Improvement of Customer Satisfaction in Mortgage Banking

TABLE OF CONTENTS

LIST OF FIGURES

LIST OF TABLES

LIST OF ABBREVIATIONS & SYMBOLS

EXECUTIVE SUMMARY

SITUATION AUDIT
Macro-Environmental Analysis
Competition
SWOT Analysis
Segmentation & Target Market

PROBLEM STATEMENT AND ANALYSIS
The Managerial Problem
The Central Service Problem

CUSTOMER SATISFACTION STRATEGIES
Conceptual Framework
Service Strategies
Alternative Strategies

EVALUATION CRITERIA

ANALYSIS OF THE SERVICE STRATEGIES

RECOMMENDATIONS

IMPLEMENTATION

REFERENCES

LIST OF FIGURES

Figure 1: FHB mortgage market volume

Figure 2: FHB dwellings and FHB loan size

Figure 3: FHB mortgage target market size

Figure 4: MFI customer satisfaction ranking

Figure 5: Conceptual Framework

Figure 6: Disconfirmation of expectations model

Figure 7: Schedule for implementation of One-Stop Mortgage Centres

LIST OF TABLES

Table 1: Commonwealth FHB mortgages - Strengths & Weaknesses

Table 2: Commonwealth FHB mortgages - Opportunities and Threats

Table 3: Customer benefit segmentation

Table 4: Evaluation - Extended Business Hours

Table 4: Evaluation - One-Stop Mortgage Centre

LIST OF ABBREVIATIONS & SYMBOLS

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EXECUTIVE SUMMARY

The objective of this report is to increase customer satisfaction of Commonwealth Bank of Australia’s (CBA) first homebuyers mortgage. In regards to this, CBA currently has a low level of customer satisfaction in comparison with the other main banks. Based on the conceptual framework, customers tend to feel dissatisfied with the mortgage service provided by CBA due to the period of time for the mortgage’s approval process as well as the lack of convenience and flexibility of CBA’s services. In an effort to increase satisfaction, the current situation is reviewed resulting in access points to CBA’s weakness in customer satisfaction. Several potential strategies are introduced to tackle the problem. The most promising ones are describes and evaluated in terms of costs and effectiveness to increase customer satisfaction. Finally a “one-stop mortgage centre”-strategy is recommended for implementation in order to decrease customers’ non-financial costs and increase their convenience in first home buyer mortgages.

SITUATION AUDIT

Commonwealth Bank of Australia (CBA) is Australia’s largest retail bank and one of the Australian ‘Big Four’ (FinAnalysis, 2007). It provides a full range of retail banking services including mortgages, credit cards, personal loans, transaction accounts and demand and term deposit (CBA website). The Commonwealth Bank offers a complete range of mortgage options designed to meet different needs and goals of their customers. It also has leading domestic market shares in mortgages with 18.5%.

Customer satisfaction however is a big issue in CBA. The importance becomes obvious with a look at the rewards granted by the banks shareholders. For the increase of customer satisfaction resulting in better rankings than the competitors, the bank offers up to AU$ 11.6 million reward to CEO Ralph Norris. It is the first time that CBA approved an executive bonus plan that is tied to customer satisfaction instead of KPIs or numbers of customers. The bonus payment will result from the customer satisfaction rankings position and a 2.2 percentage of the growth in net profit between October 2007 and July 2010. Furthermore the growth rate must be higher than the average growth of its four major competitors ANZ, NAB Westpac and St. George Bank, otherwise the reward will be zero (ABC, 07/10/2007).

The market for mortgages provided to first home buyers (FHB) is continuously growing with a recent market volume of AU$ 2.85 billion in August 2007 (figure 1), which is a 17.1% share of the AU$ 16.4 billion mortgage market. Noteworthy interruptions to this trend only occurred due to the FHOS phase (Jul 2000 - Jan 2002). The growth of the market is mainly driven by the size of the FHB loans that reached AU$ 242,600 in August, due to increased housing prices. Furthermore, the number of FHB mortgages approved is volatile with a slightly increasing trend from 1991 to 11,750 (figure 2). In September the number of FHB mortgage sales fell sharply due to the increase in interest rates (The Financial Review 09/10/2007).

Figure 1: FHB mortgage market volume

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Source: Australian Bureau of Statistics, Housing Finance Commitments (Owner Occupation), Cat. No. 5609.0 Table 9a.

Figure 2: FHB dwellings and FHB loan size

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Source: Australian Bureau of statistics, Housing Finance Commitments (Owner Occupation), Cat. No. 5609.0 Table 9a.

Shrinking margins in mortgage banking due to stronger competition might be “offset by growth in other areas, such as wealth management” (ABC 15/02/2007), but it shows the necessity of improving the service. Furthermore CBA’s mortgage portfolio grew 11.4% during the last financial year, which is below the market growth of 12.8% (The Financial Review 16/08/2007). This indicates that CBA loses market share in its mortgage segment. It occurs when persistent rises in interest rate and increased house prices throughout Australia have pushed housing affordability to its lowest level (News.com.au 18/10/2007). Research conduct by Housing Industry Association (HIA) concludes that FHB with an average household income of $98,000 a year would have to use 31.7% of their income in order to purchase a home (News.com.au 18/10/2007). HIA recommends a maximum of 30% to avoid mortgage repayment stress (The Financial Review 08/06/2007). As a consequence, single FHB now are seeking for government support to overcome the affordability constraints. First home owner grant incentive for co-ownership and the provision of affordable housing were at the top of the list of single FHB (Perth Now 05/11/2007), but it is not likely to be increased (The Age 14/06/2007).

Providing mortgages to FHBs is an important task to tie customers to CBA. Despite of the profits achieved, cross selling and loyalty are appreciated side effects rising from customer satisfaction. A mortgage is contracted for a 25 to 30 year commitment. In average Australian mortgages are refinanced within four to five years by a better interest rates mortgage or selling the house to move to another one (MFAA). Therefore the customer will have frequent contact to the bank in order to repay the loan at least within the next few years.

To meet the customer’s expectations of purchasing the service product, the product itself and the related services are important. This includes key figures regarding the core service (maturity, interest rate, repayments, options, etc.) as well as the service peripherals such as customer treatment, availability, reliability, convenience and professionalism in consultation. To satisfy the FHB, CBA already provides a wide range of actions in its mortgage services. For example, mobile mortgage lenders will meet the anticipated customers at their homes on request to hold the consultation. Mortgage application forms can be completed and transmitted online, so they just have to be checked and validated by the consultant for saving the customers’ valuable time. Furthermore branches continuously are refurbished to make the customer feel more comfortable and a new customer service model has been established in 2006 to be able to spend more time on the needs of consumers. (CBA Annual Report 2006 & 2007, CBA website)

Macro-Environmental Analysis

PEST-Analysis Consist of political/legal forces, economic, socio-cultural and technological factors. All of these forces are interrelated with each other. The PEST-Analysis on CBA FHB mortgages shows the main elements as followed:

Political Forces The political environment reflects the governmental issues present in the country such as interest rates increase (Anon, The Mortgage Magazine, 2007). Interest rate is being set up by the Reserve Bank of Australia. Therefore, CBA has to follow every policy that has been instructed by government and RBA.

Economic Forces Commonwealth Bank has announced on 10th August 2007 that they will increase interest rates on a range of deposit, variable mortgage and business loan accounts, reflecting recent increases in market rates by 0.25% (CBA website). With an increase of weekly housing rent nowadays, Australian society now tend to buy their own house instead of renting (Perth Now 05/11/2007). In the middle of 2008, a home mortgage interest rate is expected to increase between 9 and 10 per cent. RBA is struggling to keep the lid on an overheating Australian economy thus the mortgages interest rate will raise with not one but three more rises in the middle of 2008 (Colebatch & Ahmed, 2007)

Social Forces Having an own house is the Australian dream. Home ownership provides benefits such as safety, freedom and privacy. Therefore Australian societies highly value it (ABS Australian Social Trends, 2003). Australians consider owning a house as part of their investment into their future.

Technological Forces With the advance technology this day, a mortgage application can be done through internet via CBA website. By applying for the mortgage through internet consumers do not have to pay for the establishment fees. As a consequence, the consumer has fast and convenient ways in applying for mortgages online at any time.

Competition

Besides the three major competitors, namely ANZ, NAB and Westpac, CBA also face competition from other financial service suppliers like St. Georges, numerous mortgage brokers, Credit Union or international banking corporations. As shown in figure 4 on page 12 the major banks are well on track with their customer satisfaction. But it also shows that CBA has the least percentage of overall customer satisfaction with 80 % in September 2006, while ANZ has the highest percentage of customer satisfaction with 88% (Nielsen Media Research 2006).

This may occur because ANZ does offer extended hours service and online pre-approval application service that contribute to fast and time-flexible applications. Furthermore, they also run television campaign promoting their mobile lenders and extended hour services.

SWOT Analysis

SWOT Analysis is the overall evaluation of a company’s strengths, weaknesses, opportunities, and threats. There are two categories of SWOT analysis; internal (strengths and weaknesses) and external environment (opportunities and threats). (Kotler et al 2003, p.97, Healy 2004, pp. 23, 32).

Strengths & Weaknesses as assessment of CBA FHB mortgages internal strengths and weaknesses, based on the marketing mix variables (the 7 P’s: product, price, promotion, place, people, process and physical evidence) in terms of its service delivery processes, its facilities and the impact the marketing mix variables have on customer satisfaction are shown in table 1.

Table 1: Commonwealth FHB mortgages - Strengths & Weaknesses

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Table 1: Commonwealth FHB mortgages - Strengths & Weaknesses (continued)

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Sources: ACCC, CBA Annual Report 2006 & 2007, CBA website

Opportunities & Threats as stated in table 2 are the assessment of CBA FHB mortgages external opportunities and threats, based on the marketing mix variables 7 P’s.

Table 2: Commonwealth FHB mortgages - Opportunities and Threats

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