How To Get Serious About Bank Customer Segmentation

Bank Customer Segmentation

“Check out our 1.15% CD” is probably the worst advertisement that a bank can do and unfortunately derivations of that approach are the most common form of advertising for banks. When our competitors promote generic advertisements around rate we love it, as it is a sign that the bank has not taken the time to understand their customer – ironic, since most banks pride themselves on knowing their customer.

 

If you are a start-up business, the first thing you do is to conduct a detailed segmentation analysis to outline the demographics, psychographics and importances of the customers they seek to target. It is only after a customer is understood that you can accurately refine your product, your business model, pricing, positioning and marketing - doing it any other way likely results in vast inefficiencies.

 

Unlike start-up businesses, banks already have an idea of who their existing customers are.  But customers are so much more than the sum of their deposits and loans from a bank.  Banks can use customer segmentation to deepen their understanding of their existing customer base and identify new customer segments that may be growth opportunities for them. 

 

This exercise enables banks to match profitable products to the right customer segments (those most likely to use those services) and then create marketing programs to reach those customers.  Without understanding who existing and desirable customer segments are, a bank’s marketing efforts will likely miss the right customers.  In marketing, the shotgun approach is rarely successful.

 

Customer segmentation is not difficult for a bank since vast amounts of data are available and behavior is well understood.  Customer segmentation is typically a combination of data analysis (your own data and 3rd party aggregated data you can find) and some intelligent assumptions based on many data points that you can access.  The goal is to understand who your customers are and, more importantly, what they need.  Demographic and psychographic segmentation allows you to understand who the customers are (from different angles).  Importances allow you to explore what those customers need and how they would use your products.

 

Demographic Segmentation

Demographic segmentation is the most common and well understood so we will not dive into this too much as this is the foundation for Marketing 101.  This includes much of the information you have about your existing customers as well as census data you can collect from your geographic region(s) in which you operate.  It is particularly useful for identifying a future threat or opportunity (i.e. by 2043, the US will have a majority-minority population) but many not be particularly actionable today. 

 

Aspects of demographic segmentation include:

 

  • Sex, age, marital status, family size, age of children, income, occupation, geographic location, education, race, religion and nationality
  • For commercial customers, this would also include type of business, number of employees, age of business, organization structure and geography
  • For advanced banks, the new frontier is charting their type of social networks. This determines how well the customer is connected within a given community (geography, professional, demographic, etc.) that will further form the basis of understanding value

 

Attitudes & Lifestyle (Psychographics)

While banks usually take the time to understand demographic information, psychographic analysis is rare.  Here banks strive to understand insight into customer personality traits, values, attitudes, interests and lifestyles.  They are a good basis for identifying differences in response and are a far better predictor of need.  Since all the products a bank offers should be positioned as the solution to a particular customer’s pain point, banks can use psychographics as the window to identify the most likely customer to experience the pain their problem solves.

 

Market research (surveys) is a powerful way to identify customer segments using psychographic criteria.  A bank can conduct simple surveys on its own through its branches, on its website or its social media pages.  However, there are many 3rd party research reports freely available online from the ABA, consulting firms like Accenture and by large banks that can shed light on how consumers feel.  These market research reports include customer attitudes on mobile banking, branch banking, bank fees, credit card usage, online banking, mobile payments and loan products. 

 

For banks, some of the more important psychographic factors for customers are:

 

  • Evangelists, loyalists, occasional bank users or reluctant customers?
  • Are they impulse buyers, crowd followers or the analytical type?
  • Are they first movers on new bank products or late adopters?
  • Comfort for conducting banking online or on a mobile device
  • Ability to get to a bank on a night or a weekend given current banking hours
  • Preference for speaking to someone face to face rather than by phone when conducting certain transactions
  • Willingness to drive to a bank’s ATM versus using the cash back services at a grocery store

 

Importances

Importances is the term used to identify the importance a customer attaches to specific product benefits and characteristics.  When customers can be grouped together based on the similarity of their importances, you can create “benefit” segmentation.  This strategy has been particularly effective for credit card products.  “Cash back” cards appeal to customers who prefer a benefit that is transparent and simple.  This type of incentive works best for consumers who pay off their balances every month.  Other customers prefer rewards programs tied to miles and/or points.  There is often an annual fee for these cards, and they appeal to customers who may value status and perks as much as the actual value of the benefit from the rewards program.

 

Importances can include factors related to price, service or ease of use.  For example:

 

  • Are customers price, convenience or value sensitive? Customers who think price is important will have greater price elasticity and may require fee transparency and flexibility.
  • How important is it for their bank to be involved in charity, the community or social issues?
  • Customers who are time constrained and value flexibility may want to do more business or product research online.  This could translate into the ability to schedule an appointment with a banker online (to avoid waiting in line at a branch) or adding a “chat” feature to your website during the day so that someone can get banking done discreetly at her desk during her lunch hour.

 

When your segmentation analysis is complete, you will have 5-8 key segments that reflect both your current customer base and your targets.   This framework can help traditional banks capture the demographics, psychographics and importances that make up customer segmentation:

 

  • Geographic / Demographic:  age, marital status, etc.
  • Personal preferences for banking:  access channel, preferred payment method, response to marketing, product/channel preference
  • Behavioristic:  understands financial complexity, open to purchasing new products
  • Attitude:  likes to give donations, expects to work with senior bankers
  • Financial parameters:  assets, credit rating, liabilities, financial potential, business owner
  • Generational & life stage:  young family; mortgage, mid-life; college savings, retired; safer products

  

Any effort in doing customer segmentation is a good investment for your bank. Hopefully, this primer will get you started in thinking further about the composition of your current and desired customer base. The more time you take to understand and segment your bank’s customer, the more successful it will be in utilizing sales, marketing and product design investment efficiently.  Understanding your segments will allow you to take the next step towards doing Customer Lifetime Value analyses (CLTV) so that you can determine how many marketing dollars you should spend per customer.