In Customer Acquisition and Retention

iStock_000014901205SmallAt the recent CBA Live conference in Washington D.C., the attendees were treated to a keynote session that featured five thought leaders making the case for five different forces that they believed would fundamentally disrupt banking—everything from Bitcoin to the rise of millennials.

This ‘Disruption Smackdown’ was interesting (and very entertaining), but it failed to cover a key trend that has the potential to massively disrupt the financial industry—personalization.

Many of the companies that financial industry experts point to as potential disrupters—Amazon, Netflix, Google—have an important thing in common. They all excel at personalization. These companies are able to deliver personalized experiences to their customers by understanding what each customer wants and segmenting the way they treat those customers based on that understanding. Amazon has their personalized product recommendations and Netflix their movie recommendations. Google customizes their results based on their users’ search history, location, and dozens of other factors.

Banks Behind The Curve

Despite a growing focus on big data, most financial institutions do not go far enough in using what they know about their customers to determine how they treat their customers. The way that most banks currently design and market credit cards is a perfect example.

When a consumer is shopping around for a new credit card, they generally start by deciding what is most important to them. Are they looking to rack up a lot of rewards points? Are they interested in finding the lowest possible APR? Or are they fine with any card, as long as it doesn’t have an annual fee? Different consumers care about different features.

Issuers cater to these preferences by creating a multitude of different credit cards with different combinations of these product features. These products are designed to appeal to different segments of consumers. The issuer might have a card for their ‘I carry a balance and am constantly looking for the lowest APR’ segment. This card won’t have any lavish rewards and it might carry a hearty annual fee, but it will have a low introductory interest rate. On the other end of the spectrum, an issuer might have a card for their ‘I pay my balance off every month and use my card to build airline miles for my yearly vacation’ segment. This card will have a higher APR and possibly an annual membership fee, but it will reward the user with double airline miles and priority seating.

Depending on their portfolio and marketing goals, an issuer may identify dozens of different segments of potential credit card customers, each deserving of their own product option. This is segmentation at its finest…but it is not personalization.

The Problem with Segmentation

The purpose behind segmentation is to provide each potential customer with the most compelling product offer possible. Banks want to align, as closely as they can, the credit card they offer to a consumer with that consumer’s needs and preferences, because if they do, that consumer is much more likely to accept and utilize that credit card.

Segmentation enables banks to improve that alignment, but not perfect it. This is due to the fact that consumers are, at a very granular level, unique. There might be two consumers that a bank has correctly segmented into their ‘I pay my balance off every month and use my card to build airline miles for my yearly vacation’ segment who look the same at 30,000 feet, but have some key differences when you examine them closely. One of the consumers might be completely committed to achieving platinum status on their airline even if they have to pay a $500 annual fee to do so. The other might be very focused on building up their miles, but unwilling to pay even a $50 annual fee. An issuer would struggle to successfully pitch the same credit card—say one with fantastic mileage rewards but a $300 annual fee—to both of these consumers.

Segmentation of One

The future of banking is personalization. The ability to create a ‘segment of one’ based on an individual consumer’s needs and preferences and tune the pricing and terms of that consumer’s product offer appropriately.

That future is creeping up on us.

As traditional techniques like batch segmentation, direct mail, and outbound calling continue to slip to the bottom of financial marketers’ toolboxes, new concepts like personalization and segmentation of one are becoming more prominent. The data, analytics, and technology necessary to enable the creation of truly personalized product offers are now available.

The question is whether banks will embrace this trend and proactively disrupt their own industry or wait for Amazon or Google to do it for them.

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