Behavioral Segmentation Ramping Up the Banking Customer Segmentation Approach

 Even before the pandemic, the banking industry was fast transforming. Customers sought a new kind of banking experience, and Fintechs were ready to take up with their tech-driven innovative services. Despite conventional banks' high levels of trust, clients, particularly the younger generation, were more prepared to test new and innovative financial services that provided them with more choice, control, and hyper-personalized services. Banking altered much more as the virus spread throughout the world. Customer behavior altered when bad loans rose, loan applications decreased, and customer behavior changed. Online banking grew commonplace as social separation became the norm, and early research shows that this tendency may be here to stay. 

Traditional banks must alter their strategies and operating models to continue recruiting and maintaining clients in this environment. A new banking strategy must be built on customer-centric relationship-based models, which include knowing what customers want, engaging them holistically throughout the bank, and providing relevant and value-added services. Customer loyalty, retention, and long-term growth are all dependent on this. To improve their offers, banks must now dive deeper into their customers' minds, and behavioral segmentation is critical.

Expanding Segmentation Strategies to Include Customer Behavior

Segmenting customers isn't a new concept. Customers have been classified by banks for decades based on broad demographic variables including age, gender, location, income, and the type of account they have with them. They then used this information to create loyalty programs or service offers for account holders who were women, such as special discounts. This worked in a time when there was little competition, little innovation, and banks followed predictable operational paradigms. Customer loyalty is on the decline, and competition for customer share of wallets is peaking nowadays. It's crucial to keep clients and expand your current business. Customers are 82 percent more inclined to buy or renew with the same bank if they believe their involvement with the bank provides value¹. They're 86% more likely to boost their spending at the same bank and 97% more likely to spread favorable word-of-mouth reviews. 

Financial institutions want deeper insight into customer behavior and preferences in order to succeed in the digital age. This includes a comprehensive picture of their interactions with the bank, spanning products and divisions. A customer can have both, a bank savings account and yet be a health insurance policy customer. It would assist the bank in determining the worth of their health insurance coverage if their premiums are paid on time, where they spend money from their savings account, and other pertinent information. This would aid in the creation of a more complete picture of the customer's behaviors, preferences, objectives, and aspirations, as well as their creditworthiness. With this information, the bank may customize relevant offers and interactions to the customer's preferences and personalize their experience.

The Principles of Behavioral Segmentation

The first stage in a behavioral segmentation approach is to break through organizational silos, obtain and evaluate full data on the customer's contact with the bank. Demographics and socio-economic characteristics, geographical data, and behavioral data are all types of data. Behavioral data can include but is not limited to, spending, saving, and investing tendencies, risk, credit ratings, and custom scores, among other things. Customers are divided into behavioral segments based on this data.

This segmentation can aid service providers in providing individualized and preferred treatment to certain groups. They may be used to customize incentives and perks, transaction fees, fee waivers, discounts, free services, and even tailored offers according to a customer's tier. Tier 1 customers, for example, are those who do not have a substantial bank portfolio or have very little money. As an incentive, they might get movie tickets to a recently released blockbuster. However, based on their financial behavior and lifestyle choices, another customer with a significant portion of wallet would likely belong in Tier 5 or the top segment and be rewarded with movie tickets, valet parking, health club membership, airport transfers, and more.

By proposing to advance a customer up the tiers based on their activities, the tiering system may also be utilized to incentivize particular behaviors. For example, a customer with only a basic savings account is in Tier 1, but the company may want them to become an insurance customer as well. If a customer opens a life insurance account, they can earn points that will help them advance to the next Tier. If they purchase insurance and raise their savings account deposits, they may be able to earn additional points, allowing them to advance to Tier 3 and enjoy all of the perks that come with it. Customers would not only be rewarded, but they would also be part of a longer value-driven relationship.

Of course, it is equally important to monitor and evaluate the segments regularly. A customer who made it to a particular level may not be eligible to remain there forever. Some may exhibit behavior that merits an upgrade while others may reduce their spending and consequently need to be moved to a lower tier. These moves, especially downgrades needn’t always happen. Customer engagement can be monitored over a period and if basic criteria for that tier is not met during that time, they are moved to the lower one. Continuous assessment is critical for a successful behavioral segmentation strategy simply because change is the most basic trait of human behavior.

It obviously is also critical to keep track of and review the segments on a regular basis. A customer who has progressed to a certain level may not be entitled to stay there indefinitely. Some may demonstrate conduct that warrants a promotion, while others may limit their expenditure and, as a result, be relegated to a lower tier. These actions, particularly downgrades, are not always necessary. Customer involvement may be tracked over time, and if the fundamental criterion for that tier isn't satisfied, they'll be demoted to the lowest tier. Because change is the most basic aspect of human behavior, a continuous evaluation is essential for a successful behavioral segmentation plan.

Building the Tech Foundation
To accomplish behavioral segmentation, banks require a cutting-edge technology platform that can provide an integrated data landscape for the development of complete rules and enable the advanced analytics needed to extract insights from customer behavior. Legacy banking cores are incapable of doing so, and entirely revamping them is a dangerous operation. Before banks, one alternative is to partner with fintech for a mutually advantageous operating model. Working with a third-party vendor to put a middle layer on top of the core and host analytics and other digital technology solutions is another option.

The banking industry has undergone an irreversible transformation. The old banking system may be phased out in favor of innovative models in which banks act as orchestrators of a customer-centric ecosystem of financial and non-financial services. Understanding customer behavior and successful segmentation based on it will be critical for such business models to succeed. In fact, in the coming years, practically every financial innovation will be based on customer behavior. And now is an excellent opportunity for banks to raise their behavioral segmentation game and get ready for the digital future.