Digital banking and segmentation
Segmentation is common practice among banks both in the UK and abroad. But is it just about marketing new products? Or do different types of customer require a different type of banking experience to keep them engaged?
The desire to group customers into different categories has largely been driven by marketing teams looking to improve the accuracy of their targeting and cross-selling campaigns. However, there is now also broad acceptance that segmenting customer bases is not just about offering different products to different customers, but also offering different services and even different – particularly digital – experiences.
You need look no further than Santander’s SmartBank app to see an example of an alternative platform being offered to certain type of consumer (in this case, students). The app brings PFM functionality to the fore and includes features not found in the main app, including a chatbot that helps users search and get insights from their transaction history.
You can question how much value this is really going to deliver and, while the app has some nice functionality, it’s whole existence is still based on a relatively crude form of customer profiling. Indeed, our primary issue with the segmentation practices that we see at the moment is that they are a one-way process; they do not, as Mapa believes they should, constitute a dialogue between the bank and the customer.
Segmentation by wealth and income
One of the most obvious way we see banks placing customers in sub-sets is by their level of income (or general financial health), an approach that leads them to create three categories: premium, standard and sub-standard.
Obviously, banks do not refer to individuals as ‘sub-standard’, but there is now a range of ‘basic’ accounts that provide banking services to customers that are not eligible for other current accounts, namely those that offer overdraft facilities. These accounts, which banks are obliged to offer in the UK, are designed for those customers who cannot pass credit checks.
For the middle tier of customers, banks offer a range of accounts that offer a variety of features, and then they provide premium accounts that cater to high-income customers. Take Barclays UK as an example. The Basic Account offers just a debit account, the Barclays Account allows customers to apply for an overdraft of up to £5000, and then the Premier Account that is exclusively for customers with incomes over £75,000 offers additional rewards, other exclusive products and a fee-free overdraft.
Segmentation by life stage
The other main way banks look to split up their customer base is by age, or increasingly by what can be called ‘life events’. This approach seeks to target products to people at different stages in their life. This generally puts customers on a standardised trajectory (in terms of product needs) that takes them from their child account and student accounts, on to mortgages for first time buyers, and then investments and retirement savings. On the surface this looks fairly sensible and it probably works well with the product sets that banks have, but it still represents an over-simplification of customer needs based on assumptions, not on insight.
The big underlying problem here is that banks do not make enough effort to understand their customers’ financial and broader life objectives. Indeed, they do not really profile their customers effectively and this is due to the fact that they simply do not ask their customers for this information. Nor do they then use the information they do have (particularly transaction information) to generate insights.
Indeed, we believe the best way to improve the usefulness of segmentation is to get the customer to tell the bank where they should belong – through their actions (transactions) or by explicitly stating their financial goals. The reason why no bank is doing this right now is because no one is truly doing PFM properly or recognising that there actually needs to be a number of different variants of PFM. Indeed, banks need to get over the one-size-fits-all pie charts of the past.
By getting a better insight-driven profile of a customer, banks can not only determine what types of products they might need, but also what tools they need to meet their financial needs and objectives. Indeed, there will be different types of PFM tools for different types of customer.
Santander’s SmartBank, designed for students, focuses on analysing day-to-day spending on a debit card and, realistically, few students will need more sophisticated tools. For other types of customer, we are starting to see some more specialised tools. Prosper Daily, the PFM app of US P2P lender Prosper, focuses on helping customers work out how best to utilize the credit they have available on credit cards. In other words, it helps them borrow in the most affordable manner. Notably, Prosper offers loans for debt consolidation, so they not only offer a certain type of tool, they offer a product that complements it as well. There’s also a number of investment platforms that again cater to a different market segment.
The Prosper Daily PFM tool
So what if a customer wants one or more of these tools? The short answer is open APIs and the creation of digital financial eco-systems. These transformative trends will not only aid the creation of segmented services, they will in fact help create personalised experiences, where the user can connect together the exact services they need together. At the core of the eco-system will sit an aggregator platform that brings together account and product information from a range of sources. Remember, there’s no reason why that platform cannot be provided by an incumbent bank.
So, what’s the key takeaway here? If banks and FinTech are successful at offering products and services that cater to specific needs, they will not just be segmenting their customers, they will in fact be assisting in creating personalised services that will ultimately provide greater value for the customer than any of the segmentation practices currently in play.