• Cognizant 20-20 Insights

Divide and Prosper: Targeting Key

Customer Segments to Drive Bank Profits
In today’s slow-growth era, a seven-step framework can help banks
identify and sell to their highest value customer segments.

Executive Summary customers shun branches in favor of online

North American retail banks face multiple
challenges, including a low interest rate envi-
ronment, rising regulatory costs and customers
spurning traditional branches. In response, they
are moving to reinvent their operating models,
better understand their customers and grow
their share of wallet within their most profitable
segments.
Rather than accept vague classifications such
as “mass affluent,” leading banks are organizing
around the specific needs of their most profitable
customer segments. This white paper describes
why it is essential to organize around customer
segments rather than geographies or product
silos to grow share of wallet, boost customer
retention and improve lead generation, while
increasing branch and call center productivity. We
end with our proven seven-step framework for
banks to identify and sell to their most profitable
client segments.
Business as Usual = High-Risk Strategy
North American retail banks are facing a
prolonged period of low interest rates and higher
compliance costs, both of which make it harder
to earn a reasonable rate of return on invested
capital. These financial institutions also need
to rethink their retail strategies as younger
banking or even abandon conventional banks for
nontraditional players, such as PayPal, Google
Wallet and Amazon Payments.
Amid these changes, banks are shifting from a
focus on customer acquisition to capturing a
greater share of wallet from their most profitable
customers. There is room for growth here; a
March 2012 report from BAI Research found
that financial institutions typically capture only
46% of a customer’s total deposit balances.1 The
percentage of total balance captured is even
lower for other types of accounts, at just 10% for
total loan balances and 2% for total investment
balances. The rest represents an untapped
market that is available for primary financial insti-
tutions that can understand customer needs and
can convince existing customers to consolidate
more of their banking and investment activities
with them.
Moving from strategic intent to operation-
ally capturing a greater share of wallet requires
thoughtful tactics that enable cross- and
up-selling. Identifying and seizing these oppor-
tunities requires a deeper understanding of
customer needs, wants and expectations. It is no
surprise that many retail banks are embarking on
efforts to segment clients and customize service

cognizant 20-20 insights | november 2013

 levels using analytics and data-driven decisions.
Another BAI Research study2 shows segmenta-
tion is the top investment area for marketing
and product development at banks with more
than $2.5 billion in assets. For banks with under
$2.5 billion in assets, investments in relationship
packaging and pricing strategies are followed
closely by segmentation (which helps drive the
effectiveness of their strategies).
Segmentation per se is nothing new. But historical
and broad definitions such as “mass affluent”
and “affluent” vary across banks and are not
precise enough to generate higher revenue and
profits in today’s challenging market. To succeed,
banks must understand the underlying emotive
needs and desires of specific
Banks must client segments and use
understand the those insights to restructure
underlying emotive around their most profitable
customer segments.
needs and desires
of specific client For some banks, the segmen-
tation exercise may uncover
segments and use the classic “80% of profits
those insights to from 20% of customers“
restructure around truism that is commonly found
among our clients and further
their most profitable affirmed by industry research.
customer segments. Some banks may choose
to focus not on customers
who are the most profitable today but on those
they expect will grow more profitable as the
relationship matures. But whichever segments
they identify as most valuable, banks that fully
understand and serve specific segments are most
likely to prosper amid continuing competitive
pressure and technological change.
Some of the most important evidence supporting
the effectiveness of this strategy comes from
customers themselves. A survey conducted by
BAI Research found that consumers are eager
for their banks to approach them with cross-sell
opportunities that help them better manage their
financial affairs.3 Developing and targeting such
offers, however, requires a more in-depth under-
standing of the high-value customer segments
than what most banks have today. Many banks
lack the internal systems, processes, data and
insights to identify and proactively serve their
highest-value segments.
Five High-Value Segments
In partnership with BAI and in our work with
clients, we have identified five distinct customer
cognizant 20-20 insights
segments that can help banks tailor their product
and service offerings (see Figure 1). Each segment
offers different revenue potential, investment
objectives, comfort with technology, levels of
satisfaction with their current financial institu-
tion and service preferences. Banks can combine
an in-depth understanding of each segment with
their business objectives to refine cross-sell
efforts that maximize their share of wallet and
long-term profitability. Deeper understanding of
each segment will also help banks adjust their IT
and staff investments to maximize profit potential.
• “Marginalized Middles:” This is the largest
banking segment and consists of individuals
who are younger than the average customer
and have the second highest revenue per
household. Compared with other segments,
these individuals are the least satisfied with
their primary financial institution, most
confused about bank fees and most likely to pay
someone else to handle their finances. The size
of this group, and its tendency to visit branches
less than other segments, may make it imprac-
tical to provide these customers with personal-
ized service. For Marginalized Middles, consider
a greater focus on self-service channels and
easy-to-understand marketing messages as
cost-effective ways to increase customer satis-
faction and solidify the relationship.
• “Satisfied Traditionalists:” This segment
accounts for almost 20% of customers and
represents the oldest customers with the sec-
ond-highest total deposit revenue potential per
household and the highest investment balance.
The profitability of this group is limited by its
low receptivity to product offerings and to
online, mobile and debit services. Building a
product base focused on the needs of these
individuals, such as products and services that
manage cash flow with low risk, could drive a
greater share of their wallet and revenue.
• “Sophisticated Opportunists:” Members of
this group are of average age, with the highest
income of any other group. While these indi-
viduals represent only 7% of the market, they
are high-potential and very knowledgeable
customers who are the most receptive to con-
solidating with one institution and the most
open to new investment products with high
upside and relatively high risk. Clarity around
fees, as well as product features and benefits,
are important to them. Product packaging,
such as rewards for consolidating accounts, is
2
 also important. Also consider online financial Segmentation in Practice
planning and investment management tools
Identifying and targeting key customer segments
that allow this group to manage its finances.
is already delivering benefits for banks. For
• “Disengaged Skeptics:” This group represents example:
a rich opportunity, as its members (about 20%
of all customers) are very dissatisfied with • As the economy remains a concern for
customer service at their primary institu- most consumers, their need for guidance and
tion. They trust banks only for basic payment services from financial institutions is likely to
services, and with the bulk of their invest- grow. That help doesn’t always have to come
ments in other institutions — such as brokerage from a high-cost, in-person channel such as
companies and investment firms — they must an advisor in a branch. Low-cost alternatives,
be convinced to rely on banks rather than already being provided by discount brokerage
investment firms to manage their financial firms, include on-line investment screening
affairs. To capture a greater share of wallet, tools and call center support. Segmentation
banks must offer comprehensive and trustwor- helps identify which channels are most appro-
thy investment solutions, enhanced customer priate for each segment.
service and less-risky investments as this • Market research showed one major bank
segment (the second-oldest) nears retirement. that it was losing market share with wealthy
residents in specific geographic areas. A study
• “Struggling Techies:” This group also
represents about 20% of the market and has revealed that this segment was more interested
the youngest members with the lowest income. in preserving capital than being exposed to
While this is currently a low-deposit, low-reve- market risk. In response, the bank offered
nue group, these individuals have the highest deposit products with increased interest rates,
share of wallet at their primary institution supporting the rollout with marketing efforts.
and are very receptive to tempting offers. The • Identifying customer segments for specific
mobile and social media initiatives they crave delivery channels (such as mobile) can
allow low-cost support that fits their current uncover potential opportunities. A Cognizant
revenue potential, while forging a relation- mobile banking analysis,4 for example, found
ship that can pay off as they grow into a more that “Ardent Affluents” use advanced features
profitable segment.

Capitalizing on Opportunities for Share of Wallet Growth

Satisfied Traditionalists have the greatest amount of money to invest, but they keep just
2% of their total investment dollars at their primary institution. Meanwhile, Sophisticated
Opportunists have a lower investment total but a higher percent of investment dollars
maintained at their primary financial institution.

$300
$258,180
Weighted balances at all institutions

$250  Deposits
 Loans
 Investments
$200 $187,866

$160,800
$153,785
$150
$118,968

$100 $91,127
$76,628 $70,469
$67,606 $66,398
$58,971 $59,926 $56,761
$52,762
50 $42,116 $41,232 $40,381
$31,065

46% 10% 2% 47% 8% 2% 46% 10% 2% 40% 10% 2% 53% 9% 3% 46% 19% 6%
$0
Weighted Marginalized Disengaged Satisfied Struggling Sophisticated
Average Middles Skeptics Traditionalists Techies Opportunists

(Percentages = share of wallet at primary financial institution)

Figure 1

cognizant 20-20 insights 3

 Quick Take
When the Sum of the Parts is Greater than the Whole
We recently helped a leading U.S. super-region-
al bank transform its operating model into a
segmented and relationship-based structure. We
enabled cross- and up-selling across various lines
of business (consumer, commercial and wealth
management); identified and developed enhanced
capabilities for insight-driven selling and cross-
business unit collaboration; and improved the
customer experience through service request
visibility and cross-channel integration.
The streamlined sales process resulted in
improvements in several areas:
• Better identification of sales opportunities.
• Improved customer acquisition and retention
through better understanding of customer
needs and preferences.
such as mobile photo bill pay; are open to
receiving expert guidance on personal finance
and investments; and are interested in services
such as spending pattern analysis and loyalty
rewards/points. “Liberal Users,” by contrast, are
not heavy mobile users but “will respond best
to services related to money management,”
according to the analysis.
Best Practices
Based on our work with clients, we have developed
a seven-step customer segmentation framework.
It takes into account customer criteria such as
channel preference, risk tolerance, sensitivity to
rates, and fees and product mix to help banks
tailor offerings for each segment.
This framework also takes into account profitabil-
ity criteria such as the breadth of products each
segment is likely to purchase, the length of their
relationship with the bank and estimated lifetime
value.
1. Define your strategic objectives and assess
your internal capabilities. Consider your
goals in customer retention, new product
introductions, planned entry into new markets
and the changing role of your branches. This
cognizant 20-20 insights
• Increased branch and call center productivity.
• Better access to customer data and collabora-
tion tools.
• Increased customer satisfaction and customer
retention via enhanced service request
handling.
• Increased lead generation and revenue
growth.
By transforming its go-to-market model to one
based on segments and relationships, the bank
was able to materially improve both customer
satisfaction and retention while accelerating the
achievement of its strategic goals.
is also the time to identify internal capabili-
ties (staff, process, technology and culture
changes) to achieve these goals, assess how
well you understand these capabilities and
determine the optimal mix of building, buying
or “renting” capabilities to fill gaps. This step
must involve retail bank executives and other
business leaders, and it usually involves
workshops and consensus-building meetings.
Among the outputs that help the bank are
SWOT (strengths, weaknesses, opportunities
and threats) analysis and IT gap assessments.
2. Define target markets and customer
segments. This is the core work of under-
standing likely profitability characteristics and
baseline assumptions for each target market
and customer segment. It includes understand-
ing which specific factors are important to each
segment, such as their risk tolerance, channel
preference, rate or fee sensitivity, and their
expectations for customer service. Among the
tools used in this analysis are client surveys
and internal profitability and cost models.
3. Target desired niche/sub-groups. Which
groups have attributes the bank is seeking, such
as receptivity to new offers, likelihood to con-
solidate with one institution or high household
4
 incomes? Ideally, the results of this targeting
are a redesign of the bank service model to
better serve more profitable segments.
4. Develop test and control cell offers. Based
on modeling and profitability analysis of these
sub-groups, test to see which products and
services generate superior response rates and
receptivity and how each segment compares
with a control group. A typical test cell might
include 700-1,000 customers. The duration of
the offers depends on the scope of the change
being tested, with longer tests conducted for
more expensive strategies such as redesign-
ing physical branches. Cell offers are often
conducted first in one geography and then
rolled out to others if successful.
5. Refine programs and measure results. Con-
tinually improve your ability to quickly capture
test results and decide which pilot programs
to move into production and which to shelve.
Metrics include net new customers or additional
deposits/loans that current customers bring
from other financial services providers. This
should be a continual process as the bank
rolls out new offers, measures their success
and tweaks offerings as market conditions,
customer needs and technology change.
6. Roll out proven programs, offers or solutions
to a broader audience. Prioritize and accelerate
the deployment of products and services that
resonate with a target segment, accounting for
budget and service capacity constraints.
7. Document and communicate key learnings.
This is the ongoing process of understanding
what worked well and what could work better
with adjustments. Also consider the customer
service lessons that were learned, how they
can be applied to other parts of the bank and
how the bank can best evolve its capabilities to
address changing customer preferences.
Looking Forward
Tomorrow’s banking leaders will be those that
most effectively understand the underlying
needs and desires of their most profitable client
segments and focus their organizational talent
and capabilities on creating unique products and
services. Segmentation is not a one-time event
but an ongoing process of understanding changes
in demographics, technologies and customer
needs. These insights can help banks continu-
ally fine-tune their products, services, marketing
efforts and channels to maximize their return on
investment by focusing on their most profitable
segments.

Footnotes
1
“The New Dynamics of Consumer Banking Relationships,” BAI Research, March 2012,
http://www.marketwired.com/press-release/New-Study-on-US-Consumer-Preferences-Reveals-Key-
Differences-How-Consumers-Interact-1636540.htm.
2
“The New Banking Consumer: Five Core Segments and How to Reach Them,” BAI, March 2012,
http://www.latinia.com/IF/Documentos/The_New_Banking_Consumer_5_Core_Segments.pdf.
3
“BAI Solutions Demand Pulse,” BAI, December 2010, http://www.bai.org/research/strategic.aspx.
4
“Segment-Based Strategies for Mobile Banking,” Cognizant Technology Solutions, June 2013,
http://www.cognizant.com/InsightsWhitepapers/Segment-Based-Strategies-for-Mobile-Banking.pdf.

cognizant 20-20 insights 5

About the Authors
Vin Malhotra is the Lead Partner with Cognizant Business Consulting’s Banking and Financial Services
Practice and leads the Retail and Mobile Banking Practice. He has 27 years of experience in management
consulting, helping clients increase their ROI from their technology investments with a focus on the retail,
commercial and mortgage banking industries. Vin’s clients have included international and regional banks,
credit unions and Fortune 1000 firms in the BPO, payments and financial technology spaces. He has served
clients in multiple geographies and is a frequent speaker at industry conferences. Vin can be reached at
Vin.Malhotra@cognizant.com.

Biswadeep Sengupta is a Senior Consultant within Cognizant Business Consulting’s Banking and Financial
Services Business Unit. For the last five years, he has served as a lead business analyst and consultant
for various bank implementation projects across the world. Biswadeep’s areas of expertise include asset
and wealth management, retail banking, consumer lending and payments. He holds an MBA in finance and
strategy and can be reached at Biswadeep.Sengupta@cognizant.com.

About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-
sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in
Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry
and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50
delivery centers worldwide and approximately 164,300 employees as of June 30, 2013, Cognizant is a member of the
NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing
and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.

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