"Fishing for pearls" with the big net of Digitalization

Customer Segmentation has both advantages and disadvantages.

At the individual advisor level, it’s extremely efficient to focus the energy on the clients which bring the highest returns or earning potential. On the financial institution level, however, a division of customers into, let's say - "retail", "private banking" and "wealth management" can mean that attractive customers who have ended up in the wrong segment are not being approached with the right service offering. And, one level above, if we look at the division of the business areas into private customer and corporate customer (names may vary from institution to institution), sorting them into silos can cause negative side effect due to poor information flow between the different areas and thus  lower business potential.

In the following, we will discuss how you can take advantage of segmentation and how to manage the undesirable effects of splitting customers into different business classes.

Let's start at the individual advisor level, working in a bank or a savings bank, and who might be an asset manager or an individual advisor. This person may not be familiar with the client asking tricky and specialized questions about corporate actions such as reverse split or individual shares. It can take hours to research and find answers to these questions. In this case, you - as an advisor, before dutifully investing a lot of time on this should pause and ask yourself how to respond appropriately to this client's request. The degree of effort you will invest in answering the question must correlate with the return you generate or could generate with this client so your work can be done with efficiency and more effectively. After all, according to the Pareto principle, you’ll make 80% of your revenue, with 20% of your best clients.

But which of your clients are the top 20%?

To understand this better, first divide all your existing clients into three or four groups, according to their income from the previous and the current year. It is best to create a list where you can rank in descending order. If necessary, exclude unusual one-off income to make the picture clearer.

Second: go through your clients again to assess how much potential they have. Then, divide them into categories like "small" - "medium" - "large”, for example. To be able to estimate who belongs where, you’ll need to collect information about your clients. Are there rich relatives, an interesting life partner, friends and above all, assets with other banks? With an average of 3.5 bank accounts per customer, it can happen that a client of yours with a small savings plan is only classified as uninteresting, but he might have much more assets. If you find out for example, that there are EUR 300,000 deposited in a custodial account, this client profile will immediately change, ending up in the “large” potential category.

If you have done this exercise and gained an overview of your clients’ profiles, you can now approach them in a much more focused and personalized way. For instance, you can offer a customer who has a large portfolio with a competitor, the opportunity to get a second opinion from you, on their third-party investments. "Second opinion - free of charge and without obligation". There are no limits to your creativity when it comes to the type of services you can offer!

Just like the individual advisors, financial institutions with their “retail”, “private banking” and “wealth management” segments, also have undiscovered “pearls” in their business. The challenge here is to ensure permeability between the segments. Above all, from bottom to top, i.e. from retail banking to private banking to wealth management. Customers must be selected according to their potential, with a suitable service offering. An apparently small saver from the retail segment, who has assets elsewhere or who might also be willing to invest their money in a different way than a savings account needs to be approached appropriately with a tailored offer that gives them added value.

And how do you find out if someone has potential? Nobody has the time to speak to 300 or 500 customers who are assigned to one retail banking advisor. This is where, today, you can take advantage of digitalization. Like Silicon Valley companies, you – as a financial institution can start building a relationship with your customers digitally. For example, by providing retail customers with a digital tool to manage their assets holistically.

For privacy reasons, it is not possible to see all the details of your clients’ assets without their consent, but you - as a financial service provider, who has a digital financial tool can always see whether the client has assets on the platform, and how often they use it. With these parameters, it’s possible, for instance, to target customers with assets on the platform who use the tool regularly, and thus to “fish the pearls” in the investor's pool, without much effort.

If we go one level up and look at the business of financial institutions, we can also find opportunities here. Usually, there is segmentation of the private customers and the corporate customers. Depending on the organizational form, these can legally be even two separate banks, with corresponding regulations and limited information exchange between entities. So, what can be done, for example, to attract interesting corporate customers to the private customer business? The already successful young entrepreneur who maintains a business account with his company at the bank is the perfect target customer for private banking (or whatever corresponding area of the respective institution may be called in individual cases).

Also, here it makes sense to start the relationship with the private customer digitally. One way of drawing the young entrepreneur from our example more deeply into the ecosystem of the financial institution would be to offer them a web-based tool via a private financial advisor. Just like Amazon gradually "supplies" its customers, who initially only bought books online there, with music, videos and now also groceries, a modern financial service provider must offer an ecosystem of complementary services.

But always keep in mind: the services you provide to the target customer must offer added value or customer experience. If you want to help them manage their private finances using software, it must be designed to be intuitive, user-friendly, taking on the familiar logic of business accounting, and encouraging its use regularly thus integrating it fully in everyday life. Then, as a financial institution you will have the opportunity of looking after corporate clients in the private segment as well, while availing of the wide range of services that are available there: current account, credit card, private real estate financing, etc.

Segmentation can carry a risk of missing opportunities. Digitalization can help you to disclose uncovered potential, with little effort. Because it doesn't make much difference whether you provide a tool to 100 or 200 target customers. The net with which you now "fish for pearls” can be much larger than before (thanks to digitalization), when you only had personal contact and support. Today, it’s normal to start a relationship with a customer online. And add personal contact later, when a certain level of trust has already been established digitally.