Bit by bit (October 2010)

Editorial content organized by topic

Sponsored content from industry partners

PRODUCT/CONTRACT ANNOUNCEMENTS
Latest offerings by category

JOB BOARD

Articles submitted by industry partners

DIGITAL EDITION ARCHIVE

Online Edition

Bit by bit (October 2010)

If segmentation is good, subsegmentation is better. Comerica Bank and others are now beginning to put the results of deep data mining to work.

Banks are successfully employing segmenting technology to piece together a picture of their customers’ needs.

By Melanie Scarborough, contributing editor

Knowledge is power and, for banks, increasingly it is profitable. Although it is a long-standing practice for banks to categorize customers into discrete segments, those groups now can be subdivided into pieces small enough to form a Byzantine mosaic.

The availability of information online and the explosion of social media enables banks to build extensive personal profiles of their customers. Armed with the knowledge that a customer is shopping for a new car, is recently divorced, or has a child who will soon enter college, banks can assign that individual to appropriate segments and tailor products and services accordingly.

Technology also allows banks to monitor accounts more closely and segment customers according to their relationship with the bank. Daniel McCarty, executive vice-president of treasury management services at Detroit-based Comerica Bank, which has almost $35 billion in assets, says they recently upgraded their internal tracking of customer transactions. “There is such valuable information in day-to-day processing—product usage, type of products, trend on payments, where the payments are going,” he says. “Deep, rich data-mining is available because of the new system.”

Rise of the subsegment
Detailed profiles let banks use what is quickly becoming the most valuable tool of customer segmentation: subsegmentation. Gathering information from the internet allows banks to know their customers on a granular level, says Sunny Banerjea, global solutions executive for IBM, who has studied customer segmentation for almost 20 years. Instead of merely lumping together all customers over the age of 65, that group might include a subsegment of customers who have grandchildren. The smaller the segment, the better the bank can target that market.

Subsegmentation also can dictate how a product is presented. For instance, instead of merely advertising mortgages to prospective homebuyers, a bank might identify a subsegment of young people buying a house for the first time. “You might train people differently to help those customers through that,” explains Mary Beth Sullivan, managing partner, Capital Performance Group, Washington, D.C. “Need-based segmentation requires not only offering products, but information and support.”

Banks increasingly are using transactional segmentation, i.e., tracking whether the customer commonly uses a debit card, goes to a particular branch, or writes checks instead of paying bills online. “It’s important to understand how [customers] use the distribution system because there could be different ways for building segments and devising treatment standards,” says Sullivan. “Knowing that I write checks instead of using a debit card may be a way to reach out to me—but you wouldn’t want to do that to everyone; you need to target people.”

Transactional segmentation isn’t an easy process for the majority of banks, Sullivan adds. “Most don’t have a good handle on customer transaction data, and it’s not an inexpensive proposition to capture, store and make that data mean something.”

Knowing your customers well at one point doesn’t mean you know them that way forever. Customer segmentation is fluid because customers’ circumstances change. By monitoring those situations, banks can act in time to protect themselves and retain their clients. “One of the most potent data points for whether an individual is a potential credit problem is whether they’ve recently had a divorce,” says Sullivan. “

Even within the segment of customers who have had a reversal of fortune, banks might find a profitable subsegment. “If a customer regularly had direct-deposit paychecks that suddenly stop coming, that should be a trigger event,” says Banerjea. “Likely, it will move the customer into a segment of riskier clients, but it might be an opportunity for a 401(k) rollover. Segmentation drives more action into the customer’s portfolio. If your situation is changing and the bank knows that, it can take action.”

Finding veins of gold
Most banks choose not to devote resources toward risky or unprofitable customers, but subsegmentation enables them to find gems within the dregs. The 18-to-35 age group is one banks don’t usually pursue with the zeal of Eliot Ness. Such customers typically have low balances, may be saddled with student-loan debt and haven’t reached their peak-earning potential.

But a few years ago RBC Royal Bank, which has U.S. headquarters in Raleigh, N.C., used its segmentation data to identify customers in that age range who were medical or dental school students or interns. Recognizing their potential value, the bank marketed to them offers for medical-equipment loans and mortgages to purchase their first offices. “If you’re creative enough,” says Banerjea, “you can understand the need of any segment.”

He cited a bank in Austin, Texas, that is courting customers most banks diligently ignore: those on the bottom of the economic pyramid. “They do the same as everyone else—pay their bills—but they don’t have bank accounts,” says Banerjea. What they do have is cell phones, which provides a channel for the bank to engage them. By offering free checking to a population that typically relies on check-cashing companies, the bank hopes to build a customer base from an underserved population.

Keep up traditions
Customer segmentation is not just about subsegments. Large community banks, in particular, can benefit from using traditional groupings. Among the three segments Middlesex Savings Bank, Natick, Mass., monitors is the group of customers that provide its top 1% of profits. “We track those relationships and engage in a series of outreaches to them distinct from what we do with our normal base,” says marketing director James Briand. “We’ve found that’s been effective.”

However, Middlesex Savings identifies that segment only internally because despite being the sixth largest mutual bank in the country, with assets of $4 billion, it is committed to the mutuality ideal that all customers are valuable partners.

Middlesex Savings also has identified its segment of small-business owners. “We maintain a mixed-customer segment so we can track them as both business and personal relationships,” says Briand. “That’s a particularly sweet spot.”

The third segment Middlesex Savings follows closely is new customers. “We look at what they come in with, what they’re buying and how heavily invested they are in the bank,” he says. In the coming year, new customers will receive particular focus as the bank expands its technological ability to target them online. “We’ve used mail and email, but that’s somewhat cumbersome,” Briand says. “This will increase more of a unique outreach.”

First National Bank Bemidji, a $518 million-asset bank in Bemidji, Minn., queries its mainframe for customer information such as age and products purchased to build segments for specific promotions and correspondence. “We have 50% market share in our community,” says Sue Engel, director of sales and marketing, “and we look to retain that share and even enhance it with more of these types of efforts using segmentation and CRM.”

One traditional segmentation tool—demographics—is now considered by some to be outdated. Others, like Sullivan, say the value of demographics is irrefutable. “They’re not as powerful as knowing something about the individual, like age, gender or income level, but you can’t deny the power of demographics,” she says. In particular, they help banks know where their best customers are, which can be crucial in decisions such as branch expansion. “If a neighborhood is filled with Gen Yers, it may not be a market your bank can do well against,” Sullivan explains.

Tailor your touchpoints
Segmenting customers by age often entails segmenting them by approach. Younger customers are better reached online; they’re unlikely to be lured into the branch by the offer of a free toaster. “The younger you go, the more technology-savvy the potential customer is,” says Comerica’s McCarty. When previous generations opened bank accounts, they were handed a book to select their style of checks. “That opening kit is now down to five choices of checks and the rest is online,” he says. “The younger customers never get to the book because they never write a check.”

To cultivate the young segment, banks must make sure they offer an engaging online presence. Whereas older customers might want advice in how to manage their money, young people want only the ability to figure it out for themselves. “Add self-service tools [to your website],” Sullivan recommends. “That’s a very Gen Y thing.”

Small-business owners form another segment that may require distinctive handling. Comerica Bank’s Donna Berger, senior vice-president, Treasury Management Services, National Relationship Services, says her group is studying how small businesses react to the bank’s product and what messages appeal to those customers. “Understanding they might be a lot less tech-savvy, we want to know how they can onboard with us easily,” she says. “It’s a challenge, but one we’re focusing attention on, hoping that small customers become larger customers.”

The segment representing a bank’s most profitable customers is likely to expect the best service. Comerica actively markets to its commercial customers the advantages of giving the bank more business. “It becomes very apparent in our proposals that the more you have [at the bank], the more of us you get,” McCarty says. Customers who meet certain criteria are assigned a service specialist; others are referred to a call center. Surprisingly, the distinction seems to matter more to the bank than to the customers. “There are many big, dynamic customers who call the 800 line even though a dedicated individual is available to them,” he says. “We let the relationship find its own level.”

Tracking the number of products purchased can alert banks when to move customers into the segment of committed clients. “The fifth product locks in dependence,” McCarty says. “It becomes a tighter and tighter relationship.” â–

To tell the truth…or not

Should banks let their customers know into which segments they fall? Mary Beth Sullivan, managing partner of Capital Performance Group, Washington, D.C., says they absolutely should. “It is a mistake for most banks not to be open about customer segmentation,” she says. “The right approach for bankers is to make the value propositions explicit. If customers want to do more business with you, make it very clear what they get for that.”

Platinum customers might get:
• Higher levels of service,
• Separate teller lines,
• Dedicated telephone lines answered by a person instead of an automated device,
• A banker assigned to them who will answer any questions,
• Their calls routed to the head of the queue.

“Banks can differentiate their service levels much like the airlines do so that the best customers get the best levels of service,” says Sullivan. “No one is upset because preferred airline customers get first boarding on a plane.” In fact, she suspects more agitation occurs because customers don’t realize profitability dictates service levels and pricing. “Our problem in this business is that banks haven’t made it explicit for a long time,” she says. “Because they haven’t said, ‘You’re basic, gold or platinum,’ the downside is confusion.”

Granted, most customers don’t understand the complicated algorithm of profitability. “They think if they have four accounts with you, they should get good service—but those accounts may not be profitable,” Sullivan says. “If you’re going to define it, you have to do so in a way the customer understands.”

Service levels also should be defined in a way that prevents less profitable customers from feeling diminished. Banks should say, “Everyone gets great service; some get different service,” she recommends. By keeping the parameters of segmentation secret, banks lose the opportunity to get more business. “Make it clear that being a platinum customer has certain qualifications. Otherwise, people cannot choose to become one,” says Sullivan. “It’s silly not to make it explicit. Let people choose to do more business with you, and reward them when they do.”

— M.S.

The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj1010/index.php?startid=44