A Data-Based Method for Banking Customer Segmentation

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Customer segmentation is a concept that you are likely already acquainted with and using in some capacity inside your company. Data has emerged as the most valuable asset for financial institutions in the digital age, offering insight into things like product performance, consumer behaviour, market trends, and more. In all of this, customer segmentation is extremely important since it offers possibilities to better understand each customer's requirements and preferences and how to target those needs and preferences to boost revenue.

However, consumer segmentation on its own is insufficient. Your commercial or retail banking customer segmentation strategy must be successful if you want to see measurable outcomes.

Why Banking Customer Segmentation Needs to Improve

What Basic Segmentation Gets Wrong was the title of this section in earlier editions of the essay. Before changing our stance, we gave it a lot of thought. After all, the problem with basic segmentation isn't so much that it doesn't work as well as it could, but rather that it doesn't.

You see, the majority of banks base their segmentation on the characteristics of their customers (age, gender, income, geographic location, education, and so on). It can only get you so far, even though such information is useful—for instance, that clients between the ages of 30 and 40 are the most likely to apply for a home loan. This strategy for client segmentation in banking is constrained since it lacks granularity and nuance, relies on fundamental presumptions, and considers each demography as a single entity.

Let's expand on this illustration to show yet another instance where banks fall short of making the best use of precise consumer data. Consider that you are trying to attract a client, Jeff, who belongs to the group of clients who have house loans with rival lenders. He receives the same marketing materials as the rest of the segment's clients. However, you omit to mention that earlier that month, Jeff contacted your company's wealth group for investment guidance. You see, Jeff recently lost his grandmother, leaving him with a sizeable fortune that he wants to invest but needs some assistance to get going.

How Should Your Customers Be Segmented?

There is no one right approach to segment; it actually depends on the current requirements of your firm. However, there are a few factors you might want to take into account when creating client profiles:

Using this data, you may develop client personas. For illustration purposes, let's design a sample segment we'll call "Up-and-Comers." Customers who fall into this category tend to be male, somewhat young (say, in their mid-20s to early 30s), and frequently found in chic urban neighborhoods. Price-sensitive due to their lower income and credit scores, they have the potential to considerably increase their income and credit scores over the long run. Up-and-Comers like to manage their banking online and visit branches seldom because they are extremely independent and technologically knowledgeable. You might market to customers in this group using social media based on the persona you've established.