Flexibility is key in segmenting customer groups

Financial institutions are under immense pressure to find new ways to acquire customers, strengthen and grow existing customer relationships and generate revenue. Understanding what motivates different customer groups is critical for designing and delivering products and services that satisfy these objectives.

To dig deeper into this, Saylent commissioned a study to assess consumer and small business banking preferences and depth of relationships they have with their financial institutions. The findings provide key insights into how different groups prefer to interact with their bank and the products and services they desire. Here are some takeaways based on the survey results:

Substantial opportunity exists with underbanked and millennials. Franchise growth only helps the bottom line when acquired households are profitable. However, competition for profitable households is intense, reducing expected returns. A better strategy is to take the path of least resistance: focus on the underbanked market and millennials.

Financial institutions have sacrificed the underbanked market to alternative providers of financial services. Recapturing this market, and strengthening and growing relationships with millennials profitably, requires a better understanding of what these customers and potential customers are looking for in their products and services. Our study found, for example, that 56% of millennials and 54% of the underbanked would open an account that didn’t include overdraft fees.

To learn more about what’s important to these groups, it’s critical for institutions to analyze their customers’ demographics, transactions and purchasing behaviors to gain an understanding of how they prefer to interact with their financial provider.

Flexibility and contextual-based pricing are key. The study demonstrates that products should be flexible to meet the needs of different consumers; it also shows the need for incentives to change consumer banking behaviors. For example, while 52% of consumers prefer debit cards as their primary account access channel, that leaves 48% still preferring checks and cash.  Converting long-ingrained transaction behaviors such as teller withdrawals and check processing that burden banks with expenses to revenue-generating transactions such as debit point-of-sale will take more than just wishing.

Contextual-based pricing, whereby financial institutions personalize and price products based on customer behaviors, enables institutions to optimize their products for the individual customer. Such products drive acquisition and retention of the most profitable customers by offering them the ability to customize their banking experience.

Using contextual pricing also allows banks to reduce disintermediation risk of high balance relationships if rates rise. Traditional CD customers have been driven by low rates into transactional products.  Contextual pricing allows your bank to encourage these customers to deepen their relationship, offering rewards for maintaining and growing deposits while balancing costs.  Contextual pricing strategies also enable consumers to self-select rewards and fees, giving clients control of their banking relationship. Pricing based on behavior allows banks to maximize their accounts’ consumer appeal while operating within guiderails to maximize profitability.

Drive adoption by differentiating and packaging products for different audiences. One of the many missteps banks have made over the past few years with millennials has been offering one-size-fits-all products and services. However, in reality, a millennial technology worker in the Southeast has significantly different banking habits and needs than a graduate student in Los Angeles or a new family looking to buy a house in Chicago. Offering a specific lifestyle account for each of these consumers isn’t always possible (or desirable), so using tools that create account structures with tiers that appeal to multiple market segments with features and benefits that are meaningful to individuals creates competitive differentiation.

Mass affluent customers are looking for differentiated deposit products that meet their needs by simplifying their financial lives. Providing a well-designed mass affluent focused product can overcome challenges to growing these relationships, for example. Given this segment’s preference for time deposits and high relative balances, implementing a product that’s priced based on the profitability of a customer’s relationship would help drive cross sell and deeper share of wallet.

The study also found that small businesses don’t choose banks based on deposit products. However, deposit accounts can be a barrier to gaining business deposits if not positioned correctly. For example, 97% of small businesses with a credit relationship shopped their financial institution based on credit policies and pricing first, according to our study; deposit products were a secondary consideration. However, delivering a small business deposit product with desirable features (such as packaged cash management services) will help give a bank a differentiated offering to encourage client engagement.

More effectively serve customer needs by optimizing for mobile. Across all segments, branch location was considered important or extremely important by 78% of survey respondents. However, only 13% report the branch as their primary channel for managing their money. This indicates that branches are critical to acquiring new clients but that they’ll be lightly trafficked and confirms the need to continue investments in mobile banking. It also indicates that some incentives may be required to convert customers fully to the mobile channel.

Leveraging the investment in branches will require a new approach. Branch consolidations, reformatting and outright closures aren’t always possible. Driving new product sales through branch networks will require a rethinking of products and how they’re delivered to keep the branch a complementary channel to mobile and other new technologies.

When banks use their own data to truly “listen to” and understand their customers and what motivates them, they’re best equipped to deliver solutions that drive customer satisfaction, bolster loyalty and account growth.

Mr. Moultrie is director, Advisory Services, for Franklin, Mass.-based Saylent, which provides financial institutions with analytic software and services to improve profitability and product innovation. He can be reached at [email protected].