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THE LUMIN LAB

Why Customer Segmentation in Banking Is Crucial for Marketing and Service Offerings

Banks and credit unions have been using customer segmentation strategies forever. It’s also been a challenge to devise useful strategies. That’s because financial institutions were limited by clunky back-end legacy systems that made it difficult, if not impossible, to get reliable data. Even Citibank, led by tech visionary John Reed — the bank that introduced ATMs in 1977 — struggled in the ’90s to segment audiences using anything more than assumptions and census data. 

What did they really know about their users? Not much. Demographics will only get you so far, and even that information was difficult to extract. It wasn’t until the mid-1990s that advances in data management and computer technologies even started to permit banks and credit unions to glean gold nuggets from the customer information they had.

Well, it’s a new digital day. The data is there and available to use when marketers know how to use it. Segmentation is valuable for any industry, but customer segmentation in banking is essential to attracting and retaining high-lifetime-value end users. These days, you need to know who your users are. But even that’s not enough. You must be able to anticipate what they need before they even know they need it. That’s the key to keeping them from defecting to the competition.

What Is Customer Segmentation?

Customer segmentation begins with organizing your clients into groups that share similar characteristics. These characteristics may include, for example:

Demographics

  • What is their age, gender, occupation, family status, income, etc.?
  • Do their family members bank with you?

Geographics

  • In which city, county, state and neighborhood do they live?

Psychographics

  • What is their level of satisfaction with your bank or credit union? What beliefs do they have about financial matters in general? For example, are they price sensitive, risk-averse, savers, spenders, etc.?
  • What are their interests, affiliations, and personal preferences?

Behaviors

  • How, when and where do they use your services? Are they early adopters of technology?
  • Which products do they use? 
  • Where are they in terms of various life-cycle milestones, such as graduating college, starting a family, buying a home, planning for retirement, etc.?

Customer value

  • How profitable have they been in the past? How profitable are they now? What do you expect in the future?
  • What share of wallet is in your bank or credit union?
  • What is their estimated net worth, cash on hand, etc.?

Users can be segmented in any number of ways, and your mileage may vary. Use what makes sense for your marketing efforts. If the data is there and the information is important, you can use it to segment. The process is similar for business bankings, but will also include information on the company, number of employees, annual profits, and maturity of the business. 

Benefits of Segmentation for Banks and Credit Unions

If you’re not segmenting, you’re missing opportunities to deepen your relationships with users. Segmentation allows you to tailor your offerings and your services to meet their evolving needs. Banks and credits unions benefit from understanding who their most valuable users are.

It may seem increasingly difficult to build enduring relationships in the digital world. But it’s not. You don’t have to sit across the desk from your users to get to know them. Their online behaviors can reveal a lot, particularly when it comes to anticipating their next move. With the right data and a segmentation filter, you can better understand how and where to communicate with your users and devise strategies that are more closely aligned with each segment.

8 Ways To Level Up Your Customer Segmentation Strategies

Demographics are only a small part of the total picture. You’ll need to get a more refined and granular view. But just having a big pile of data isn’t enough either. You must analyze and understand what the data is teaching you about your customers, and use these insights to formulate good strategies. Keep the following tips in mind as you revise your approach:

  1. Build segmentation strategies in compliance with banking laws and regulations. For example, the Equal Credit Opportunity Act makes it illegal to use race, color, sex, religion or other nonapplicable factors in evaluating a loan application. Segmentation strategies must not inadvertently systematize policies that support discrimination.
  1. Base your segmentation on what you actually know. Don’t assume or use made-up personas when you can use data. Put aside your personal biases.

  2. Differentiate life-cycle changes from generational changes. Yes, the technology has changed and the circumstances are not the same now as in, say, 2009. But there are more differences among generations than there are between them. An 18-year-old will act differently from a 50-year-old regardless of generation.

  3. Your old pre-pandemic segments may no longer be valid. Don’t throw them out, but do verify. Make adjustments to your segments based on recent behaviors.

  4. Continue to improve your segments. They are never finished. Pain points change over time. Use current data analysis and evolving technology to ensure that your segments still work for your users and your strategies.

  5. Right-size your segments. You can personalize within them. Don’t get overly granular. You won’t have the bandwidth or the budget, nor will microscopic segments be useful.

  6. Segments and personalization are different, although they are closely linked. Use segmentation to find patterns and gain a thorough understanding of your users. Personalization is the step beyond segmentation. It’s how you communicate with your audience.

  7. Get enough data. Your tech stacks must be integrated. Ensure that your data-gathering systems and data-processing systems are connected and that the available data is being used.
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Getting the Most From Your Data

One of the best things you can do to ensure that your segmentation strategies are working the way you envisioned is to find the right partner. Outdated legacy systems and obsolete tech stacks can make it nearly impossible to manage data effectively or perform the type of data analytics you require. You need a holistic picture of your users’ activities across the various siloed divisions, including your digital and physical channels.

Lumin Digital lets you upgrade your current systems with a cloud-native banking platform. If you want to get the most out of your customer segmentation strategy, powerful data analytics are essential. With Lumin Digital, your bank or credit union will have the necessary tools to deepen relationships and retain more of your valuable users. Contact us today to find out more.

Pamela Michaels Fay is a business, financial, technology, legal and lifestyle writer, whose work is informed by over 20 years of strategy, leadership and organizational development consulting for Fortune 500 companies.

Sources

Euromoney – The bankers that define the decades: John Reed, Citibank

The Free Library – Data mining and customer relationship marketing in the banking industry

The Financial Brand – Is Everything Bankers Think They Know About Millennials & Gen Z Wrong?