The bottom line: a potentially stronger bottom line

Segmenting your customers enables you to provide relevant product offerings, services, interactions, and content to specific clients and prospects - when and where they need it.

Yes, but not in the same way or with the same relevance as today.
In the past, many banks considered—and some implemented—a form of customer segmentation. Many of those efforts, though, met with limited success, often due to the lack of access to the right tools or technology.  Either the functionality wasn’t there, or the tools that provided it were priced in a way that left many banks out of the market. 

Segmenting customers based on attributes that were easy to identify and track also presented challenges. For example, some banks segmented customers based on demographics and/or psychographics, only to find those attributes were hard to track and of limited use in identifying customer needs or purchase behavior.  Ultimately, many banks were unable to bridge their organizations’ historically siloed or intensely product-focused organizational structures to roll out a true “customer-oriented” program. 

What’s different now? 
Four primary driving forces are propelling customer segmentation analyses back into the forefront right now. 

A new business model for banks. In short, the rules for operating a profitable bank have changed.  The introduction of sweeping regulatory changes over the last few years combined with the lackluster economy have placed significant limitations on previously reliable key sources of  revenue.  This has caused banks to rethink who they target, to whom they lend, how they price their products, and which services to offer—just to name a few.  Banks need to have a greater understanding of their opportunities and how the changes they make will impact their bottom line—ideally before these changes are implemented.  This requires a deeper knowledge of their customers, those customers’ needs, and, ideally, how customers may be impacted by major decisions. 

Increased customer expectations. Everywhere we turn, businesses are using information and technology to allow us to customize our experiences, retain our preferences, anticipate our needs, keep us informed, provide timely offers, and more.  With these increasingly customized experiences in other industries, banking customers are growing to expect more relevant products, services, and experiences from their banks. But this isn’t about giving everything to all customers; it’s about meeting each segment’s most important needs in the most relevant way.  In addition, the current business environment is intensifying competition among banks for the “best” customers.  By segmenting its customer base, a bank will be in a stronger position to identify and address customer needs.  This makes for a better customer experience and allows the bank to solidify its most desirable customer relationships while allocating resources where it is likely to realize the greatest return.  

More Technology Options. Advancements in technology have added an array of choices for banks to collect and analyze customer information, making meaningful customer segmentation possible at a variety of price points.  Many solutions can also complement and leverage the technology banks already have in place.  Banks that want to upgrade their tools will be able to choose among options that require minimal capital investment. 

More demands on limited bank resources. With the expansion of how and where people bank, there are far more investment choices competing for a banks limited resources.  For example, look at all of the options (channels) that customers have to access or view their accounts today. Customers can choose to conduct their banking needs using mobile phones, tablets, online services, ATMs, branches, call centers, payment cards, or mail.  Without knowing which customer segments will be most impacted or relevant to its strategy, how does a bank make channel investment decisions that are likely to provide the greatest return, retain customers, and attract future customers? Multiply those factors by all of the other types of decisions facing today’s banks, and you begin to see the impact.

What if you don’t have the necessary customer data?
While working on a recent customer segmentation analysis, a group of analysts determined that they didn’t have the data we needed.  After defining the project’s business objectives, we created a related data “wish list.” The analysts felt they had very little of the data on our list.  After a little more digging and some reverse engineering of existing reports, we were able to get at approximately 80 percent of the data we needed.  For some of the missing elements, we identified proxies that we could use with a reasonable degree of confidence. 

Are you likely to have everything on your information or data wish list? Probably not, but there is usually a lot more information available than most people realize. And in our experience, there is almost always a way to get at sufficient data.  Between regulatory requirements and the nature of the business, banks have a gold mine of data on their customers.  In addition, coupled with external data sources such as UCC filings, data aggregators, the census bureau or credit bureaus, this data can be pulled together at a customer level and provide a basis for creating meaningful and actionable customer segments.

The bottom line: a potentially stronger bottom line.
Is your bank struggling with some or all of these questions?

  • Where are our greatest opportunities for growth?
  • Who are our most valuable customers?
  • Which channels should we expand or enhance?
  • How can we improve our customers’ experience?
  • How will a pricing change impact our customers?

 

You are likely to find that by adding an understanding of your customer segments, you will be able to make more informed decisions about allocating limited resources for the greatest return. For example, this allows for a much higher ROI on marketing spend with the ability to more effectively and efficiently target marketing messages and offers to address specific customer needs. Many banks have found that they have the potential to significantly grow their loan portfolios and/or top line revenue by simply gaining a larger share of wallet from the customers they already have. This is an easier and much more cost effective route than the investment required to acquire new customers. For those that do target new customers, they can use “like-profiling” techniques modeled after their best customers to refine their acquisition efforts and increase the likelihood that they are attracting the types of customers they really want.

Segmenting your customers enables you to provide relevant product offerings, services, interactions, and content to specific clients and prospects - when and where they need it. This increased customer orientation will likely lead these customers to “reward” you by remaining loyal to your institution and expanding their relationship with your bank through the purchase of additional products or expanded service use. All of these behaviors can have a positive impact on your bottom line. What banker wouldn’t want that in today’s environment?

West Monroe Partners helps financial institutions leverage valuable customer insights to improve loyalty and increase their lifetime value. For more information, please contact Cathy Pricco.