Europe's retail banks are missing out on what amounts to a sizable "loyalty bonus," according to McKinsey research. We examined the banking markets in Belgium, Germany, and Italy and found that loyal customers typically generate, over the life of their relationship with an institution, 30 to 70 percent more value than run-of-the-mill clients do. Loyal customers not only buy more products than their counterparts but also tolerate higher banking charges.

In our experience, most of the region's banks fail to identify and nurture these important customers, relying instead on segmentation models that are ineffective and even counterproductive. In fact, we believe that such miscues may be contributing to a growing sense of disenchantment among banking customers across the region.

Our research emphasizes what marketers in other retail industries already know: loyal customers—those who will recommend a bank to friends and family, feel that their expectations have been exceeded, and will without hesitation select the same bank to make a fresh transaction¹—are more profitable. In practice, the mind-set of loyal customers is such that they will stick with a bank that treats them well and provides good value over the long term—even if it doesn't offer the best deal...