Yesterday Chris Skinner shared a very interesting document published by Adkit, called “Retail Customer Segmentation in Worldwide Banking”. The idea behind the study is that since 2008 banks started to focus on the customers again for their growth (whereas before the crisis growth was generated through M&A).
So Adkit investigated how banks tend to ‘divide their customer base into groups with similar characteristics in order to provide value offers and sales offers which are effective and unique’. As you might guess some groups will be offered more effective and unique products and services than others. Segmentation is one thing, after the segmentations you get the profitability and the investigation of how much more costs could potentially generate more revenues. And that is where is becomes interesting for Payment Institutions (PIs).
In this paper I will not be talking about the underdeveloped countries where a huge percentage of the population is still unbanked, because that again needs a complete other ‘segmentation story’ than for the ‘bank-developed’ countries of course.
For a better analysis I would even narrow down the PIs, since you have, I think, in terms of products, 2 types of PIs:
– New Products: the ones with brand new products focusing on customers with very specific needs
– Substitute Products: the ones with substitute products of regular payment products like credit transfers, credit and debit cards or others… by far the biggest group I would say.
That being said, we can continue with this analysis. Of course the segmentation lessons in general are relevant for PIs as well, just like for any other sector/company. I assume this is always part of a go-to-market strategy. What can be argued is whether this strategy for PIs is often focused enough.
It is the latter group (of the Substitute Products) where it often goes wrong in my understanding. PIs often think that because they have a new product in the market, they will definitely attract enough customers from the mass market who will then again spread the word to their friends, etc, etc… and thus reach a critical mass. Many times this is proven to be wrong. Take for example prepaid cards in Belgium. Companies had a lot of arguments to get a prepaid card, but beside the high prices, they never targeted a specific segment. They tried to get any mass market consumer to become their customer. They see the advantages and they think that an online marketing campaign will make the difference. Of course they have segmented the market, but they didn’t go any further. They didn’t investigate well enough how these segment need to be approached, and if they need to be approached at all. I say it’s wrong, wrong, wrong…
So you need segmentation and you need to see which segments are already satisfied with a similar service and who is servicing them, and that brings us back to the presentation of Adkit! When you think of financial services, you think of banks. Banks offers most payments services. So now you see why segmentation in banking is so important in determining what segments to approach as a PI of the second category.
One of the conclusions of Adkit is that ‘service levels differentiate between segments:
– Low profitability: no relationship manager, up to 2 contact per year
– Mid profitability: relationship manager, 3-4 contacts per year
– High profitability: expert relationship manager, 6 contacts a year along with a concierge service, available to customers at all times’
Now how do you think this ‘segmentation-service’ relationship would look like for the ‘Substitute Product’ PIs’? They would indeed be inversely to the one of a retail bank: the best serviced clients of a bank will likely go to the bank for payment services as well, and they will get the service they wish for. The ones who don’t hear a relationship manager are more easily convinced of substitute products and can often not get the payment services they wish. For example credit cards are a privilege for the ones with a higher income, that means that it low-income consumers do need a Visa or MasterCard (for let’s say international online transactions) they would need to chase a prepaid card, which has more or less the same payment service, except that the fund management is different (pre versus post funded).
Of course the fact that this ‘low profitability bank segment’ is less ‘drilled’ by bank relationship managers makes it easier for PI relationship managers to convert them to switch to their payment services. Customers unconsciously like to be approached for products that might be interesting for them, especially if it is new for them. If this doesn’t happen at the bank, then this should be the job of a PI and its sales network!
Segmentation is of course only the small first part of the exercise. After the segmentation, PIs will need to start investigating how to approach these segments, through which channels, with what kind of products, with what kind of arguments etc etc etc…
Chris Skinner talked in his introduction to the presentation about the names UK banks tend to give their segments:
– Apples: mainstream customers
– Lemons: students and underbanked
– Pears: high net worth and mass affluent
– Oranges: the die-hard oldies, retired and other with wealth but little income
For most banks the lemons are way too sour to do business with, however I strongly believe that it might exactly be that segment where many PIs should get their vitamin C to grow stronger! Oranges might also be very healthy and since the business in a PI is not based on loans or other low-term revenue streams they might also get under the radar of PIs that offer substitute payment products.