Customers’ loyalty swayed by curbs on rewards and gifts

By Karnoto Mohamad

Banks’ hankering to boost their profits may be hampered by Bank Indonesia’s policy urging them to cut interest rates and limit them in providing customers gifts. This situation becomes a new challenge for banks, as their competition is getting more brutal. They should strive so hard to nurture their customers’ loyalty. How is banks customers’ loyalty map in 2012?     

Bankers stare giddily at 2012 calendar. They are not worried of an escalating Europe crisis predicted in the middle of the year. They are afraid that their desire to make huge profits may be obstructed by Bank Indonesia (BI)’s policy ‘forcing’ banks to decrease interest rates and improve intermediation function.

Previously, BI had tried to reduce banks lending rates. In March 2011, BI issued a policy requiring banks to announce their base rates loan (SBDK). The policy could not reduce bank lending rates. However, BI does not give up.

The example was BI’s shocking step to cut benchmark interest rates from 50 basis points to 6% in the beginning of November. Some experts consider the step as too brave, because it is done in middle of the crisis escalating threat. BI also continuously criticizes efficiency problem and excessive profit margin resulting in the high interest rates loan.

At the Bankers Dinner on December 9, Bank Indonesia Governor Darmin Nasution reiterated that banks should show efficiency. BI requires banks to write loan interest rates in the Business Plan Bank (RBB). Besides, BI examines the practice of giving interest rates higher than the Deposit Insurance Agency (LPS), as well as limiting gifts to customers.

Darmin said that in other countries, banks are prohibited to offers their customers lottery or cash money. If the banks are promoting themselves, they should conduct it using proper promotion mechanisms instead of giving lottery and cash money, he said.

There is no doubt that banking industries in this country have been enjoying net interest margin (NIM) which is bigger than other countries. In October, the banking NIM was 5,95%. The number is likely to increase amid SBDK policy to decrease NIM. Previously, the banking NIM was 5,59% in the initial of 2011. Then, it reached 5,88% in March of the same year.

The big amount of NIM is supported by the high lending rates. Meanwhile, banking income is still dominated by net interest income rather than fee based income. In general, banks’ profit margins are taken from interest rates subtracted with banks’ costs of fund, their operating costs (overhead costs), and risks premium. Therefore, in order to decrease lending rates, BI urges banks to reduce their operating costs and costs of fund.

Besides, the high operating costs also indicate that the banks are not efficient. In this country, banks’ operating funds compared to their operating incomes (BOPO) are on average above 85%. The number is higher than average BOPO in Asia banking areas which range from 40% to 60%.

The problem is that overheard costs and costs of fund of banks are not the same. It depends on the bank’s size, its positioning and the bank’s business target. Banks focusing on mass markets such as micro and small segments will be desperate if they are forced to lower their NIM and BOPO. It is because operating costs for this kind of segments are high. Besides, banks working on the micro segments usually unable to compete in seizing cheap funds. Hence, a storebox of the third party fund (DPK) is dominated by expensive fare deposits. Not to mention that banks have to expand their official networks to enlarge their market penetration.  

Another hard challenge faced by banks is that they are prohibited to give any gifts and rewards, especially if it is for savings products. The absenteeism of gifts will not only affect small banks customers’ loyalty, but also customers’ loyalty of big banks such as Bank Central Asia (BCA). BCA has been becoming the market leader in savings. However, there is no guarantee that the bank, with its Tahapan BCA, will be able to keep the title when the bank’s iconic sparkling gifts and rewards are vanished.  On the other hand, banking industries which have been struggling for cheap funds throughout 2011 should work hard to maintain their customers’ loyalty. The customers’ loyalty is a precious matter for banks. Unfortunately, the loyalty is hard to create. According to MarkPlus Insight survey entitled Indonesian Bank Loyalty Index (IBLI) 2012, there is a decrease in banks customers’ loyalty in 2011.      

The research shows that despite customers’ satisfaction index increased, their loyalty index decreased.  It means that various sparkling gifts, good service innovation, and visionary loyalty programs cannot directly make the customers loyal. That is too bad because the banks have spent a lot of money for the projects.

There is no doubt that customers prefer instant gifts and rewards. The IBLI study shows the indication. During years, customers’ loyalty has correlated more with instant gifts or reward, than discount programs, special products offering with mortgages, or entertainment tickets.

A regulation to decrease banks’ interest rate and to omit cash back and gifts will surely bring new challenge for banks on maintaining their customers’ loyalty. The decrease of interest rate will likely have an impact on deposits customers’ loyalty. While, the customers’ motives will shift from investment to transactional needs. Therefore, they will not be too elastic to the decline in yield of saving products. The limitation in giving gifts and rewards, which have sweetened saving products, may put banks customers’ loyalty on a stake.

Therefore, it is no surprise that banking industries object the idea on limiting gifts or rewards. They consider BI as too interfering micro segments. They say that banks need to strengthen cheap funds structure. Besides, banks need to create good promotion programs to expand their market in this stringent competition world. In other words, gifts programs aim at pressing their costs of fund along with the increase in savings and the decrease in deposits. 

Besides, costs spend to give gifts are relative small. They range from 0,2% to 0,3%. “BCA has spent 0,25% from costs of fund for savings gifts. That is relatively small for a big bank like BCA,” General Director BCA Jahja Setiaatmadja texted Infobank last month.

Jahja said that he did not reject the idea of removing the gifts or rewards giving for customers making savings in banks. However, he said that the removal should be done simultaneously by banks. “We will do it if other banks are consistent in impeding giving gifts to customers,” Jahja stipulated.        

BCA maintains its position as a market leader in the savings market. So far, the achievement is the result of good promotion strategies, supported with electronic distribution networks (electronic delivery channel). BCA’s cheap funds structures are also stronger comparing to its competitors. Infobank Research Bureau records that per September 2011, the portion of savings in DPK BCA reached 54,18%.

BCA’s mastery of savings market is surely supported by the bank’s loyal customers. According to IBLI 2012, BCA becomes the bank with the highest index on customers’ loyalty. Yet, the index has been decreasing comparing to the last year’s index. Bank Mandiri has been consistently in the second position for six years in term of customers’ loyalty index. 

IBLI research does not merely evaluate loyalty index of customers. The research covering banking industries areas such as relationship, partnership, and satisfaction also measures loyalty index of credit card holders.

A tight competition between BCA and Bank Mandiri is vividly seen through customers’ loyalty and credit card holders ’ loyalty. The two banks seem wanting to prove which one is the best in the transactional world. Seeing from the number of automatic teller machine (ATM), Bank Mandiri has surpassed BCA. In 2011, the number of Bank Mandiri’s ATMs reached 9000 units.    

The credit cards holders’ level of loyalty between BCA and Bank Mandiri are almost equal. However, BCA is strong and hard to be surpassed by Bank Mandiri in term of credit cards business. Now, BCA has the highest loyalty index of the credit cards holders. In IBLI 2011 and 2010, Bank Mandiri was in the position. BCA, Bank Mandiri, and most of prominent banks releasing credit cards have experienced a decrease in customers’ loyalty index. In other words, banks issuing credit cards find difficulties in maintaining their customers.

The case of Irzen Octa, a credit card holder of Citibank who was allegedly abused to death by debt collectors, has made people cautious and reluctant to have or change credit cards. Besides, races on discount programs held by banks also make people do the same.

As it has happened in previous years, IBLI 2012 also calculates loyalty index of Islamic Banking Institution. For five years, two giants of Islamic Banking Institution which are Bank Mualamat and Bank Syariah Mandiri (BSM) are competing strenuously to maintain loyalty of their customers. The loyalty index between the two banks are tried to surpass one another. Three and two years ago, Bank Mualamat held the highest loyalty index. Last year, BSM was the champion. And this year, IBLI records that Bank Mualamat acquires the highest loyalty index.     

For the first time, IBLI 2012 gauges the loyalty index customers in the regional development banks (BPD). However, IBLI 2012 has only surveyed six BPD of 26 BPD. Bank Jateng reaches the highest loyalty index, followed by Bank DKI and Bank Jabar Banten.

It is a hard work for BPD to build customers’ loyalty, because the banks have captive market. Moreover, the banks have often been criticized on their service quality. The critics say that the banks’ service quality is less comparable to big and prominent banks. Therefore, it can be understood that the customers’ loyalty level of the banks are far less than other banks. For BPD that their services are still underestimated, the plan to limit gifts and rewards will make the banks more difficult to build customers’ loyalty.    

BI’s plan to limit gifts or rewards indeed has a positive purpose. That is to lower interest rates loan, so this country’s economic situation will be able to move smoothly and quickly. That is because when gifts and rewards are offered excessively, they will affect on interest rates loan. That kind of gifts and rewards will create unhealthy competition. Besides, they do not educate people.

Elimination and limitation of gifts and rewards do not only influence customers’ loyalty, but also affect in banking liquidity wholly. Based on Infobank Research Bureau, the needs of liquidity are influenced by two factors. First factor is the high credits growth. Credits grow faster than funds. This situation is like what have been occurring in a few recent years. Loans has grown 25,69% year on year since October. Meawhile, at the same time, DPK has only increased 19,02%.      

Second factor is to anticipate the possibility of global economic crisis, as the recovery of the European crisis is still uncertain. The condition will affect the drying up of the banking liquidity. When the crisis shakes this country’s financial stability, there can be funds withdrawal to be exchanged with foreign currency. Banks have diverse durability. Supposed a bank is swayed, there will be an emerging of systemic impact and migration of funds to some of the most trusted banks (flight to quality). 

(This article has been published in Infobank Magazine - No 394 January 2012)