Demographics No Longer Effective For Financial Direct Marketing

Bank and credit union marketers have traditionally relied on the use of demographic segmentation as a means of targeting customers for product and service communication. 

Recent studies, however, provide growing evidence that changes in product delivery, communication channels and competition may have made a demographic-based targeting approach much less effective compared to other approaches that use additional data sources.

Marketing segmentation is one of the most widely used marketing tools and has long played a crucial role in identifying and treating differences among customers. For decades, bank and credit union marketers have used demographic segmentation for product development, product positioning, marketing communication and results measurement. Traditionally, this segmentation has been done based on characteristics such as age, income, gender, family life stage, occupation, education, race, etc.

The reason for using demographic segmentation is that it is relatively easy to use for most financial institutions due to relatively accessible customer databases and because this form of segmentation is continuously referenced by both academic and trade literature. While it is still true that there are differences in the use of financial services across demographic segments, however, research as far back as the 1960s has suggested that demographic variables are only remote proxies for differences in buying styles, decision processes or sensitivity to promotional influences (A Two Dimensional Concept of Brand Loyalty).

A more recent research paper in the Journal of Financial Services Marketing entitled, Suboptimal Segmentation: Assessing The Use of Demographics In Financial Services Advertising found that there is little support for the reliance on demographic variables for bank marketing. Despite continuing popularity, the research found that while demographics can explain broad behaviors, they play a weak role in explaining brand preference, product purchasing, innovation adoption, channel use and technology uptake.

The explanation provided by the research indicates that customers today are better educated, more individualistic, more marketing literate and more influenced by the convenience of new channels and product offers than the customers of the 1960s and 1970s (when demographic modeling first came into vogue). The result is a significant fragmentation of the marketplace into much smaller groups that can't be defined by age, income, and other simplistic variables.

For the research, customers of the banks analyzed importance scales on 28 service related comments that related to nine key financial service factors such as website appeal, trust, customer service (pre- and post-sale), how the customer gathers insight, ease of contact, appeal of marketing, appeal of personalization (both in marketing and on the website), brand image and products used. The responses were analyzed against five demographic measures:

• Age
• Gender
• Income
• Occupation
• Education

Overwhelmingly, significant differences between demographic groups were not found, suggesting that demographic segmentation is a suboptimal basis for targeting marketing to customers. This should not be a total surprise to bank marketers if they were to do a simply straw poll of their demographically similar friends to see what services they hold, how they transact their banking, how much they trust the banking industry and their willingness to try new technologies.

More than ever, interests, opinions and overt behaviors are a much better indicator of customer demand according to the recent studies around the use of 'big data'. How does the customer save, spend, and transact is a much more powerful determinant of future financial product purchase and use patterns than the demographic profile of a customer.

Beyond Demographic Segmentation - External Tools

Part of the challenge of going beyond demographics for financial services segmentation is that some key data elements may be missing on a banks customer database or may be difficult to collect for modeling purposes due to internal data silos (product use, channel use, spend and payment data, etc.). Secondly, the difficulty and/or cost of acquiring some primary customer data may be prohibitive (social insights, credit insights).

In response to these needs, some tools have been developed using census-based (non-personal) insights. Many of these have been marketed by credit bureaus and other providers, providing more accurate geodemographic classifications that can be overlaid on customer profiles for better targeting and analysis. A summary of the segmentation advances made by bank marketers can be found in another research paper entitled, The Evolution of Segmentation Methods in Financial Services within the Journal of Financial services Marketing.

Within the context of the evolution of bank segmentation, some financial organizations have created needs-based segmentation that combines, age, family structure, age of children, etc. While some of this data is difficult to compile, it helps in the determination of produce needs and use. PriZm from Nielsen is a good example of segmentation based on lifestyle and lifestage. As with the geodemographic segmentation above, this type of lifestyle segmentation is not done at the household level but is approximated based on neighborhood insight. The power of this type of tool, therefore, will depend on how it is used (modeling, analysis) and how important personalized data is to the needs of the marketer.

Beyond Demographic Segmentation - CRM Tools

At its core, CRM is primarily concerned with obtaining knowledge about the customer at three levels:

• Understanding the demographic composition of the customer
• Understanding how the customer interacts with the bank (what products are held, what is the balance of the accounts and how do they use the service(s)
• Understanding channel use and preferences
• Understanding how to leverage this insight to sell more and prevent attrition

Understanding a customer's channel preference for purchasing new products and transacting with current products is invaluable for banks and credit unions that have both extensive physical networks but also evolving online and mobile channels that impact a customer experience. 

Organizations without channel preference insight from a marketing perspective are at a competitive disadvantage and are apt to be wasting significant marketing dollars. Similarly, those banks that simply defer to email and/or online or digital channel are also missing significant opportunities from consumers who prefer traditional channels. 

While third party tools have been developed to approximate consumer channel preferences, research has shown that channel preferences differ between most other industries (retail) and financial services. By understanding customer demand for each channel, institutions are able to optimize channel mix and allocate resources accordingly.

Behavioral Segmentation

Behavioral marketing is gaining followers within the marketing community while the dimensions of how to segment based on behavior differs from institution to institution. While some organizations will segment based on internal purchase, payments, and/or use dynamics, others are expanding the realm of behavior captured to include digital and/or social behavior. 

Decisions as to what behavior to include usually is based on access to insight and ability to process the insight. As was intended by demographic segmentation, the goal of behavioral segmentation is to divide the customer (or prospect) base into quasi-homogeneous groups that align with a bank marketers' business strategies.

A new report from Aite Group entitled, A Behavioral Segmentation of Banking Customers, uses a customer's financial activity to distinguish between segments, providing insights into purchase behavior, likelihood of referrals, interest in deals, revenue potential, risk of attrition, etc. By assigning a score to the frequency of various financial activities, insight can be gained regarding marketing opportunities (and risks) by segment.

"Segmenting consumers by how many products they own or whether they are of a certain age, income classification or educational status does very little to help banks or credit unions improve marketing effectiveness," stated Ron Shevlin, senior analyst for Aite Group and author of the report (available here). "Tracking customers' engagement is a much better predictor of customer relationship growth and referral behavior, and it helps banks and credit unions improve the relevance and focus of their marketing communications."

Interestingly, as with any segmentation or grouping of customers, there are risks to making broad assumptions with the insight. For instance, in the Aite report, highly active customers provided both an excellent source of relationship growth and referrals but also were more likely to attrite (consistent with their high activity and comfort level with channels). That said, the report found ways to make this highly active group more engaged through Personal Financial Management (PFM) tools which are valued by the highly active segment.

Bringing It All Together

While any one segmentation process can be powerful as a tool for bank marketers, many of the larger financial organizations combine many of these tools to provide a multi-dimensional view of their customers and their needs. An example of this type of segmentation was provided by the The Financial Services Club blog in a presentation by AdKit as shown below.

Options For Financial Marketers

In an era where information is prevalent and relatively easy to obtain, it is imperative that advanced segmentation dimensions be identified, tested and utilized for more effective (and efficient) marketing. With increased competition and ever-tightening margins, firms that are not able to successfully pinpoint potential customers, cross-sell indicators and income opportunities will be at a significant disadvantage to those more progressive organizations.

It is time to pursue targeting of customers and prospects that goes well beyond demographic variables that have been proven to be suboptimal. This will require testing and mirroring what is being done by the best in the financial services industry as well as other industries.

For some best-in-breed ideas beyond what was discussed above, I suggest following the IBM Big Data Hub that provides an amazing wealth of insights, case studies, technical overviews as well as interactive tools to assist any bank or credit union marketer.

Additional Resources

A Two Dimensional Concept of Brand Loyalty: Journal of Advertising Research 9(3) 29-35 (1969)

Suboptimal Segmentation - Assessing The Use of Demographics In Financial Services Advertising: Journal of Financial Services Marketing (Volume 16, 173-182)

Segmentation of Bank Customers By Expected Benefits and Attitudes: International Journal of Bank Marketing (Volume 19, 6-17)

A Behavioral Segmentation of Banking Customers: Aite Group (April 2013)

The Evolution of Segmentation Methods in Financial Services: Journal of Financial Services Marketing (Volume 7, 27-74)

Segmenting Retail Banking Customers: Journal of Financial Services Marketing (Volume 10, 179-191)

The Big Data Hub: IBM

Retail Banking Customer Segmentation in Worldwide Banking: The Financial Services Club Blog (2011)

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Banks Need To Reassess Cross-Selling Efforts

For decades, cross-selling has been a strategic priority of banks and credit unions since earning more business from current customers is the most efficient way to achieve growth. Despite this focus, a new study indicates that many financial institutions may be far from realizing the full potential of cross-selling.

In fact, according to the study, only 19 percent of retail bank customers owned three or more products in addition to a checking account with their primary bank compared to 49 percent who have three or more products with other financial institutions.

A just released Deloitte report entitled, 'Kicking It Up a Notch: Taking Retail Bank Cross-Selling to the Next Level' supports the view that success in cross-selling targeting may need to move beyond traditional product ownership, satisfaction and tenure parameters to include a behavior segmentation approach that takes into account perceptions based on total account holdings. 

While the Deloitte survey shows that banks have generally achieved long tenure and a high degree of satisfaction with customers, this success has not translated into multiple product relationships. In fact, the study found that there is a positive correlation between the number of products a customer uses and their desire to use multiple institutions.

Source: Deloitte Center for Financial Services

According to the study, customers only turned to their primary financial institution for a savings account on a consistent basis. In fact, while 75 percent of respondents owned credit cards, only 33 percent had one that was issued by their primary bank. Obviously, this could be the result of an inferior offer, poor marketing and/or the absence of a primary bank offered credit card, but it still illustrates a major opportunity gap.

Some of the other 'opportunity gaps' may be caused by poor cross-selling at the time of account initiation, poor customer education on the benefits of relationship consolidation or even beliefs that a primary bank is not the best place to build a specific relationship (wealth management or insurance products).

Source: Deloitte Center for Financial Services

The research suggests that banks and credit unions may want to revisit traditional cross-selling strategies that focus on current product ownership, tenure of relationship and demographics to predict cross-selling success. Deloitte believes a deeper analysis of customer perceptions and motivations driving product purchasing may be needed, including a potential share of wallet segmentation scheme.

Share of Wallet Segmentation

"To remain competitive in a largely saturated market where revenue opportunities from new customers tend to be limited, deepening relationships with existing customers will likely remain critical to increasing banks’ top-line growth," Deloitte says. "One important way this might be achieved is through more refined strategies and targeted execution of cross-selling programs."

As a first step, respondents were grouped into four segments - 'Basic Users', 'Value Shoppers', 'Diversifiers' and 'Consolidators' - based on share of wallet.

The segments were then analyzed based on a number of dimensions such as demographics, perceptions, price sensitivity and channel use.

Finally, the segments were analyzed for product ownership patterns to identify opportunities for cross-sell success as well as 'dead ends', where investment could be wasted (no expanded ownership potential). Product ownership details available in the full report.

Segment Challenges and Opportunities

Basic Users

As the name implies, 'Basic Users', despite the large size of this segment (42 percent of respondents), have limited financial means, less access to credit, and an average bank product ownership rate of 1.7. And while there is uniformity of income and product ownership rates, Deloitte suggests there are two groups of basic users; 1) young people whose product needs may evolve/grow as they get older, and 2) middle-aged and older customers whose needs and behavior are unlikely to alter over time.

"One way to attract young basic users could be through education. Providing information and advice on financial challenges, such as debt management, benefits of improving one’s credit score, and the importance of saving early for retirement may help banks become the go-to institution for this group," Deloitte says.

To target young basic users Deloitte suggests use of social media and mobile banking and gamification that emphasizes improved money management.

"As young basic users progress in their professional and personal lives, their needs are likely to evolve. Banks could leverage their primary relationship to engage early with this group to provide products that meet their needs at various life events - education, marriage, purchasing a home, starting a family, investing, or retirement. This can allow their product needs to be met sequentially and appropriately, rather than pushing products prematurely with limited success or failing to cross-sell at all. A consultative approach as opposed to hard-selling may be particularly effective with this group."

In addition, Deloitte suggests retail bankers could learn from product bundling strategies common in other industries, offering younger consumers in the Basic User segment the flexibility to purchase products in bundles as well as individually. For example, all add-on elements of checking account such as debit card usage, in-network ATM usage, paper checks, overdraft protection, and wire transfers can be priced individually. "Such a pricing approach will likely increase the affordability of the product, allowing Basic Users to pick and choose services that fit their wallet size," says Deloitte.

Deloitte also advocates low-cost products such as prepaid cards with low usage fees, no minimum balance requirement or overdraft fee. While the younger part of this segment is relatively small and could be considered a long-term investment, banks and credit unions who connect early could enjoy relationship growth over time.

Value Shoppers

Value Shoppers, the second largest Deloitte segment (39 percent), are described as being the least loyal customers with only 1.1 products with their primary bank. A lack of trust among this category of customers means that they usually don't believe their bank is 'fair', and are prepared to take their business elsewhere even over a 'slight' fee increase (6 in 10 will leave if fees increase $5 a month).

Nonetheless, Deloitte suggests targeting value shoppers can be an attractive proposition for banks.

"They have all the attributes that banks typically look for in high-value customers: financial strength, broad product needs, and higher channel engagement levels (67% pay their bills online and 58% use bank tellers) - the second highest among all the segments. Winning over this segment will likely involve changing their negative perceptions and incentivising product consolidation at the primary bank,"' Deloitte says.

The report notes that companies seen as having transparent pricing are best placed to win customers' trust. This may require simplified fee structure, consistent communication or a better demonstration of value.

"Given value shoppers’ low affinity with their primary banks and their tendency to shop for the best offers, loyalty incentives could be effective in influencing them to consolidate some, if not all, of their financial relationships with primary banks," says Deloitte. "Although banks have effectively implemented rewards programs at the individual product level, they will have to build a more holistic structure that incentivises customers to achieve the 'preferred' status in multiple product categories."

Wells Fargo’s Portfolio Management Account (PMA) is provided as a good example of incentivising customers for consolidating accounts with the bank. The PMA package begins with a checking account, which is then linked to other eligible Wells Fargo accounts, including savings, deposit, credit, mortgage, and brokerage. (details available in the Deloitte research available here)

Diversifiers

This group, according to Deloitte, is comprised of a significant proportion of mass affluent households (47 percent) and takes the highest average amount of bank products at 6.3, with about half from their primary bank. What they don't have through their primary financial, institution is the likes of investments, life insurance, and annuity products.

"Banks seeking to grow relationships with 'Diversifiers' may need to target specific products where the segment relies on other financial players (investment brokerage, life insurance and annuities)," says Deloitte. "Retaining this segment will also likely require banks to shift from traditional pricing to value-added benefits."

Advice given here includes personalised service at the branch level, access to dedicated financial advisors, and immediate resolution of any complaints.

Deloitte also suggests that banks could impress diversifiers by developing a better perception among the mass affluent base as a viable alternative for investment and brokerage services. The report highlights an example of Bank of America utilising its Merrill Lynch unit.

Consolidators

'Consolidators' are the banks' most loyal consumers, holding an average of 4.1 products with 3.6 of the products at their primary bank. They clearly hold a positive view of their primary bank, often in terms of service and even fees.

"What strategy should banks use with consolidators?" Deloitte asks. " Banks should retain them and leverage their loyalty by converting them to advocates."

"Personalised attention to consolidators’ needs and prompt response to their concerns will strengthen their relationship with the primary bank, increasing the possibility of turning them into advocates," says Deloitte. "Peer influence-based, community-oriented marketing holds the potential to create authentic customer relationships."

The report goes on to suggest banks could create dedicated virtual space, both on websites and social media pages, for consolidators to share their experiences and influence the perceptions and buying decisions of other customers. "Banks may also consider devising reward programs to incentivise consolidators to help generate referrals."

Additional Ways to Achieve Cross-Sell Success

While I have written many blog posts around the importance of cross-selling and the opportunities for success, Deloitte also emphasizes the importance of of changing current banks processes and functions to achieve success. Three aspects recommended by Deloitte are:

• Improve onboarding: It is critical to make the onboarding process efficient and effective since 75 percent of cross-selling occurs in the first three months
• Set cross-divisional goals: Set goals that ensure that lines of business stay coordinated and capitalize on cross-functional relationships
• Equip sales force: Combine incentives with training to improve sales force effectiveness

As shown in this recap of the well done Deloitte research report, banks need to move beyond product ownership and demographics to better understand the behavioral and attitudinal traits of customer segments. With this understanding, banks can redesign their channel and communication strategy and fine-tune product offerings to suit the needs of the different segments.

While the process may be challenging, it is clear the current strategies are not effective and need to be adjusted to remain competitive in a highly saturated market where revenue opportunities from new customers are limited and the importance of deepening relationships is paramount.

Additional Detail of the Deloitte Research

The survey was conducted online by Harris Interactive during August 16-30, 2012. In total, 4,271 checking account customers aged 18 years or older participated in the survey. Responses were weighted across geographic regions, income levels, age, and gender groups to reflect the national population.

Definitions of “primary bank” as used in the Deloitte report refers to the bank where respondents have their primary checking account. “Other financial institutions” refers to other organizations at which customers have a financial relationship.

The analysis includes 12 different products sold by financial institutions beyond the checking account:

• Savings account
• Money market account
• Home equity line of credit
• Investment/brokerage account
• Credit card
• Auto loan
• Prepaid card
• Life insurance
• CD
• Mortgage
• Secured card
• Annuity

Additional Resources

Kicking It Up a Notch: Taking Cross-Selling to the Next Level - Deloitte (July 2013)

Kicking It Up a Notch: Taking Cross-Selling to the Next Level (Infographic) - Deloitte (July 2013)

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