New Frontiers in Credit Card Segmentation: Tapping Unmet Consumer Needs 11

New frontiers in credit card segmentation: Tapping unmet consumer needs 11 New frontiers in credit card segmentation: Tapping unmet consumer needs Credit card issuers have traditionally targeted consumers by using information about their behaviors and demographics. Behaviors are often based on credit bureau reports on how a person spends and pays over time; customers are typically categorized as transactors, revolvers or subprime. Demographics are derived from census reports and other non-financial databases and cover facts such as income, age and geography. This model has served the industry well for decades, enabling it to offer three main card types—rewards, low-rate and subprime—to cater to different users. Luke Fiorio However, with the dramatic decline in ac- mand for their product by providing only the quisitions over the past five years, issuers benefits that customers value. The challenge Robert Mau competing in similar segments with similar for issuers is aligning the right value propo- Jonathan Steitz products are finding it hard to differentiate sition with the right consumers. The ques- Thomas Welander themselves: The total number of accounts at tion is: how do issuers develop a suite of top issuers has declined by an average of 4 credit cards that fulfill customers’ needs percent over the past five years according to more precisely without piling on features The Nilson Report. The result is a race to at- that add needless complexity or are not val- tract new accounts. Some issuers have of- ued by users? The answer lies in a more nu- fered as much as $400 to customers signing anced and powerful approach to customer up for a new card, and the top five U.S. is- segmentation—one that can, by extension, suers are spending over $100 million a year be adopted across a range of consumer fi- on advertising campaigns. But as switching nance products and markets. incentives rise, profit margins inevitably fall. This approach has already been used suc- Issuers do have an alternative: they can cessfully for two recent credit card launches maintain a profit margin and generate de- in the U.S., as well as one in Brazil, where a 12 McKinsey on Payments May 2014 large issuer identified three distinct cus- Targeting customers more precisely through tomer segments and shaped an integrated smarter segmentation is easy to agree with approach to the design of new products, but much more challenging to pull off. The messages and channels; the bank expects to secret lies in a hybrid approach that segments see new accounts grow by 2 to 5 percent as it customers primarily by their needs and atti- rolls out the cards in the coming months. tudes—exposing the underlying reasons why customers use their credit cards—but also A new twist on needs-based takes into account a small number of finan- segmentation cial behaviors (see sidebar, pages 14 and 15). Attempting to develop a deeper and more Adding these measures to the mix provides rounded view of consumers is nothing new. further representation of underlying needs Institutions have long sought closer connec- and makes the segments easier to score in an tions with customers, but have struggled issuer’s database. Armed with this segmenta- with limited data and arm’s-length interac- tion, card issuers can not only craft better tions. However, the two-way communica- value propositions but also identify groups tions opened up by online and mobile that are not well served by current offers. channels enable today’s issuers to capture much more information about each cus- Fine-tuning offers to meet distinct tomer, information that can be used to exe- customer needs cute a sophisticated needs-based McKinsey’s Global Concepts Consumer segmentation. (See previous article, “Digital Life Survey provides an example of how banking: Winning the beachhead,” for more adding financial behaviors into the mix re- on leveraging customer behavior data for sults in segmentation that is more sharply more advanced segmentation.) By connect- differentiated: ing data on how people spend, save, shop Segment 1: Prosperous and content Armed with enhanced segmentation, People in this segment keep their finances in card issuers can not only craft better order, use credit cards for 59 percent of their purchases and love rewards; they dislike re- value propositions but also volving debt. They look for convenience and identify groups that are not well served minimum effort, preferring to “set it and for- get it” rather than get closely involved with by current offers. banks or card issuers. This is the wealthiest segment in the McKinsey segmentation, and travel, banks can bridge the gaps be- with an average of $503,000 in household tween business lines, enhance their cus- financial assets, five times the average for tomer knowledge and improve cross-selling. credit card holders. It also has the highest To do so, they need to have the right mes- concentration of premium network card sage and product available in the right chan- users at 17 percent, twice the average. nel when a potential customer comes looking. This is the new frontier of segmen- Getting a card into this segment’s wallet in- tation, channel and product strategy. volves offering rewards. To differentiate their New frontiers in credit card segmentation: Tapping unmet consumer needs 13 card, issuers should position it not merely as a quently, with half making online transactions spending instrument but as a tool that facili- three times a week. tates financial success through ease of use. For Acquiring and keeping these customers calls instance, if a credit card could offer a means for a balancing act, as they see themselves as of steering a large purchase straight into a pitted against issuers in a win-or-lose game. low-rate installment loan, it could meet this Always striving to borrow at the lowest cost, segment’s occasional borrowing needs without they try to steal the bait from issuers’ traps the stigma or higher interest rates associated without triggering fees or higher rates with revolving credit. through mishaps or oversights. To build fi- delity, issuers could foster a sense of part- Acquiring and keeping deal chasers nership rather than competition by making calls for a balancing act, as they see these customers feel they are getting the best deal and occasionally satisfying their ap- themselves as pitted against issuers in petite for a great new offer; all, of course, a win-or-lose game. Always striving to while ensuring the product remains prof- itable. A big sign-up or annual bonus can be borrow at the lowest cost, they try to justified, for instance, if a customer is likely steal the bait from issuers’ traps to spend heavily and fund the offer through interchange revenue. without triggering fees or higher rates Segment 3: Financially stressed through mishaps or oversights. People in this segment carry heavy credit Segment 2: Deal chasers card debt—nearly four times the average, at $7,453—and consider themselves unable to With average revolving debt of $3,802— control their spending or stick to a budget. twice the average—these cardholders move Some are chronic spendthrifts; others are their balances around to chase the best mired in circumstances that force them to transfer rates. This segment is the most likely borrow on credit cards to pay for essentials. to have a cobranded card (24 percent com- They seldom shop around for better places pared with 17 percent overall) and to pay an to put their outstanding balances and doubt annual fee for a reward card (19 percent they will ever get out from under their bur- compared with 13 percent). Deal chasers are den of debt. They expect financial trouble highly involved with financial products and for themselves and the wider economy. This are nearly as satisfied with their financial sit- is the poorest among the segments, with just uation as the prosperous and content seg- a quarter of the financial assets (a mean of ment (34 and 37 percent respectively, $44,000) of the average cardholder. compared with 20 percent overall), and rank second in both income ($65,000 median) Credit plays a crucial role in satisfying this and financial assets ($150,000). Despite car- group’s day-to-day needs: keeping a roof rying higher debt, they are confident about over their head, paying for their daily com- managing it and view the economic outlook mute, keeping a prescription filled. This is as positive. They use online banking fre- not a sustainable path, but they are unable 14 McKinsey on Payments May 2014 McKinsey’s U.S. Consumer Financial Life Survey McKinsey’s Consumer Financial Life Survey is an ongoing survey taken three times a year since 2009. Since the survey began, 24,000 U.S. consumers have taken the 30-minute self-administered interview. Topics explored include financial behaviors, preferences and motivations, with an empha- sis on payments. The data from the survey were used to create a needs-based segmentation of U.S. credit card holders that yields a more comprehensive picture than traditional demographic- and behaviors-based segmen- tations (Exhibit A). The five groups identified by the segmentation are distinguished by members’ economic circumstances, household money management style and reasons for using credit cards on various purchasing occa- sions. In addition to needs and attitudes, the segmentation takes into account certain spending behaviors that can be identified from customer data—namely, the volume of household expenditure, the proportion spent on credit cards and the proportion of revolving debt to income—in order to score customers and prospects more accurately into segments. Notably, these behaviors correspond to underlying needs that can be addressed by a credit card product.

Load more