus is a response to a range of imperatives, including the need for sustainable organic growth and regulatory pressure to improve the fairness and clarity of banks’ dealings with their customers. Banks are clear that without a well-thought-out and sustained focus on their customers’ evolving needs, they will not be successful.

At the same time, banks are facing a range of customer-related challenges, including emerging threats from new entrants and non-traditional competitors, as well as the need to better harness the use of technology and improve channel integration. Most importantly however, Canadian financial institutions, like their global peers, have recognized that they need to deliver enhanced personal service to create sustainable market advantage.

Key messages from customersFirst, the good news. Overall, customers are happy with their primary financial institution, with results from our survey indicating that approximately 70% are very satisfied with their primary bank or credit union, and 71% have had their primary relationship for over a decade. As such, on an overall basis, our survey findings clearly demonstrate that Canadian financial institutions can be justly proud of the level of satisfaction and loyalty they have succeeded in achieving with their customers.

However notwithstanding the overall level of satisfaction that Canadians have with their financial institutions, our survey highlighted some important findings for those institutions focused on doing better. In sum, we believe the single most important action these institutions need to take in order to differentially enhance the retention and growth of their customers within the highly competitive Canadian retail banking marketplace is to improve the customer experience.

The key question is “how?” Based on insights gleaned from our survey, our report summarizes the three key areas financial institutions should focus on that will have the biggest impact on improving their customers’ experience.

Get the basics rightAlthough Canadian financial institutions experience some of the lowest customer attrition among their global peers — as our survey attests — Canadian banking customers do switch providers. Specifically, findings from our survey indicate that in the past five years, approximately 4 million Canadians have switched their primary bank and, somewhat surprisingly, the majority (70%) of those who did say switching was easy.

Given the highly competitive retail banking environment – and the relative ease those who have switched perceived the process to be – Canadian financial institutions cannot afford to give any of their customers reasons to consider switching to a competitor.

3

Executive summary

4

And in order to avoid awakening those switching thoughts in the minds of their customers, our survey’s findings are clear on the most important first step financial institutions need to take to retain customers and build loyalty: get the basics right.

Our survey respondents made it clear that when the fundamentals of banking service go wrong, their interest in switching rises considerably.

More specifically, according to our research:

• 87% of respondents would be likely to switch providers if their financial institution failed to secure their data

• 85% of respondents would likely switch if they had to contact their financial institution multiple times for issue resolution

• 70% of respondents would likely switch if errors were made during their on-boarding process

Customers quite rightly expect basic banking services to be delivered right every time so when they experience breakdowns in these basic services, the trust and confidence in their primary financial institution erodes, making them significantly more open and susceptible to competing offers.

Putting the “personal” in personal bankingWhile Canadians’ overall level of satisfaction with their financial institutions is good, our survey has identified a number of gaps between their current experience and the experiences they most desire — some of which they value enough that they would switch from their primary provider of banking services in order to receive them.

Now more than ever, Canadians expect more personalization in their dealings with their financial institutions. Uniform, “one size fits all” banking experiences are no longer in line with customer expectations and financial institutions that fail to adapt their business models will see declines in customer satisfaction and increased attrition.

Specifically, our survey highlighted a number of areas in which Canadians are seeking greater personalization from their financial institutions, including the following:

• Customers strongly believe that they should be rewarded for their loyalty. According to our research, 61% of Canadians would be likely to switch banks if the option to bundle products for additional discounts were available. Product bundling, while not a new feature for the market, provides greater scope for banks to reward loyalty with innovative offerings while increasing customer retention and improving cross-selling.

• Customers want more personalized service. This doesn’t mean targeted products designed for the individual, but it does mean that the bank has to know the customer, be knowledgeable about their existing relationship and previous interactions with the bank and, if the relationship warrants it, assign the customer a personal banker.

Changing the channels on the customerOur survey highlights a number of important insights with respect to the manner in which Canadians access their banking services. On an overall basis, our Canadian survey reinforces a key theme from our global survey results: the “omni channel” model – which assumes the customer will decide which channel is best suited to serve a particular banking need at a particular point in time – is continuing to evolve. Specifically our survey highlighted the following important channel findings.

Executive summary

5

“Provide better incentives [such as reward miles], not just [the bank’s] own incentives.”

“Speak to me, offer me package bundle deals and offer rebates. I’ve brought my three children to the bank, one with a mortgage, student loans, credit card, RESP, and two more with credit cards, but loyalty is not rewarded.”

Executive summary

6

“Make it easier to solve issues over the phone rather than having to come into branch with an appointment.”

“I get very good service from my local branch but other branches treat me like a total stranger.”

Executive summary

7

• The branch still very important, but its role is changing. The branch remains a dominant channel for Canadians to seek advice and obtain products, especially when it comes to big decisions such as mortgages and other large-purchase financing. However, customers are looking for innovations that make banking through this channel more convenient. Forward-looking banks have an opportunity to capitalize on these expectations and differentiate themselves in the market.

• Social media presents a unique challenge. Canadians are among the most engaged in social media in the world, yet many organizations are struggling to find a way to engage their customers. According to our research, 43% of respondents do not want to have any interactions with their main bank through social media.

• Customers want an improved cross-channel experience. While the branch remains the key channel for advice and purchases, customers highly value online channels for simpler transactions. Therefore, the ability to move seamlessly from one channel to another is becoming increasingly important. For example, according to our research, 47% of respondents would switch to a bank that would provide the ability to start a product purchase in one channel and complete it in another. While banks would argue that they provide this today, the reality is that for the most part the experience is not smooth and does not provide the seamless experience customers are seeking.

Implications for Canadian financial institutionsIt’s clear from our findings that customers want more from their banks. How should banks best respond? Banks will need to reconsider how they interact with their customers by ensuring that they put the customer at the centre of their evolving business model by taking the following first key actions.

Focus on key customer interactions. Banks focusing on improving everyday service should concentrate their transformation efforts on the most critical customer interactions, such as account opening, lost/stolen cards and complaints. Transforming these critical interactions will not only improve the basics, it will also lower the cost to serve as error rates and manual interventions are reduced. Banks should consider low customer satisfaction with basic services such as payments and fraud protection unacceptable.

Enhancing the speed and effectiveness of complaint management is also vital. Improvements to other critical everyday interactions should create a virtuous circle, reducing the strain on complaint handling and other customer touchpoints.

Deepen and better leverage customer insights. In a broader market place which increasingly raise consumer expectations regarding the personalization of customer experiences and offers, Canadian financial institutions need to better understand their customer base. To maximize revenue while keeping costs under control, retail banks need to gain a deep understanding of who their most loyal and profitable customers are in order to differentially invest in how they interact and serve them.

But customer insight and segmentation needs to move beyond basic dimensions of profitability, income, age and geographic location. Successful financial institutions will need to supplement their traditional analytics with a better understanding of customers’ behaviour, lifestyles, attitudes, networks and influencing circles. While such increased personalization will become an important capability for differentiation and a way to reward loyal customers profitably, there is consensus that its delivery will pose significant behavioural, data and system challenges.

Executive summary

8

Deliver the cross-channel experience. Banks need to use customer data across channels to provide the fully integrated channel experience customers are looking for. And they need to drive digital usage for simple transactions, thereby allowing the branch channel to better focus on providing the added value customers are seeking — namely, advice.

Branches will remain a key component of the customer proposition. At the height of the internet boom, there was a growing consensus that technology would render the bank branch obsolete. Yet as our survey demonstrates, rumours of the demise of the branch have been greatly exaggerated. If anything, the branch is becoming even more important at a time when retail banks are competing for new, high-value customers.

Customers recognize the role of the branch in their relationship with their bank. Seven out of 10 respondents say that the majority of their product purchases take place through the branch network or face to face.

But despite being a vital channel for sales and advice, branch networks will need to transform. By reframing the branch network as a revenue-generating channel rather than a cost or servicing centre, retail banks can improve the cost-to-income ratio of their branch networks. This might involve the reformatting of branches to increase their focus on sales and advice, the reallocation of resources to branches with higher customer footprints, or the incorporation of technology into branches to ensure that simple transactions can still be completed cost effectively and efficiently.

As well, this increased role for sales and advice in branch networks will require new skills and training among employees who have face-to-face relationships. Yet, even more critical than having the right resources in the right channels will be the need to adopt a seamless multi-channel approach. In the “omni channel” universe, customers will increasingly expect to be able to seamlessly move from one channel to another, and will increasingly demand consistent service regardless of whether they opt to conduct a transaction online, through a call centre or in a branch.

The way forwardTaken as whole, these actions represent a transformation of how financial institutions in Canada have traditionally operated their retail banking units. As such, this transformation must be driven by the top and encompass the whole of the retail bank: front, back and middle. Fundamental redesign of the business model may be necessary to create the blueprint for future success. Setting the culture and the tone from the top will be key to ensuring that the customer is put at the centre of everything the bank does, such as defining executive ownership of key cross-bank processes that drive performance and deliver on the basics that customers demand.

As with all transformations, making use of technological capabilities will also be key — investment will become increasingly important in the areas of customer insight, process automation and cross channel integration. At a time when banks are concerned about rising costs and declining growth, the increased leverage of technology offers a rare opportunity to both improve customer service and reduce the cost base. The opportunity presented to the financial institutions who successfully execute on this transformation is significant by helping to protect a future of customer growth, profitability and shareholder value.

Generally happy with their banks

9

Canadian financial institutions can be proud of the satisfaction and loyalty levels they have achieved with their customers.The overall level of satisfaction with banks is high, with 70% of Canadians stating that they are very satisfied with their main financial institution. This has contributed in part to the notable high levels of loyalty that Canadians have towards their banks — 71% have been with their current financial institution for over a decade. Atlantic Canadians and Quebec residents appear to be the most loyal, with 68% and 62%, respectively, banking with the same institution for over 15 years.

Overall satisfaction with main financial institution (by age group)

0%

20%

40%

60%

80%

100% Not satisfied

Satisfied

65+55-6445-5435-4425-3418-24

65% 63% 66% 64%

74%

85%

Generally happy with their banks

10

Tenure at current financial institution (by age group)

0%

20%

40%

60%

80%

100% 15+ Years

10-14 Years

5-9 Years

1-4 Years

Less than one year

65+55-6445-5435-4425-3418-24

31.9% 34.3% 52.3% 67.4% 77.4% 83.2%

Generally happy with their banks

11

14%

Have switched institutions in the last five years

Have switched institutions in the last five years (by age group)

Despite high levels of satisfaction, customers continue to look for an improved banking experience Although there are strong satisfaction and loyalty levels, attrition has taken place. Approximately 14% of respondents — most of them between 18 and 44 years old — have switched their main bank in the past five years. And despite perceptions around the challenges of moving financial products from one financial institution to another, most of the switchers, 70%, say switching was easy.With the highly competitive retail banking environment and ease of switching, financial institutions cannot afford to give any of their customers reason to consider switching their banking relationship to a competitor.

Tenure at current financial institution (by age group)

0%

5%

10%

15%

20%

25%

65+55-6445-5435-4425-3418-24

Banks should focus on three key themes

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“When disputes arise, they should deal with them fairly.”Example market response: an international retail bank has invested in enterprise complaint-handling software to enable it to capture, manage and analyze complaints to improve customer service efficiency and boost customer satisfaction.

Get the basics rightSecuring customer information, quick customer issue resolution and the customer on-boarding process are critical basics for banks to master before they start considering strategies that can “wow” their customers. Customers feel strongly that securing their personal information and issue resolution are particularly important when they consider switching their main financial institution. Over 85% of respondents stated that they would be likely to switch their main bank if their current financial institution failed to properly secure their financial information and there was an unanticipated personal information leakage.

Similarly, over 85% of respondents noted that they would switch to another bank if their current bank could not resolve an issue after the first contact or multiple contacts, and did not follow up on the issue.

Approximately 70% of respondents would switch their main financial institution if their current bank made an error when opening or closing their account.

1

13

Banks should focus on three key themes

Banks should focus on three key themes

14

FI didn’t follow direction when opening/closing an account and made an error

On boarding

Contacted FI multiple times about an issue without a response

FI failed to properly secure yourfinancial information resulting in your account being compromised

Issueresolution

Datasecurity

0 20% 40% 60% 80% 100%

70.5% 29.5%

85.3% 14.7%

87.8% 12.4%

Likely Unlikely

Likelihood of switching financial institution if situation were to occur: % of respondents

Financial institutions need to focus on key customer interactions such as account opening, lost/stolen cards and complaint handling. Having met fundamental customer needs at each key touchpoint, financial institutions will have a solid foundation to go above and beyond with additional value-adding strategies that can help them retain existing customers and attract new ones.

Banks should focus on three key themes

15

Generally happy with their banks

16

“Treat their customers as though they mattered and appreciate their loyalty!”Example market response: an international bank offers an offset deposit account that allows customers to connect their savings account to their home loan. Money deposited into the account counts towards their mortgage and reduces the amount of interest they have to pay.

Putting the “personal” in personal banking

Customers today see their individual needs as unique and expect their financial institutions to cater to them on a personal level through custom pricing for products and services that take into account their loyalty, as well as personalized advice and service. Nearly two-thirds (61%) of respondents would be likely to switch banks if a competitor offered the option to bundle multiple products to receive additional discounts.

Today, customers feel that their loyalty is often not rewarded when they are considered for new products. This sentiment is reported particularly highly by respondents between the ages of 25 and 34, who are building up their wealth and purchasing their first home, as well as those between 45 and 54 years old, who are at the peak of their career and may have substantial investments with their banks.

217

Banks should focus on three key themes

Likelihood to switch to another financial institution if they allowed you to bundle multiple products to receive a discount (by age group).

0%

10%

20%

30%

40%

50%

60%

70%

65+55 to 6445 to 5435 to 4425 to 3418 to 24

53%

64.2%

58.6%

63.6%

54.4%57.3%

Banks should focus on three key themes

18

To retain customers and maintain satisfaction, banks should seek opportunities to establish programs to reward loyal customers and increase cross-selling opportunities. The challenge is in understanding customers’ relationships with the bank and orchestrating product and pricing strategies across multiple business lines and product groups.

Canadians have emphasized the importance of the provision of personalized service and advice and are likely to switch their business to a bank that they believe provides that service.

Over 65% of respondents said it was important to have a personal banking representative who understands their unique needs, is aware of their existing relationship with the bank and is familiar with previous interactions they’ve had with the bank. And 67% of respondents said that other banking representatives should also be aware of customers’ existing product portfolios and previous conversations with the bank, as long as it leads to better advice and service.

Over 40% of respondents stated that they would switch their main financial institution if another bank offered a personal banking representative and if representatives were knowledgeable about previous interactions with the bank.

It’s critical that banks understand their customer base if they’re going to be able to create personalized tactics that cater to individual customers’ needs.

Segmentation analysis will need to evolve from using traditional age, income and geographic information to capturing customer behaviour, lifestyles, attitudes, networks and influences.

With deep understanding of customers and their profitability financial institutions will be able to create personalized advice and service offerings that could lead to a highly differentiated customer experience while keeping costs under control.

0% 20% 40% 60% 80% 100%

0% 20% 40% 60% 80 100%

65%

67%

Information about banking products & services you currently use is accessible to different people within

your financial institution so they can provide you with the best advice based on your personal situation

Representatives of your financial institution are knowledgeable about previous conversations you had

with other people at your FI, so you don’t have to keep repeating yourself

Your financial institution assigns you a personal banking representative, who knows you and your

unique needs

Importance of main financial institution offering specific service:

Features that would drive a Canadians to consider switching financial institutions if offered at another:

Assigns a personal banking rep that knows you and your unique needs

FI reps are knowledgeable about previous conversation so you don’t

have to repeat yourself

FI rep contacts you from time-to-time to inform you of new products better suited to your

particular needs29%

65%

44%

43%

Important Unimportant

Banks should focus on three key themes

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“Proactively meet my needs, look at lifestyle or age related changes and reach out to me.”Example market response: Global bank issued RFID tags for private banking customers that enable the customer to be recognized when entering the branch, to offer more differentiated, personalized service.

Banks should focus on three key themes

20

“Be relevant. [For example,] have a mobile banking app, allow online access to budget/money programs.”Example market response: a number of Canadian banks and credit unions have launched or are in the process of launching the ability for customers to deposit cheques by taking a picture of the cheque with their smartphone or tablet.

“Make more in-branch-only services available online or on the phone.”Example market response: large European asset management firm invested in a Business Process Management solution to enable clients to begin a product purchase in one channel and seamlessly transfer to another channel to complete the purchase if necessary.

Banks should focus on three key themes

21

Changing channels on the customerCanadians prefer to seek advice and obtain products in person at bank branches more than any other channel, especially when it comes to big decisions such as mortgages and other large-purchase financing. In addition, customers prefer selecting chequing, savings or other deposit accounts in person.

While the branch is still the dominant channel when it comes to seeking advice and obtaining products, the emergence of new self-service online and mobile channels requires careful integration if banks want to create differentiated customer experiences.

Customers are looking for innovations that make banking more convenient. Banks have an opportunity to capitalize on this and differentiate themselves in the market through offerings such as the “digital wallet” — the capability to conduct transactions electronically.

Two-thirds (67%) of respondents between the ages of 18 and 44 who own a smartphone are interested in using a digital wallet. The majority (88%) of respondents in this age bracket currently own a smartphone.

3

Seeking advice

Determining financing for new homeDetermining financing for other large purchase

Selecting most appropriate account

64% 62%59%

82% New mortgage74% Line of credit71% Chequing/Savings/Deposit account

Obtainingproducts

Banks should focus on three key themes

22

The emergence of new self-service channels will force banks to rethink how customers purchase their products.

Canada has one of the highest rates of penetration of social networks around the globe. But while Canadians are highly engaged in social media, financial institutions struggle with how they can engage their customers in a conversation. According to our research, 43% of respondents — most of them 45 years old and up — do not want to have any interactions with their main bank through social media.

Customers look for a seamless cross-channel experience. Nearly half (47%) of respondents would switch to another financial institution if it offered the ability to start product purchases in one channel and complete them in another.

By leveraging customer data across channels, financial institutions will be able to design and provide a fully integrated experience. Careful design of cross-channel customer experience may not only lead to more convenient banking and a way to differentiate banking advice and service offerings. It may also lead to a significant reduction in the cost to serve by driving customers to lower-cost channels for basic service transactions, while refocusing the branch network on more revenue-generating activities.

How often do you use the following types of social media?

0%

10%

20%

30%

40%

50%

60%

70%

80%

Social N

etworks

(e.g. F

aceb

ook) Blogs

(e.g. T

witter

)

Virtual

Games

(e.g. S

econd Life

)

Online G

roups

with lo

cal fo

cus

(e.g. Y

elp) Inter

net

Foru

ms

Do not use

socia

l med

ia

66%

24%

14% 13%

27%

15%

Use social media at least once a week

23

Conclusions

Implications for Canadian financial institutionsCanadian banking customers’ behaviour, attitudes and expectations continue to evolve. Our survey shows that Canadian banks can rightly be proud of how loyal and satisfied their customers are. However, in this highly competitive, challenging market, banks cannot stand still and must continue to invest in their customers if they wish to continue to succeed.

Global trends are also emerging around multi-banking and the threat of new entrants into the retail banking market from non-financial services industries, putting further strain on customer loyalty and requiring Canadian banks to re-evaluate their customer-focused strategies.

Banks need to meet the basic needs of their customers, but beyond that they need to know their customers, reward their loyalty and enable them to interact in a seamless way with the bank — when, where and how the customers want.

To create the blueprint for future success, financial institutions will need to go through a fundamental transformation that will encompass the whole of the retail bank. Customer-centric design needs to become a part of the culture and the tone from the top. Executive ownership of key cross-bank processes will be critical to drive performance and deliver results.

Technology will play an increasingly important role to enable financial institutions to garner a deep understanding of customers’ needs and preferences, in improving and creating a differentiated customer experience, as well as in reducing the cost base.

MethodologyThis report presents the results of an online survey of over 2,400 Canadian banking customers aged 18 years and older. The study was commissioned by EY and research was conducted by TNS in December 2012. Results are weighted to the actual population of Canada, according to Statistics Canada data, based on region, gender, age and household income.

Contact usTo learn more about this survey, and how we can help you achieve your growth goals, contact your EY advisor or one of the following members of our team:

Paul Battista Partner, Canadian Financial Services Advisory Leader +1 416 943 3820 | paul.a.battista@ca.ey.com

Julian Jordan Senior Manager, Financial Services Customer Lead +1 416 943 3057 | julian.jordan@ca.ey.com

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