A new strategy for old banking ways

At the Asia Pacific Bankers’ Congress two months ago, MasterCard International vice president Steve Laue offered a new perspective in market segmentation that virtually had bankers shaking in their Marks & Spencer suits. First of all, it would require a total restructuring of banks, and second it would eliminate the small "empires" within banks — product managers would become mere "factories" and new front liners would emerge.

There’s nothing more drastic than taking away the title "boss" from one’s office door, but Laue insists that segmentation marketing would open up new opportunities for banks and shift the emphasis from products to clients.

"Most banks in the world these days are led by their products," says Laue. "Within these institutions are little empires, businesses in their own right. The card manager, for example, wouldn’t know much about mortgage; the insurance manager wouldn’t know much about credit cards. So within a bank, you’re actually seeing an institution that’s fractionalized. You have the card group fighting for funds within the bank, you’ve got the mortgage group doing the same thing, so these businesses are hitting the same market all the time. In a free-for-all marketplace, each product king, each product manager is trying to outdo the other product groups in performance. Under the segmentation strategy, you actually divide the market by whatever means you wish. Rather than the product managers leading the charge, you have segmentation managers who are responsible for penetrating a segment and they put together all the products a segment needs."

Banks divide segments by whatever means they wish. Laue jokes that they could even create a blonde segment if they want. But seriously, the more common identifiers would be income and age – and from there you get bundles of segments. For instance, clients under the ages of 30 to 49 with an X amount of income, who own their own homes and have no delinquencies can make up one segment. Another segment could be those who are renting.

"It’s not an easy thing to do," he concedes, "and it takes a lot of research, but the main investment a bank makes is in research. Without proper research they just don’t have a foundation to build their market on."

Laue cites as examples banks such as the Commonwealth Bank of Australia, which has three main segments: the developer segment, the transactor and the high-value customer. He explains that the transactor segment is the normal man on the street that goes and costs the bank more than what the bank makes from him. "He’s the one who uses the branch. The cost-income ratio could be around 300 percent, where the bank loses three dollars for every dollar it makes."

The developer segment is usually made up of people who have children, paying for a house and car. "So they need a card that has utility, earns them bonuses, has flexible payment plan, a mortgage program that allows them to have withdrawals, insurance package that covers their house, and loans. So it’s no good if you’re a developer and I’m trying to sell you a platinum card because it has attributes that you don’t need."

The high-value customer segment wants things that are more sophisticated. He needs a much more integrated loan package, an integrated credit card. "He values and is prepared to pay for financial advice. And then you have the corporate segment, which has an entirely different set of needs."

What does this all mean to a bank’s clients? They get products that are relevant to their lives, not products that are pushed down their throats by product managers who blindly try and make the sale without knowing the client at all. I once received a phone call early in the morning from my credit card company that offered a loan tied to my card. And because I was sleepy and the caller was annoying, I said yes I needed a loan. I had completely forgotten about it until I received a check in the mail and a flyer that explained I would pay for my loan in X number of months with an X interest. But I didn’t need the loan! And to cancel it, I had to pay a P300 processing fee. Now I wonder if I would have received that offer at all if the bank wasn’t so product-driven and was instead focusing on market segmentation— my market segment.

Another classic example of marketing mistake that banks make is offering products to somebody who’s the last person that needs them. During his presentation at the Bankers’ Congress, Steve Laue touched on this wrong approach by saying that banks mistakenly offer platinum-type services to platinum cardholders. "It’s quite the opposite: A CEO doesn’t need concierge service, he doesn’t need special airline lounges (his first-class ticket and frequent flyer card already give him that) and a whole lot of things from his platinum card that he doesn’t need. So the product is pitched wrong. The platinum card is really for someone who aspires to have all these things. A platinum card may be even more suitable to a transactor marketplace, the lower level, the aspirational market – they will need the airport lounges for the one flight they will take in a year, they will need concierge services. They value these things; a CEO already has them."

The biggest challenge that this new strategy faces is from bankers themselves. The bank must undergo a huge cultural change "where you got all these people with their little empires and you change their focus from being the king to being a servant," says Laue. "That’s a pretty difficult cultural change and I think you need a very good communication strategy from the very beginning because you need to change behaviors."

When a bank shifts from being product-led to a segmentation-led bank, what happens is that product managers become people under the segmentation manager, who now leads the charge. A segmentation manager makes sure the bank penetrates a particular segment, identifies the needs of the segment he’s managing (the corporate, developer, transactor or high-value segment) and has the knowledge of the different products (loans, mortgage, insurance) relevant to the segment. Rather than one group being well-versed in one product, you now have one person who knows all about these products. If, for instances, the segmentation manager says his segment needs a new product, he goes to the product managers and asks them to create it. That’s what Laue means when he says product managers become "factories."

So how does segmentation actually benefit the bank and why is it so important to adopt? "To keep you, the client. I want to make sure you have every product you need at the right pricing to make sure the other bank can’t come in and take you away from me with its products. It’s important to understand what your needs are, not to sell you things that do more than you want them to do. And it’s good customer relationship management, to make sure that as your needs change, you will have new products."

MasterCard vice president for commercial payment solutions Peter Gordon adds, "As you move through the life cycle, you get married, you have children, you instantly you move into a different area of financial needs, so the bank wants to keep you for life, not just for a period."

"It’s very good from a protectionist point of view," says Laue. "Let’s say I’m offering my customers loans, credit cards and mortgage, and another bank is offering him a card that’s actually cheaper than what I’m offering. He’s still less likely to move because his card with my bank is linked to his insurance, his loans, etc. He may be gaining points, which may be helping him pay for his bank fees, etc."

Laue says no bank in the Philippines is doing segmentation yet. When he introduced the idea at the Bankers’ Congress in Manila, how did bankers react? "With a great deal of confusion," he says with a laugh. "It’s very funny, one banker came up to me and said, ‘I’m glad you gave me this information because my bank just told me to start doing a product strategy. It’s crazy, but we’ve got to do it this way especially here where the cost-income ratio is very high.’"

According to Laue, in other countries in Asia there are already some banks moving toward segmentation. "The Commonwealth Bank of Australia took two to three years to do it."

In an industry where old strategies are firmly entrenched and positions are protected, it would take a bank determination to embrace this new strategy. "It’s a new concept," says Laue. "But you have to remember that in the marketplace there are new concepts working all the time."