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Customer Segmentation Models In Banking Are Broken

For decades, financial marketers relied on customer segmentation models built around basic demographic data. But simplistic demographics such as age, income, and education are poor predictors of actual consumer behavior. Instead, banks and credit unions should segment consumers by their level of digital sophistication and financial acumen, then tailor products, services, and delivery channels accordingly.

The segmentation strategies financial institutions have long used are flawed in today’s digital environment. While traditional demographics can serve as a reasonable starting point for a basic segmentation strategy, they don’t come close to capturing the full story of how a consumer prefers to manage their finances.

According to by Ernst & Young (EY), basic segmentation is inadequate for banks and credit unions because it doesn’t yield the nuanced insights necessary to understand consumers from different angles. Relying on traditional demographic models can actually give banks and credit unions a false sense of security — that they “know their market” — because such crude frameworks don’t correlate strongly with consumers’ needs and preferences.

“Basic segmentation models do not provide sufficient insight into customer needs, channel preferences or desire for receiving advice from banks,” says EY in their report. “Marketing strategies based on standardized assumptions — rather than deeper insights about life stages, behaviors, attitudes, interests, lifestyles and other psychographic factors — are destined to fall short.”

Instead, EY recommends dividing consumers into one of four segmentation buckets that assess each person’s level of digital sophistication and financial acumen. This more robust segmentation picture better gauges how consumers prefer to interact with technology and the extent of their financial knowledge and confidence. Financial institutions can then overlay these new segments with more traditional segmentation to better understand consumer attitudes.

To define these segments, EY asked consumers to rate their preferences for managing their life via digital channels and their level of comfort with financial products and services.

EY’s findings reveal that across all age groups and countries, consumers are typically more digitally confident than they are financially savvy. In the U.S. for instance, 49% of consumers feel they are digitally sophisticated while only 38% say they feel comfortable with financial matters.

Reality Check: Just because a consumer is digitally savvy does not mean that they are also financially savvy, and vice versa — a flawed inference that many financial marketers are guilty of making. EY’s segments are age-agnostic, so a Baby Boomer could be a “Pro” while a Millennial could be a “Traditionalist.”

1. The Pros

The Pros love to use digital channels to run all aspects of their lives, and they understand banking products/services. They are confident that they can manage their own finances, and the majority actively manage their financial portfolios. Not surprisingly, Pros are active on social media and are heavy users of mobile banking.

  • 85% feel in control of their finances
  • 57% have utilized fintech players and alternate providers
  • 66% bank through their mobile phone
  • 62% actively manage their own portfolios
  • 38% say they distrust institutions without any branches

The Pros are also open to new financial products as well as new financial providers. If traditional banking providers don’t satisfy a Pro, they are more likely to bolt for nonbank competitors, especially when lured with products such as mobile payments, investments, insurance and prepaid cards.

Key Insight: A strong provider of digital banking tools and solutions can sway Pros away from your institution.

2. Digital Stars

Like the Pros, Digital Stars love all things digital but they are less comfortable managing their own finances; 85% of Pros are confident in managing their finances vs. 52% for Digital Stars. Digital Stars tend to want it all — those omni-channel consumers who want to bank through their mobile phones but also value being able to speak to a human.

  • 63% value being able to speak with someone at their bank 24/7
  • 52% have utilized fintech players and alternate providers
  • 60% bank through their mobile phone
  • 52% are comfortable managing their own finances

The biggest danger banks and credit unions face with Digital Stars is that because they prefer to manage many aspects of their life with digital technology, they are vulnerable to nonbank competitors that offer a better digital experience.

Key Insight: Digital Stars are the biggest flight risk for traditional banks and credit unions.

3. Traditionalists

The good news? Traditionalists are the most loyal of the four segments. The bad news is that Traditionalists — who want 24/7 access to real live human beings — are the least profitable segment to serve. Traditionalists like branches, and distrust those financial providers that don’t have any. They are also leery about data security and prefer to do business with a well-known entity. This means they are less likely to move to a nonbank competitor.

  • 49% feel it’s important that they can speak to someone at their bank 24/7
  • 52% don’t trust banking providers without branches
  • 30% are comfortable managing their finances on their own
  • 59% feel in control of their finances
  • 38% bank through their mobile phone

Key Insight: Traditionalists aren’t going to leave your institution… but you may want them to.

4. Financial Stars

Financial Stars are not quite as confident in their financial abilities as Pros, but three quarters of them still say they feel in control of their finances and actively manage their own portfolios. Financial Stars like digital channels, but they aren’t as heavy users of online shopping or social media as Pros and Digital Stars, quite possibly due to security concerns.

  • 38% distrust financial institutions without branches
  • 78% feel in control of their finances
  • 60% bank through their mobile phone
  • 74% actively manage their financial portfolios
  • 56% are active in social media channels

Key Insight: Financial Stars are leery of online data security and are less likely to move from your institution to a nonbank competitor.

Three Steps to Enrich Your Customer Understanding

To better understand today’s more demanding and less loyal customers and combat an erosion of trust and relevance, EY has three recommendations for banks and credit unions.

1. Orient an organizational mindset for a digital-first customer culture. The experience in the mobile channel has to be defect-free, allow forquick user authentication, offer simplified processes and communications suitable for a small screen, and provide for personalization. It must also feature design discipline, keep pace with new industry functionalities and evolving customer expectations, and offer interactive mobile services and real-time advisory assistance. EY says it is critical to overcome any internal or political resistance here. Branch, sales and transactions staff may view digital as threatening rather than complementary, and this is where senior management needs to overcome organizational barriers to channel integration by championing a culture wherein the primary emphasis is on the customer experience, not the delivery method. A truly customer-centric culture starts at the top, with senior bank leadership making it clear that the organization prioritizes customer service.

2. Address potential “moments of truth” and ensure avenues for dynamic customer feedback. Customer journey mapping is an effective first step to gaining broad-based and holistic views of how existing processes and experiences intersect with customer needs and preferences. EY says banking providers should strive to understand the emotional components along these customer journeys that make individuals feel appreciated and valued. Certain key interactions can be considered as “moments of truth” because they leave strong and lasting impressions.

3. Adopt an agile use of (big) data analytics to sharpen their proposition and enhance customer values. Given advances in data management and analytics tools, financial institutions not only have easier access to the quantity and variety of data collated, but can also analyze and make sense of the information available at greater speed. EY says this allows for the baseline demographics used for customer segmentations (e.g., age and income) to be enhanced with additional information (such as the digital and financial sophistication dimensions), other strategic measures (including life stage, loyalty and overall risk profile) and tactical metrics (such as the upsell potential, churn risk and product utilization rate) to create more granular classification. EY says financial marketers need to dig deeper into their already existing — but often underexploited — treasure trove of transactional and behavioral data sets to determine the right levels of personalization that are necessary for each segment. Then there are also other external data to consider (e,g., psychographic data pulled from social networking profiles can help construct profiles based on customers’ values, attitudes, interests, personality traits and lifestyle choices).

The Balancing Act Between Digital and Human

Fintechs and nonbank competitors are getting better and better at engaging consumers because they have done a better job of understanding consumer behavior. Startups such as and have found the sweet spot by targeting Digital Stars — offering automated advice to those consumers who are extremely comfortable with digital channels but have less confidence in their financial acumen. Robo advisors provide the personal financial management and education these consumers desire, coupled with a digital delivery platform that delivers the customer experience they have come to expect.

There isn’t a standard equation to getting the right ratio of online to digital delivery. It would be shortsighted for financial institutions that want to attract Millennials to only push digital channels at the expense of branches. Sure, Millennials are more likely to be Digital Stars but there are also Millennials who are Traditionalists.

Many of today’s consumers are comfortable with a digital lifestyle, so you will need to continue to roll out and improve your digital capabilities. But at the same time, you can’t ignore the most than quarter of consumers in the Traditionalist camp prefer to interact with human beings.

Since Traditionalists, as a segment, are the least profitable, it makes perfect sense to move as many of these folks into self-service delivery channels for routine transactions as possible. But you should try to nudge rather than force them to make these shifts.

You should also rethink the branch experience for those consumers who either need more financial guidance and/or for those who prefer lower levels of digital engagement. Provide financial education and advice via both online and human channels, Remember a fair number of Digital Stars also like to speak with a human on occasion. And Digital Stars will leave if their needs are not being met.

Moving Beyond Traditional Segmentation Models

Most banks and credit unions already have access to the data they need to create new segmentation models that more accurately reflect what consumers value. Analytics, machine learning and artificial intelligence can make sense of the data.

Look at your customer information files and create models that test how well your products, services and loyalty programs match up to the needs of these four new segments.

Transaction and behavioral data sets can also provide clues to how to personalize products and services to each segment. Social media data mining allows you to construct profiles based on consumer values, attitudes, interests, personality traits, and lifestyle choice.

The goal is to get rid of generalized segmentation and replace it with data that allows you to individualize everything from the products you offer, to when you offer them, to how you offer them based on real rather than perceived needs and preferences.

“A more granular understanding of consumers is no longer a ‘nice-to-have’ item, but a strategic and competitive imperative for banking providers,” says EY. “Customer understanding should be a living, breathing part of everyday business, with insights underpinning the full range of banking operations.”

With deeper understanding, banks and credit unions can identify what customers need and want in their financial engagements, prioritize investments into customer experience enhancements, redesign outdated processes and create innovative, intuitive digital experiences.

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Comments

  1. Don Draper says:

    All this is doing is repacking segmentation, its not fixing anything.

  2. Any suggestions for a better segmentation model, “Don”? Perhaps you can share what type of segmentation models the folks at JP Morgan Chase are using?

  3. I’m not certain that this “four segmentation buckets” overlay to basic segmentation is of any greater value than a customer segmentation system like Claritas’ P$YCLE or PRIZM. While I agree with EY’s assessment that “granular customer understanding is no longer a nice-to-have agenda item,” it is helpful to remember that many community banks and credit unions are barely navigating basic segmentation. In an age where segmentation is being enhanced at large institutions by AI and machine learning, the industry’s smaller institutions are woefully behind in efficiently translating data to insights.

  4. I don’t think the EY segmentation model was intended as an “overlay” for basic demographic models. I believe it is a standalone system intended as a substitute, where you replace psychographic indicators for demographic criteria.

    And while you may be right — P$CYCLE or PRIZM may be equal or better than EY’s model — the reality is that most financial institutions aren’t using those systems. Indeed, most banks and credit unions have never even heard of them.

    The vast majority of financial institutions are barely doing any segmentation at all, and those that are only use a couple demographic data points, or target by geography, or base their segmentation on what product(s) a customer does/doesn’t hold.

    Financial institutions are way behind the curve with respect to segmentation. They need to be needled and prodded to push further, faster. Here at The Financial Brand, we’ll settle for modest, incremental gains.

  5. Some interesting information and the basic premise is worth consideration. However, conflating preference for digital with financial expertise and confidence, seems tenuous and misleading.

  6. provides 12 specific and granular segmentation buckets backed by 800 clients and almost 2 million accounts data.

    Love this stuff!

  7. What do you mean, David? How so?

    To me, the two barometers — “How digital is someone?” and “How financially savvy are they?” — seem like perfectly reasonable segmentation criteria.

    Do you have a suggestion for an alternative to demographic segmentation systems?

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