Personalized customer experiences

Two of the biggest demographic trends in consumer banking in recent times have been:

• Slowing down of new customer acquisitions: In mature economies like the US, the deposit base has levelled off over the last several years. This, in turn, has meant that banks have to rely on their existing customer base to deliver growth.
• Channel preference by age group: While the baby boomers have not wholeheartedly adopted digital banking (although that is changing in the post-pandemic world), millennials and the subsequent generations, by and large, prefer to almost exclusively bank digitally.

Both these secular trends have meant that a key growth driver for banks is going to be increasing revenue per customer – which is why cross-selling and up-selling are becoming key elements of customer engagement. As more and more customer interactions shift to digital channels, there is an opportunity for traditional firms to learn from tech firms. For instance, Amazon attributes 35 percent of its sales to cross-selling7 – it has achieved this by creating hyper-personalized customer experiences on the back of data and AI. Taking a leaf from their playbook, here is how a bank might want to approach the personalization challenge:

• FAANGs pioneered the idea of ‘Segment of 1’ – intending to move away from the traditional idea of broad segments, which limited personalization – to develop micro-segments with a two-pronged strategy. This strategy enabled them to engage with customers with a high degree of precision, which in turn has significantly expanded the customer relationship and share of wallet for them:
  • Identify transactional and behavioural attributes that help define customer characteristics to a high degree of personalization. For a bank, this would be along the multiple dimensions of wealth and income, financial acumen and digital sophistication.
  • Approach segmentation as dynamic. Over a customer’s life journey, the need states and capabilities (especially financial status), and hence, behaviours, continue to evolve all the time. And with that, the segments will need to be refined with ever-increasing frequency.
• As banks’ understanding of customers deepens with micro- segmentation, it becomes possible for them to design personalized offers tailored to specific customer micro-segments and layered with customer-need states. For a bank facing limited net growth in new customers, it is critical to design and offer products and services which cut across product lines. Personalized engagement needs to be addressed in the following dimensions:
  • What is the most relevant product/service?
  • What is the right channel? A bank would need to factor in the possibility that customers can switch channels within specific interactions. For example, a customer might respond to a digital offer by calling into the call centre and/or walking into a branch. The bank needs to have the capability to provide a seamless experience to the customer through these channel hops.
  • What is the right engagement frequency? Unlike in retail shopping, customer interactions with banks are relatively low-frequency, with a high-value transaction happening only once in a while. This requires the bank to be able to drive the right frequency of engagement across its channels to be able to truly capture the customer’s attention at the right time with the right product/service.
• And last but not least, the traditional notion of customer lifetime value (CLV) was pioneered in the retail industry and embraced by banks over the last two decades as an underpinning for loyalty programmes. As loyalty, especially among gen-Zs, wanes, it is time for banks to start moving away from attempting to predict the total lifetime value of customers and instead focus on the ‘next best action’. The goal is to predict immediate actions that are likely to have the highest customer impact and hence maximum response rates.
• This is becoming even more important in the highly volatile and uncertain economic environment that we have today. For instance, in the current sluggish economy, a bank should focus on protecting its credit customers by driving actions sensitive to their need states. A proactive adjustment offer of loan refinancing with the focus on the customer’s current situation, as opposed to a reflexive reaction to an eroding CLV, for example, could go a long way in building customer loyalty.