Read the following case and answer the questions that follow:

The student market: a lesson in retention

Students represent a significant part of the youth market and have received considerable attention from the financial services sector over the last few decades. In the last 1970s the major clearing banks began to develop students accounts aimed at school leavers going on to further education. The driving factor at that time was that a vast majority of students received local education authority grants paid by cheque for which a bank account was desirable.

Since the 1970s much has changed with respect to grants and most students are now funded by students loans and/or parental contribution with an increasing number supplementing their financial means with part-time employment. Nevertheless, students still represent an attractive market segment for financial institutions. They are easily identifiable in demographic terms and can be easily located and reached. In addition they have specific and identifiable needs and represent a captive market while at university; many students will obtain employment in high paying jobs with extensive financial services needs. With little switching they present the opportunity to capitalize on the full lifetime value of the segment.

While at university students are generally unprofitable; they only start contributing to the profits of financial institutions the year after graduation. Profitability has then found to increase every year up to 10 years. The costs of acquiring university students are high due to marketing expenditure from promotion offers used to entice them. Yet, once graduated; they are more likely to be in higher paid jobs with salaries increasing at higher rates than their non-university counterparts.

For this reason, financial institutions are keen to retain their student customers beyond graduation. One problem with this is that recent graduates are highly mobile in the early years of their career, with serious consequences for their relationship with their financial services provider.

Defection rates among students have been found to vary up to 36 percent in the UK and 18 per cent in Ireland. The average length of a students relationship with a financial institution is around five and half percent years. Research into the student market by Colgate et al. found that a reduction in the defection rate of less than 3 per cent, and reducing the defection rate by a further 5 per cent can generate increased profits of over 500 percent.

In order to reduce defection rates and increase retention rates, financial institutions need to understand why students switch. Studies have shown that students initial motives for choosing a financial services provider are convenience of location and parental influence. High mobility on graduation may cause many students to switch their provider in order to achieve greater convenience. Indeed, the study by Colgate et al. highlighted convenience as the top reason for defection (33%), followed by dissatisfaction with the service provided (23%), refusal of an overdraft request (12%) and dissatisfaction with charges (11%).

Factors which were found likely to encourage students to stay with their financial services provider and not switch were ranked as: no charges, good customer service, and interest paid on current accounts, competitive saving rates and competitive overdraft rates.

Thus, students would seem to be fairly price-sensitive, and it appears that financial institution may be able to retain their student customers beyond graduation by offering more competitive prices, or perhaps rewarding their loyalty with discounts. At the same time, however, students also seem to place a great deal of emphasis on good customer service. Poor customer service can be a motive for switching.

Financial institutions need to be aware that young people today expect higher levels of service than their predecessors did. A study by Lewis et al. showed that while 72 percent of the students sample surveyed were at least content with the level of service received, there was some room for improvement.

Students expect reliability from their financial services provider in terms of accurate statements and being able to trust the employees knowledge of the products offered. Tangibles, in the form of the branch dcor and appearance seem to have the least effect on perceptions of quality. While students are generally pleased with the peoples aspects of service, they do perceive some shortfalls in relation to the aspects of delivery such as product knowledge, speed and efficiency, slow queues, and limited opening hours of branches.

If financial institutions are serious about retaining their student customers after graduation, they need to consider them as proper customers and not just students.

Required

a) Explain why financial institutions are able to target student customers (4 marks)

b) What can financial institutions do to improve service to student customers and retain them? (5 marks)