Invisible Brand

The major banks see customer segmentation as the route to even greater domination and profitability from their retail operations.There have been some successes, but the challenge remains a daunting one…

Considering that between them the major British banking groups have reported full-year profits of some £25 billion in 2003, it’s hard to believe that in at least one of their biggest markets they’re only scratching the surface.

The fact is, though, that according to research CCHM commissioned recently, “scratching the surface” is a pretty fair definition of what the leading banks think they’re doing in the UK retail market.

Our qualitative study looked into attitudes among senior decision-makers towards the prospect of the depolarisation of financial services.The sample included people in both manufacturing and distribution businesses, and among the distributors about half worked for banks.

The respondents’ thoughts on depolarisation were complex (actually, that’s ‘complex’ in the sense of ‘confused and uncertain’) but that’s another story. One of the most interesting sidelights that came out of the research was the consistent belief among the bank respondents that there is still enormous potential for segmenting the retail customer base.

The story so far
In fact, according to these respondents, segmenting the retail customer base and then delivering propositions designed to maximise the profit potential of each segment is one of the central themes of retail bank marketing today. And if you’re thinking that there’s little to show for any of this yet – apart from a recent frenzy of activity, much of it muddled and catastrophically unsuccessful, in the HNW/wealth management area – the answer is that you ain’t seen nothing yet.

In taking a closer look at this emerging phenomenon, let’s start with that difficult and turbulent HNW/wealth management area.This hasn’t been the banks’ strongest suit in recent years, and the main spanner thrown into the works has been the Internet.

Somehow or other, a few years ago, the idea got about that the Internet was the key channel for delivering wealth management services to high net worth customers. Ironically, within a few years, this will probably be true. But it hasn’t been true over the last few years, and several net-based services, such as Lloyds TSB’s Create, the Merrill Lynch/HSBC joint venture and Abbey’s Cahoot lost enough money between them to make an almost perceptible dent in that £25 billion profit. (Incidentally, it would be unfair to focus this criticism exclusively on the banks.

It’s been said, no doubt untruthfully, that the single most unsuccessful wealth management play was in fact Norwich Union’s norwichunion.com.They gave away a rather good book about wealth management to try to generate consumer interest. It has been said, no doubt unfairly, that it would have been cheaper to offer people in the street £10,000 in cash to receive a free book than to have gone to the trouble and expense of building the website.)

Segments that work
Anyway, it’s odd that the banks should have been so distracted by the Internet in designing wealth management offerings, because the affluent/high net worth sector is the only one that’s sufficiently profitable to provide a high-touch, face-to-face service. In fact, bigger picture, that’s the way it’s been going, with RBS NatWest using the Coutts brand much more aggressively as an upsell, Barclays doing the same with Barclays Premier, and various specialised wealth managers, especially from continental Europe, making significant inroads.

At the same time two other banks – HSBC and the Co-operative – have most clearly identified and targeted a very different segment. First Direct and Smile both cater for a much younger, more technologically confident group (First Direct’s probably a bit more affluent than Smile’s) who are perfectly happy to trade off access to a branch network for 24/7 convenience and a brand which reflects a lifestyle choice.

The unconquered wilderness
But overall, initiatives like these are still the exceptions rather than the rules.Broadly speaking, if you are a customer of a big British bank, the basic service you’ll be offered will be the same whoever you are. Bearing in mind that the biggest banks, between them, have up to a quarter of the UK adult population as customers, that represents one enormous segmentation opportunity (or challenge, depending on your point of view). And when you recognise that on the current basis it’s said that only a minority of retail customers are actually profitable, it’s clear that the opportunity needs addressing sooner rather than later.

How will this happen? Through a mixture, in all probability, of customer-led and product-led initiatives. Product-led initiatives are easier. At risk of oversimplifying, you chuck a product out into the marketplace and allow it to find its own market segment. For example, offset services like Openplan and the One Account are attractive to a segment of quite affluent people who combine a degree of financial shrewdness with a willingness to put all their eggs into one basket.Or – the big story in US retail banking in recent years – very low-cost basic bank accounts that are extremely competitive provided that you don’t want to do anything difficult (but extremely expensive when you do), attract a utilitarian segment of not-very-affluent people looking for a value buy. There are plenty of examples of product-led initiatives like these, most of them too conventional to be worth much scrutiny.

Lessons from the past
Trouble is, product-based segmentation can be taken only so far.Older readers may remember the pre-HSBC Midland’s range of targeted product brands such as Vector, Credo and Orchard. This approach was discontinued, ostensibly, because it was too expensive to sustain. But it’s unlikely that the real show-stopper was cost. The key problem quite probably stemmed from the idea that banks are in the product-delivery business. They’re not.They’re in the service delivery business. The same counter staff speaking to one customer about a Vector account would be speaking to the next one about a Credo account. If these are supposed to be different brands, with different propositions, values and personalities, this is simply too hard, especially for counter staff on less than £20k a year.

That’s why, going forward, it will be the customer-led segmentation initiatives that break the new ground.This is mainly for the obvious-but-important reason that customer-led initiatives call for overall approaches to the management of the customer relationship, not just for individual products within the portfolio.

People often think of the airlines as the main proponents of this kind of segmentation, but this is by no means certain. For one thing, most only have three segments – tourist, business and first – and for another, both business and first are effectively b2b markets, with almost all of the b2c market packed sardine-like into the back of the plane.

Learning by example?
A better example (except that they’re French) would be the giant hotel and leisure group Accor. Accor run no fewer than 13 hotel brands (maybe more, if you include the sub-brands) which target groups ranging from the upscale traveller (Sofitel) to the mass family market (Novotel) to the single-night business traveller (Formule 1).They even have specialist brands like the health spa Thalassa, and the conference centre Atria.

Admittedly some of the size and scale of this portfolio is the result of acquisition and arguably there’s a need for some rationalising, but the fully-segmented approach to the market, the brands, the service propositions and the pricing allows Accor to maximise the potential of each.

Harsh realities
It’s the kind of model that banks may show an interest in – although in truth, their challenges are a good deal more difficult and complex.One of the biggest complexities is, of course, that they suffer from a degree of political and regulatory interference that would turn the mildest mannered hotelier into Basil Fawlty. Just now, for example, the banks are supposed to be digging the country out of its enormous long-term social welfare problems by spending a great deal of time and effort trying to persuade mass-market consumers to start investing significant amounts of money in long-term savings products, in return for revenues of less than £10 in the year of the sale.Admittedly, in doing so, a bank is aiming to secure a long-term revenue stream that may grow to a much larger amount, but it’s difficult to imagine even the budget Formule 1 hotel chain providing much in the way of service for a tenner.

In fact, when you think about the reality of segmenting a retail bank with up to 12 million customers, with horrendous IT and legacy problems, and in the teeth of massive government and regulatory buggeration, it’s almost possible to start feeling a bit sorry for the organisations concerned.

For most observers of the scene, however, a few moments’ contemplation of that £25 billion profit last year is likely to restore their customary equilibrium.