Editor's note: Barry Leeds is president of Barry Leeds & Associates, a New York research and consulting firm.

Marketing, and especially marketing research, has been late in coming to the financial industry. Of all the types of market research, mystery shopping was the first to be accepted by the banking fraternity. Why? Because it was easily understood by management. It communicated to management what happened (play-by-play) when a customer or prospective customer entered a branch to open an account, inquire about a service or conduct a teller transaction.

Mystery shopping is also an instant replay of what happened when a customer or prospective customer interacted with a branch employee. In the past, when presenting shopping program results, researchers did not worry about sample size, demographics, regression analysis, statistical modeling. All they had to do was paint a picture of what happened when a customer visited a branch. Because of its vivid depictions of particular behaviors or events the mystery shopping program prompted changes - as was its goal.

A brief history

Mystery shopping in banking has evolved over the years. It is still one of the most often used research techniques while also being one of the most expensive ways to collect primary data about a customer/employee interaction.

In the 1970s, mystery shopping really caught on. During that decade, approximately 25 percent to 35 percent of all banks with over $300 million in deposits conducted some type of mystery shopping program. Most often it was a benchmark program with a one- or two-year follow-up. When mystery shopper programs were used in this manner, it was frequently difficult to note changes either for the better or worse because there were no motivational programs in place to encourage change. It was difficult to determine what caused changes that did occur.

What prompted the growing interest in mystery shopping in the '70s was the realization by bankers of the importance of developing a sales culture. And because sales professionalism became increasingly important, a device had to be developed to monitor sales skills, as well as changes in service behaviors in the sales culture. Mystery shopping began to be used as a monitoring device for sales culture development, specifically for tracking sales behaviors and skills.

This phenomenon then led to the use of mystery shopping to not only monitor but to motivate performance, set goals or standards and reward performance. Some of the more progressive and sales-oriented banks began rewarding employees based upon the performance of sales behaviors as well as sales successes.

In the '80s, the industry's new catch-all phrase was "service quality" and, once again, mystery shopping (along with consumer and customer satisfaction surveys) became the industry's standard for evaluating, monitoring and motivating performance. It was the combination of these two research methodologies that changed the basic mystery shopping methodology to one of a predictor of customer satisfaction. By determining customers' wants and needs and what satisfies customers most, checking for and reinforcing specific behaviors can be built into the mystery shopper program.

It has been proven that as the sales professionalism and service behaviors improve, so does customer satisfaction. The first step in this dual methodology is to determine what specific sales/service behaviors impress customers most. The next step is to translate these behaviors into branch employee procedures, and the final step is to monitor those procedures. So rather than ask shoppers (as researchers have in the past) "Was your branch experience pleasant?" or "Was the customer service representative pleasant?" now researchers ask shoppers if the customer service representative showed specific sales/service behaviors or took specific actions such as standing and greeting the customer, asking meaningful questions and offering to follow-up with the customer. When a bank's staff does these things, customers receive a warm, friendly, caring type of professionalism and perceive that the bank really cares about their business. This in turn helps encourage (and increase) new account deposits and fosters customer satisfaction.

Here are several examples of how to use mystery shopping to increase sales and improve service.

Increase sales and improve service

Mystery shopping can help motivate and reward the front line for encouraging applications, developing rapport with the customers, asking questions and making available appropriate products. A variety of products can be evaluated using mystery shopping, ranging from loan and deposit products to investments and non-deposit products. Measurements should be taken quarterly to provide timely feedback on missed opportunities (for example, not asking the customer to come back or forgetting to offer an application). It will also enable frequent communications with frontline personnel, heighten the importance of sales and service, and provide for performance incentives.

Service affects sales, customer satisfaction and ultimately customer loyalty, and that affects the bank's bottom line. Mystery shopping improves how the universe of consumers (purchasers and non-purchasers) are treated by your staff, customer service representatives, tellers and telephone service representatives. It tells you whether the front line is treating consumers consistently and in a manner that adheres to your standards. More specifically mystery shopping measures whether your staff is knowledgeable, efficient, helpful and courteous. Conducted on a continuous basis, mystery shopping can motivate and recognize service performance.

Used as a benchmark, mystery shopping can pinpoint strengths and weaknesses for training operations and policy refinements. A benchmark can also reveal how you measure up against the competition. In addition, it can identify the competition's best and worst practices and present you with opportunities to improve. In the end, mystery shopping helps build customer satisfaction, deeper product usage and higher customer retention, which spells increased profits.

Once again, a variety of products and scenarios should be included in the program. Monitoring how both customers and non-customers are treated when cashing or depositing a check, inquiring about overdraft protection or a money market account and conducting transactions over the telephone are just a few of the scenarios that can be used.

The 1990s have called for a much more prominent role for mystery shopping. Some might even call it the decade for "undercover testing." The 1990s have also brought more demanding, diverse and information-hungry consumers who learn quickly and react quickly - especially when misled. To satisfy consumers' need for information, companies rely on trained personnel and publications to communicate with consumers. Consumers in turn cruise the information highway by calling or visiting financial institutions, subscribing to industry specific magazines and even searching for information by computer. Some information providers (such as Money magazine and Consumer Reports) shop bank branches to report to consumers how banks and brokerage firms are doing.

New and emerging consumer markets are also making new demands on banks. For example, the purchasing power of women and minorities has increased and their voices are being heard at your institution - and in Washington. Also, the regulators responding to "market focus" want to make sure banks and mortgage companies are not misleading consumers and are making suitable products available to all members of the community. Mystery shopping can provide concrete information about the perceptions these consumer groups have of your bank, which in turn can help you capture new markets and comply with regulations.

Proactive about compliance

This brings us to the areas of compliance and proper management oversight. Banks must assure themselves, regulatory agencies, customers and stockholders that they are in compliance with the law. The worst thing that can happen to a bank is to have the lead story in the local newspaper talk about a Department of Justice investigation at their institution.

Mystery shopping has evolved so considerably that it is now being recommended to all banks by all of the federal regulatory and enforcement agencies: Office of the Comptroller of the Currency (OCC), Federal Reserve, Federal Deposit Insurance Corp. (FDIC), Office of Thrift Supervision (OTS), Department of Justice (DOJ) and Housing and Urban Development (HUD).

It is viewed as so important that federal agencies are conducting their own shopping programs and the Department of Justice has included shopping (called "testing" by government agencies) in its settlement decrees with Decatur Federal, Shawmut, Vicksburg, Chevy Chase and Northern Trust.

Fair lending and community reinvestment

Even when used for compliance, the technique's ability to help improve sales and service rings true. By asking the necessary questions to determine whether the bank is in compliance, you can also learn how well your employees are providing service.

The Equal Credit Opportunity Act (ECOA), its implementation through Regulation B, and the Fair Housing Act (FHA) prohibit discrimination in lending. The ECOA specifically prohibits statements (both oral and written) that discourage, on a prohibited basis, a "reasonable person" from asking for or completing an application for credit. Because the ECOA specifically prohibits oral or written statements that discourage applications for credit, a bank must guard against actions that may be construed as prescreening when consumers shop for credit.

Mystery shopping, in the form of matched pair testing, presents an appropriate vehicle for helping banks comply with the law. For example, matched pair testing in the pre-application stage of a mortgage loan can help lenders monitor whether they are providing minorities and non-minorities with equal access to credit.
Two shoppers (for example, one African-American and one non-minority) separately visit or call a bank and inquire about a mortgage loan for a home they wish to purchase. The shoppers simulate an actual customer inquiry and are furnished with very similar marginally qualifying financial profiles (incomes, outstanding credit, marital status, down payment, savings and so forth). The shoppers record their observations and impressions on a questionnaire immediately after the visit. Their observations and impressions are aggregated and side-by-side comparisons are made. The comparisons are made to determine whether the shoppers were treated differently.

If differences are found or possible Regulation B violations are noted, reshopping should be conducted. The shops help verify whether the findings are reflective of a pattern or practice of possible violations of the ECOA or FHA.

Mutual funds and nondeposit investment products

The guidelines issued by the four regulatory agencies (OCC, Federal Reserve Board, OTS and FDIC) specifically recommend a series of steps (inclusive of oral and written disclosures) aimed at ensuring that customers purchasing nondeposit investment products have a clear understanding of the nature of the products and the fact that they are not insured by the FDIC. The interagency guidelines recommended the following disclosures when selling or advising consumers about nondeposit investment products: (1) the fact that nondeposit investment products are not insured by the FDIC; (2) nondeposit investment products are subject to risk and possible loss of the principal amount invested in these products and are neither deposits or other obligations of the institution nor guaranteed by the institution. The interagency guidelines also hold that advertisements and brochures should clearly and conspicuously state these disclosures.

Banks involved in the sale of nondeposit investment products are also required to follow the rules of the National Association of Securities Dealers (NASD), as set forth in "Fair Sales Practices," and of the OCC in Bulletin 94-13. A bank salesperson must ask sufficient needs-based questions (about income, financial and tax status, ownership, risk tolerance, goals, liquidity) to be able to recommend suitable products.
Mystery shopping in the form of nondeposit investment product testing reveals whether a bank is providing an environment aimed at fostering a clear understanding of investment products and limiting customer confusion about the lack of federal deposit insurance coverage and the role of the institution in the sale of these products. The results of the individual tests are then aggregated and analyzed. A "reasonable person's" approach is used to reach a determination of whether the institution's nondeposit investment product sales and service practices follow the federal interagency guidelines and the NASD's fair sales practice rules.

The 1990's are interesting times for banks, and mystery shopping will continue to help banks do a better job in serving customer needs. It will help to maintain or even improve sales and service when institutions are downsizing their staff. It will help companies reinforce the importance of service in the minds of employees. And it will help provide adequate management oversight of the behavior and sales practices of its employees.