Financial Institutions Should Bank on Knowing Their Customers

It's no secret that financial institutions are under enormous pressure to find new ways to acquire customers, strengthen and grow existing customer relationships, and generate revenue. Understanding what influences different customer groups is essential for designing and providing products and services that satisfy these objectives.

 To dive deeper, Saylent commissioned a study to assess consumer and small-business banking preferences and the depth of relationships they have with their financial institutions. The findings provide key insights into how different groups prefer to interact with their bank and the products and services they desire. Below is a snapshot of those discoveries.

Millennials

The study found that 56 percent of Millennials would switch from their current bank to one that offered an account that didn't automatically pay overdraft items for a fee. This suggests that Millennials want to have control over their funds, and offering a product that doesn't include overdraft fees can be a point of differentiation. In addition, Millennials were three times as likely to identify mobile as their preferred channel. 

Underbanked

According to the study, 54 percent of underbanked consumers (defined by the FDIC as those who have used an alternative financial service product—like a payday loan, auto title loan, or check casher—in the previous 12 months) would switch from alternative financial service providers to a bank offering a product with no overdraft fees.  Twenty-five percent would pay $10 to 20 per month for such an account. 

Mass Market Consumers

Fifty-two percent prefer to use debit cards as their primary-account access channel; 48 percent prefer some combination of checks and ATMs. When it comes to motivating existing mass market accounts to transact more profitably, cash rewards and interest drive were the biggest incentives. Seventy percent would enroll in e-statements for a cash reward or preferential interest rate; 74 percent would enroll in ACH direct deposit or draft payment plan.

Worth noting, 30 percent of these consumers would stop using branches in order to receive rewards on their checking account like ATM refunds, above-market interest rates, and cash rewards. 

Mass Affluent Consumers

The study found that mass affluent consumers show an inclination for term-deposit products, with just over 50 percent noting they'll be in the market for a CD in the next six to 12 months. However, these consumers indicate that only 27 percent of their liquid savings are currently in CDs. This suggests that when rates rise, money housed in low-rate money market accounts will be looking for a higher yield. Finding ways to offer higher yields while maintaining profitability will be critical to the success of banks if and when rates start to rise.

Small Businesses

The old adage that "credit leads" in the business banking space holds up: Over 70 percent of the study's business clients began their bank relationship based on a loan or line product. Ninety-seven percent of respondents were satisfied with their banking relationship, but 71 percent would consider switching to a bank that helped them save time and money. 

The findings clearly demonstrate that different groups have different needs and desires. How can financial institutions apply these insights? Here are four key takeaways:

The underbanked and Millennials present substantial opportunity. Franchise growth only aids the bottom line when acquired households are profitable. However, competition for profitable households is intense, reducing expected returns. A better approach is to take the path of least resistance—the underbanked market and Millennials.

Financial institutions have ceded the underbanked market to alternative financial services providers. Recapturing that market, and bolstering and growing relationships with Millennials profitably, requires a better understanding of what these customers and potential customers are looking for. 

To learn more about what's important to these groups, it's critical for institutions to analyze their customers' demographics, transactions, and purchasing behaviors to gain an understanding of how they prefer to interact with their financial provider. With that understanding, banks are better equipped to influence behaviors with incentives that matter to these audiences and that benefit both the customers and institutions.

Flexibility and contextual-based pricing are key to achieving success. Contextual-based pricing—which allows financial institutions to personalize and price products based on customer behaviors—enables institutions to optimize their products and create a 1-to-1 relationship with each customer. Such products drive acquisition and retention of the most profitable customers by offering customers the ability to customize their banking experience.

Positioning products with contextual pricing strategies allows custom pricing of deposit products to cut through the noise to maximize growth and retention. Contextual pricing strategies also enable consumers to self-select rewards and fees, giving clients control of their banking relationship. Pricing based on behavior allows banks to maximize their accounts' consumer appeal while operating within guiderails to maximize profitability. 

Differentiating and packaging products for different audiences drives adoption. One of the many missteps banks have made over the past few years with Millennials has been to assume that one-size-fits-all products and services meet their needs. But a Millennial technology worker in the Southeast has different banking habits and needs than a new family looking to buy a house in Chicago or a graduate student in Los Angeles. Offering a specific lifestyle account for each of these consumers isn't always possible, so using tools that allow consumers to self-select features and benefits that are meaningful to them creates competitive differentiation. 

Mass affluent customers are seeking differentiated deposit products that meet their needs by simplifying their financial lives. Providing a well-designed mass affluent–focused product can overcome obstacles to growing these relationships. Given this segment's preference for term deposits and high relative balances, implementing a product that's priced based on the profitability of a customer's relationship would help drive cross sell opportunities and a deeper share of wallet.

The study also found that small businesses don't select banks based on deposit products; however, deposit accounts can be a barrier to gaining business deposits if not positioned appropriately. Delivering a small-business deposit product with desirable features (such as packaged cash management services) will help give banks a differentiated offering to encourage client engagement.

Optimizing for mobile more effectively serves customer needs. Across all segments, branch location is considered important or extremely important by 78 percent of survey respondents, but only 13 percent identify the branch as their primary channel. So branches are critical to acquiring new clients, but they'll be lightly trafficked.

This reinforces the need to continue investments in mobile banking and indicates that some incentives may be required to convert customers fully to the mobile channel. With the ubiquity of smartphones and the way that they're changing consumer banking behaviors, the mobile channel presents a great opportunity for institutions to provide customers with convenience, enhance satisfaction and loyalty, and reduce costs. 

Conclusion

Profitability is the holy grail of every business venture, none more so than banking. Banking has an additional dimension in that outside forces, like the U.S. Federal Reserve’s management of interest rates, can cause extra complexity. When banks use their own data to truly listen to and understand their customers and what motivates them, they're best equipped to deliver solutions that drive customer satisfaction, bolster loyalty and account growth, and enable the institutions to reach that holy grail.

Dan Moultrie is director, advisory services, for Franklin, Mass.–based Saylent, which provides financial institutions with analytic software and services that improve profitability and product innovation by delivering smarter, deeper, actionable insights on the financial behaviors of consumers and businesses.