Your Depositors Aren't 'Average'

By Steve Ledford, Tim Mills and Tom Murphy

Tailoring your organization's payments products to the distinct preferences of your customer base should lead to more meaningful segmentation — and above-average marketing results.

Financial institutions across the U.S. compete vigorously for retail depositors. Free checking, free electronic bill payment and expanding branch networks have become standard fare as banks, thrifts and credit unions battle for demand deposit accounts — the cornerstone of consumer banking relationships.

Once banks acquire an account, they proceed to bombard customers with mailers, phone calls and promotions to cross-sell additional products.

Much of this marketing is designed for the "average consumer," or is based on "typical customer" responses. Bankers like to believe that they "know what their customers want," and they may make distinctions, for example, between the "affluent" and "mass-market" customer. But in fact, these customer classes are often based more on what is being sold, and less on whom the marketing is directed to.

The drawback to this approach is that, in reality, the typical customer is likely to exhibit highly atypical behavior. It's important to remember that an average is just a statistic, and not a particularly useful statistic at that. If consumer checking accounts carry an average balance of $1,000, you can bet that there are a lot of $100 accounts, some $10,000 accounts and just about everything in between. Is it reasonable to expect the $100 depositor to react the same as the $10,000 depositor? There is simply no average customer — and basing products and services on an average customer profile will miss the mark.

The marketing of consumer financial services tends to default to traditional ways of segmenting markets. Categorizing customers according to attributes such as income, age, education and ethnicity can provide some useful insights, but they are second-rate predictors of financial buying behavior. When the subject is money, people can be highly personal in their preferences. Ultimately, it's quite difficult to create demographic or psychographic profiles of real customers. Most of the data is simply not available — or, if it is, may be of questionable accuracy.

Surprisingly, financial institutions already hold the key to information they need for a more effective segmentation of their customers: Every time a customer uses a debit card, pays a bill or writes a check, he or she is making a choice and signaling how they prefer to use their bank. Moreover, these payment behaviors are an excellent indicator of overall buying tendencies. There is no better way to predict what financial services a customer will use in the future than understanding the services he uses today.

The Survey Methodology

In 2003 and 2004, Global Concepts conducted a series of surveys to identify distinctive payment behaviors among U.S. consumers. The surveys were designed to obtain detailed data that would allow us to understand, and perhaps anticipate, payment system trends. Most important, the surveys were designed to identify which consumers were making which payments. Instead of compiling misleading averages and aggregates, the research was meant to provide granular information that financial institutions could adapt for the unique characteristics of their customers.

Each survey was based on a random telephone sample of 1,000 respondents queried about their payment behaviors — when they used branches to make payments, how they paid their bills, how they paid at the point of sale and how they accessed cash. In addition, the surveys gathered standard demographic data such as age, education, income, home ownership, family status, ethnicity and geography. The data were then analyzed to find correlations between the payment behaviors and the demographic data.

What we found was that consumers tend to fall into distinct clusters. Most consumers have distinct preferences for one type of payment. The research also found that payment behaviors can be matched to key demographic characteristics. A significant finding, however, is that the demographic factors that correlate to payment behavior are usually quite specific, and different factors are significant in different situations. While standard market segments are relatively poor predictors of payments preference, there are a few bellwether demographic factors that can be used to craft payment-centric market segments. Perhaps more important, payments activity can be tied to pools of consumers with distinctive characteristics.

This information can be used in a number of ways. If a financial institution can identify a cluster of customers according to payment transaction data, it can make educated assumptions about missing demographic data. This can help in targeting future promotions for financial products and services. Payments profiles can also help identify opportunities to get a larger share of customers' business. A bank may have a customer's checking account, but if he or she belongs to a group that uses credit cards heavily, it may want to cross-sell the card product. If a financial institution is expanding into new markets, payments profiles can help put together a compelling product offering based on dominant demographic factors in the target market. Conversely, this information can help banks avoid wasting money based on false assumptions about what customers in a given segment really want.

Some of the Key Findings

Most People Play Favorites with Payments
Very few consumers use a mix of checks, cash and cards for point-of-sale (POS) purchases. Most pick a payment instrument and use it frequently. Heavy credit card users tend to be more affluent. Heavy debit card users are younger. The most dedicated check writers tend to live in rural areas and keep relatively high balances in checking accounts.

Contrary to conventional wisdom, age is a poor predictor of check usage. While heavy check users are a little older than "average," many 18- to 34-year-olds write a lot of checks. This finding fails to support the belief of some that attrition alone will eventually spell the end of checks.

Many Consumers Rely on Retail Merchants for Cash Access
Cash back from check or debit card purchases is an important source of cash for many consumers. For heavy check writers, cash back is often the preferred method. Debit card users tend to alternate cash back requests with ATM visits. While most consumers use ATMs at least some of the time, there is a significant segment that prefers to obtain cash from a teller.

Heavy Branch Users Are Also Heavy ATM Users
The world is not divided into branch users and ATM users. Most consumers use both. In fact, the heaviest branch users are also heavy ATM users, relying on cash back from purchases as well. The most frequent branch visitors have two things in common: they are much less likely to use direct deposit and they withdraw a lot more cash than other customers, any way they can get it.

Two other groups stand out for their branch usage. Branch Avoiders tend to perform the same volume of non-branch transactions as other consumers — even though these consumers have eliminated the branch, they have not added more ATM or POS cashback transactions.

They are also much more likely to have direct deposit. These consumers conduct three times as many ATM deposit transactions as other consumers.

Drive-up consumers have a high-transaction lifestyle. Consumers who rely exclusively on the drive-up window at the branch are younger, wealthier and perhaps busier consumers overall. Drive-up consumers conduct 50% more ATM deposit and withdrawal transactions than teller-only consumers. They also conduct 18% more branch deposit transactions per month but they obtain cash through the branch less often than teller-only consumers.

Payment Behavior Clusters

When consumers are profiled according to overall payment behavior, they tend to cluster into distinct segments. The following are some of the most significant clusters.

Young, Debit-Oriented Consumers
These younger consumers use debit and cash to make purchases at the point of sale, checks to pay bills, and ATMs and debit cashback to obtain cash.

Rich, Young, Heavy Transactors
These consumers are the most affluent cluster in the survey, make the most payments and use the broadest array of payment methods. These are the users of electronic bill payment; they pay almost 60% of their bill payments via the Internet, phone and/or cards. At the point of sale, they use everything but checks.

Older Traditionalists
These consumers use the traditional payment methods: cash at the point of sale (and some credit card); checks for bill payment; and the branch (and some ATM withdrawals) for accessing cash. They do not use debit cards, obtain debit cash back or pay bills electronically. They are older, affluent and more likely to be retired.

"Middle America" Check Users
These consumers use checks for all types of transactions. They pay for almost 60% of their POS purchases with checks, the highest level of check usage at the point of sale. Almost 40% of the time, they obtain cash through check cash back. As might be expected, these consumers pay bills almost exclusively by check.

Unbanked, Heavy Cash Users
Over 80% of consumers in this cluster are unbanked. They use cash exclusively for POS purchases, and exclusively cash and money orders for bill payments.

Using Payments-based Segmentations

OK, so consumers are predictable. How can financial institutions use this information?

First, banks would be advised to stop trying to sell "average" products. Instead, retail banking offerings can be tailored to meet the needs of current or prospective customers. This may be the best rationale for creating checking account packages. It should also help guide which features belong in a package for a given consumer segment and which do not.

This presumes, of course, that an institution knows its customer mix. Most financial institutions know approximately what share of the retail market they own. Few have a solid idea of who these customers are. It is unlikely that one bank has the same profile as the other. For example, one organization's customers may use debit cards more frequently than another's. Or it may have a larger share of young customers. A disappointing response to online bill payment offers may indicate a dearth of affluent heavy transaction users.

Segments affect profitability. Heavy check users, for example, tend to keep higher DDA balances and are loyal. Young debit-card users keep minimal balances and switch banks frequently, but generate lots of interchange revenue. Young, affluent consumers are heavy users of bank services and can be prime cross-sell opportunities. The downside is that they may demand convenient branches in addition to electronic channels.

Fill product gaps. Once you know who your customers are and what they want, make sure you have the right products to meet their needs. For example, many banks have sold off their credit card portfolios. If, however, affluent customers are an important market segment, lack of an attractive card product may mean yielding share of wallet to a competitor. Conversely, fees that discourage use of on-line debit cards and debit cash-back may put off young consumers.

Understanding payment type preferences may help guide customer acquisition. The institution that knows where its competitors are vulnerable, for example, may win depositors by offering a checking account that appeals to disaffected customers. Your competitor may not realize that some of its best customers are up for grabs. For example, if your competitors' checking accounts charge a fee for on-line debit card transactions, you may be able to attract young, urban consumers who rely on those cards for both retail purchases and cash-back by making these transactions free. You don't need detailed data about the competition's customer base; you just need to know that these customers are in the local market and that the competition doesn't have the right product.

The approach just described isn't merely academic. We know of several financial institutions that are using payments-based segmentation to improve returns on marketing, re-target expansion strategies and develop new products or packages.

Target marketing isn't new or revolutionary. It's common sense. And it makes sense to use customers' own behavior, gathered daily and posted to their checking accounts, to define the targets.

Questions or comments about this article? Post them at the Banking Strategies blog.

Mr. Ledford is chief executive officer of Global Concepts Payments Systems Consulting. Tim Mills and Tom Murphy are senior vice presidents at the Atlanta-based payments consulting firm.

Copyright © 2005 by Banking Strategies, published by BAI.

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