Butter Banking: Another Story About Churn Rates

By Paul J. Mulligan

My banker came to my house the other day. Earlier that morning, I called him to let him know I wanted to reallocate some of my wife's and my IRA funds. I told him we would drop by late-afternoon to sign the authorizations. Well, while my banker was off for lunch, he drove by our house and noticed both our cars were home. So, he turned around, went back to the bank,picked up the papers and brought them to our front door.

Banking at my doorstep: I was impressed. I mentally jotted the occurrence down as yet another reason for why I like living here: a seaside town slightly smaller than a square mile with a population of less than 5,000 persons.

My town is also home to two banks with a third one breaking ground by year-end. Perhaps the forthcoming arrival of this third bank has prompted my banker to take some extra steps with his customers, like the home delivery of my IRA paperwork. I hope my banker feels confident that I won't jump ship. However, I am glad to see he has not become complacent about our relationship.

As my banker probably expects, both of the existing banks in my town will experience some account churning with the arrival of this third bank. Customer attrition is just one of those ugly realities in the banking industry. You don't really hear about account churning all that much with traditional "offline" banks, but it exists nevertheless. But the attention paid to online banks' churn rates is quite a different story.

The online bank churn rate debate began with an August 1999 survey from research firm Cyber Dialogue. According to the survey, 6.2 million consumers banked online as of July 1998. Over the next 12 months, an additional 3.2 million also signed up. However, during the same 12-month period, 3.1 million of these online bankers resigned from the service. Consequently, by Q2 1999, online banks had experienced a modest 1.6% growth rate. Or to put it the ugly way, they had a 49.2% churn rate.


With the publication of Cyber Dialogue's survey came a wave of additional studies about the churn rate of online bankers. Some corroborated it's findings, others vehemently countered. Consulting firm Meridien Research reported a very similar 50% churn rate in it's study. Management consultants McKinsey & Company placed the churn rate at 33%. In the opposition's corner, Online Resources & Communications Corp. (ORCC), a banking application provider, retaliated with another survey. ORCC suggested that the online banker churn rate was more like 16% and, for online bankers using online bill payment services, an even lower churn rate of 8%.

The debate continues globally as well. On 3 November 2000, for example, The Irish Times reported that bank customers at famed UK-based online bank Egg withdrew some ?440 million sterling during 3Q 2000, when the bank decreased their savings account rates to normal levels.

These days, Cyber Dialogue is on the other side of the fence: their online bankers' churn rate has fallen dramatically from the 49% churn rate they report last year. They now report a mere 9.8% churn rate from Q2 1999 to Q2 2000, while the number of online bankers has grown from 6.3 million to 19.4 million. (Although, saying this, I think it is appropriate to point out that Cyber Dialogue is no longer a research firm but is now an "eCRM solutions" provider.


Still, regardless of whether the firm that began the debate is now declaring that churning is essentially defunct, banks should not become complacent and think all is officially over. The value proposition of online banking could still be at stake. Viewing balances or transferring funds is compelling to a certain point. A banker showing up at your door with papers you need to sign, on the other hand, is an extremely valuable proposition.

Before he rang the bell, I wish my banker, knowing my wife's and my hectic schedule, would have realized that the chances of both of our cars being home at the same time, during a lunch hour, was more planned than uncanny. But, this is another story.

Paul J. Mulligan wrote the eMarketer eInvesting Report, which examines the state of the online investment services industry and outlines the challenges and opportunities before it. E-mail him with comments, questions and suggestions at pmulligan@emarketer.com.

First published on BankersOnline.com 1/22/01.