The segmented commercial management of clients in the banking sector can generate increases in commercial efficiency of between 20% and 35% in Individual Banking, Personal Banking and SME Banking.(1)

An adequate strategic segmentation and the implementation of a segmented commercial management model generate two fundamental benefits:

  • On the one hand, the adaptation of the service offering and the relationship model to customer segments with different financial needs improves the rate of acquisition, linkage and loyalty.
  • On the other hand, the identification of customers with significant differences in value and potential allows directing commercial capacity where there is a greater return in customer value.

However, most entities have partially or totally failed to reap the benefits of a segmented approach to customers. In this article we will describe the state of the art of segmentation in financial entities, the main trends and the main critical success factors.

1. Strategic segmentation

We call strategic segmentation the most general and multipurpose segmentation used by entities to adapt the offer of services, differentiate their commercial strategy, define investment levels, etc.

This strategic segmentation must meet the following conditions:

  • Identify segments with differentiated financial needs
  • Identify segments with different profitability, loyalty and potential
  • The segments must be actionable based on initiatives with business sense
  • The number of segments must be reduced and limited by the complexity of management
  • The size of each segment and its value must justify a differentiated treatment

Some entities use a strategic segmentation that meets the above requirements while others work with several complementary segmentations.

2. The reality in figures in financial entities

2.1 Type of segmentation

According to a study carried out by Cognodata in 36 multinational and Spanish financial entities, more than 90% of the entities have a corporate segmentation for private clients.

60% of the entities use segmentations with a single criterion, while the rest work with a combination. Among these combinations, the most common is the life cycle and income of its customers.

2.2 Uses of segmentation

Corporate segmentation is mainly used as input to develop and launch specific campaigns (96%) and to develop specialized products (85%). To a lesser extent, managers are defined by segment (65%) or the Network specializes in a specific customer niche such as personal banking or SMEs (31%).

However, 37% of those surveyed still do not carry out segmented marketing plans. This plan is the strategic guide to develop the full potential of corporate segmentation, defining, among other things, the investment, campaigns and specific objectives by segment with a value creation vision.

3. How do you segment Banking? The Ferrari with utility chassis

Most of the literature on segmentation is based on advances made by consumer goods companies that segment markets, based on surveys, to identify sophisticated segments based on the attitudes that lead the customer to the purchase decision and allow defining the attributes of the product and its communication.

The lack of specific data on their customers (for example, due to the lack of a contract), has pushed consumer goods companies to build sophisticated segmentations. In contrast, the abundance of customer information in the financial sector is not being tapped, even though segmentation and marketing techniques have been proving their worth for decades.

Financial institutions have a Ferrari engine: they know their customers, their profitability, their potential for products and services, their loyalty, loyalty, etc., and they use this information mainly to prioritize commercial action and define products with some differentiation by segment.

But few entities take advantage of the power generated by the combination of a market segmentation that deepens in trends, attitudes, hiring choices, etc. with the information available in their databases. This means that most of the segmentations are carried out with an internal vision of the entity instead of a combination with the external vision of the client.

3.1 Balanced towards inner vision

3.1.1 Binding level

The engagement metric is very useful for implementing loyalty actions. If you also have a portfolio share vision, it allows you to prioritize customer development actions. However, it is very limited in detecting differentiated customer needs.

3.1.2 Value and profitability

This segmentation classifies customers based on their value and profitability. Value is a key metric that should be involved in a segmentation, especially when approached with a net present value approach broken down into potential and current. However, a vision of value only takes into account the vision of how much a client contributes now and how much it can contribute in the future, and practically omits the vision of what it needs from the entity.

3.1.3 Income level

A strategic segmentation by income level consists of estimating the income level of the clients. The level of income is available to the entity for clients with direct debit payroll or who have contracted asset products, but it is necessary to estimate additional income and the income for the rest of the clients. To do this, direct and indirect statistical methods are used to estimate income with high reliability. This estimate is also very useful for the risk area when it comes to estimating the payment capacity of each client.

Although the level of income determines the consumption and savings capacity of customers, and therefore helps to estimate their potential for a financial institution, this segmentation does not provide visibility on the differentiated needs of customers.

3.2. Balanced towards external vision

3.2.1 Life cycles

Another of the most used segmentations is about the customer life cycle.

All the detailed information on the customer’s life cycle does not always exist in the entity, but there is the possibility of making a preliminary estimate using predictive statistical methods. In this way, an estimate with sufficient reliability is usually reached.

Clients at different stages of their life have different needs. This is reflected in the size of their homes, their cars, their leisure consumption and also in financial needs. However, a young liberal professional single may have different financial needs than a young self-employed plumber. In addition, one can have a high consumption behavior and the other save every penny, for example, for the future purchase of their home. This segmentation provides a powerful external vision but it is necessary to complement it with other relevant visions for financial behavior.

The level of income and age mixes two of the main existing variables and allows obtaining segments of the type “young people <25 years with high resources”, “young married couples with few resources” or “senior > 65 years with high income”. These types of segmentations are especially useful when it comes to identifying segments with a lot of growth potential in very early stages.

In this sense, it is important to highlight that this segmentation by income and age is often used to simplify and speed up since the data is often directly in the banks’ customer bases. However, satisfactory results are not obtained since customers who may have very different profiles but are the same age are confused within the same segment. This segmentation is just an attempt to approach segmentation by income and life cycle, which would really be the most powerful.

4. Strategic customer segmentation in personal banking

The personal banking business requires a specific segmentation to achieve the development objectives established in line with the demands in terms of service, profitability and financial sophistication of this group of customers.

This segmentation would include variables specific to this segment:

hanks to these variables, we obtain segments “Mature families with sophisticated multi-channel investors with a high balance in other entities” or “Young linked mortgaged individuals, with a taste for aggressive returns in the markets”.

Thanks to these variables, we obtain segments “Mature families with sophisticated multi-channel investors with a high balance in other entities” or “Young linked mortgaged individuals, with a taste for aggressive returns in the markets”.

5. Segmented customer management

Having a strategic segmentation is the first step towards segmented management. However, the effort to reach this segmented management in practice requires the specialization of the rest of the elements of commercial and marketing management.

Thinking about a strategic segmentation without taking into account how it is going to materialize is the main reason for the failure of the implementation of segmented customer management. Here are some management elements to consider:

Segmentation strategies must always be aligned with broader and well-designed corporate strategies that involve the entire company, from the first to the last employee. At the level of complexity in management and its cost increases, and therefore segmentation and segmented management decisions must be made by relevant business people, without forgetting to carry out the necessary change management to change the way of relating to the clients.

6. Critical success factors

Starting from the principle that 65% of the entities do not use their segmentation after two years, it seems necessary to analyze certain factors that will allow a segmentation project to be carried out successfully and that it is actually used from the beginning.

  •  The strategic segmentation project must be approached with a broad vision, responding to real business needs and aligned with the strategy
  • Determine a priori the objective of corporate segmentation
  • Knowing the objective will guide the selection of the type of segmentation (strategic / tactical), the variables and the definition of the segmentation itself.
  • Segmentation is a tool at the service of the organization and its strategy. Do we know how segmentation is going to help define and implement the business strategy? Are they lined up?
  • Balance between knowledge and actionability We
    must avoid falling into the error of going too deep: “micro-segmenting”, at the risk of distracting us from our goal. The limit will be defined based on the objective that we have previously established for the segmentation
  • Participation of the Business area
  • The contribution of the Business is critical to understand the cases that arise during the analysis, as well as to define the segmentation and its final degree of depth.
  • The Business is the main client of the segmentation and has to know in depth what each segment means in order to use it properly from the beginning and extract its full potential.

7. Conclusion

Starting from the principle that 65% of the entities do not use their segmentation after two years, it seems necessary to analyze certain factors that will allow a segmentation project to be carried out successfully and that it is actually used from the beginning.

  • As we have seen throughout the document, a segmented approach to the market can increase the commercial efficiency of a financial entity through the improvement in customer acquisition, bonding and loyalty, who see their specific financial needs better satisfied than their competitors. .
  • The reality is that financial institutions have a Ferrari with a utility chassis. On the one hand, financial institutions have little sophistication when it comes to building truly relevant and impactful metrics. Second, they fail because they fail to fully integrate segmentation with strategy and daily operations.
  • A strategic segmentation must combine the vision of the potential and value of each segment for the entity with the differentiated needs of customers. In this sense, incorporating the life cycle, interests, channel preferences, financial sophistication, etc. It allows us to understand what each customer segment really needs and therefore how we can realize that potential.
  • At Cognodata we believe that in an environment in which financial entities are consolidating and it is difficult to differentiate themselves, a segmented commercial and strategic approach will allow the most daring entities to lead the changes in the market.

Cognodata has developed a portfolio of solutions and management tools for corporate segmentation capable of defining the different types of customers, thus making it possible to attract and retain the segments of those who are most attractive.