What is Customer Segmentation? Benefits, Examples in Banking

Consumers have grown to expect personalized and tailored experiences from their financial providers. And, they are ready to share their data in exchange for more relevant experiences.

In fact, MX research found that 55% of U.S. consumers agreed they would give their financial provider access to more of their data if they knew it would result in a better experience. But, if they share their data, they expect financial providers to actually use it.  

65% of U.S. consumers agree they expect their financial institutions to use the data they have on them to provide them with actionable and clear insights about their finances. 

One-size-fits-all approaches don’t meet this expectation. Financial providers need to leverage the data that consumers share to create effective customer segmentation to meet their unique needs. 

In this post, we’ll cover:

• What is Customer Segmentation?
• Why is Customer Segmentation Important in Financial Services?
• Benefits of Customer Segmentation
• How Does MX Support Customer Segmentation?

What is Customer Segmentation in Banking?

Customer segmentation is the process of dividing a customer base into smaller groups using a variety of shared characteristics. It helps businesses better understand the trends, habits, and needs of each group. 

With customer segmentation, businesses can target and message their customers based on demographic, geographic, psychographic, and/or behavioral characteristics. By segmenting customers according to specific needs, preferences, and behaviors, businesses can more effectively tailor their marketing, products, and services. It helps companies know and reach the right customer base with the right message, product, or service at the right time. Consumers can occupy multiple segments and segments change and evolve over time as consumer behavior and needs change. 

Within banking, customer-permissioned financial data enables financial institutions and fintechs to segment customers based on characteristics such as spending affinities, risk tolerance, credit history, income, spending and savings habits, investments, financial management behaviors, etc. 

Why is Customer Segmentation Important in Banking?

Customer segmentation is a valuable tool for any industry, but none more so than financial services. The money experience is deeply personal. Each consumer has a different set of circumstances, goals, and life moments that influence the financial products and services they want and need.  

Customer segmentation allows financial providers to deliver more personalized messages, offers, and experiences at scale for consumers. And, with the rise of Open Banking, financial providers have access to more consumer-permissioned data than ever to understand customers on a deeper level and segment accordingly.   

Benefits of Customer Segmentation in Banking

Customer segmentation improves financial products and services in a variety of ways that benefit both the consumer and business. 

Benefits for Consumers

Some examples of benefits customer segmentation provides consumers are:

1. More Personalized Products and Services

Segmentation ensures that financial institutions offer products that suit the specific needs and goals of different consumer groups. For instance, consider the needs of different generations: Gen Z customers who’ve recently graduated may benefit from an offer to refinance their student loans while Baby Boomers who have been out of school for some time would likely not benefit from this same offer.

The more data a financial provider has, the more they can use customer segmentation to tailor products and services to meet specific needs. This means consumers get exactly what they need, instead of being overwhelmed with options that don’t apply to them.

2. Increased Customer Satisfaction

When financial institutions understand a customer’s needs, behavior, and preferences, they can provide more relevant experiences, which improves customer satisfaction and loyalty. Consumers may receive tailored financial advice, faster and more informed responses to questions, and better services that support a consumer’s financial goals. 

3. Improved Financial Advice

Navigating finances is challenging and many consumers struggle to do so on their own. MX research found 50% of consumers see money as their main source of stress and 44% say they struggle to make ends meet. Whether in boom or bust, consumers want their financial providers to offer personalized advice on next steps. Customer segmentation helps financial providers offer more relevant advice to a wide range of customers.  

4. More Relevant Offers and Promotions

Instead of receiving generic marketing offers, consumers benefit from receiving deals and promotions that actually make sense for them. If you’re a recent college graduate, for example, you might get offers for first-time homebuyer loans or low-fee credit cards, rather than irrelevant offers targeted at different groups.

Benefits for Financial Providers

Examples of the benefits of customer segmentation for financial institutions are:

1. More Effective Marketing and Communications 

Even a financial provider with the best products and services will still struggle if they fail to put them in the hands of the consumers at the opportune moment. By marketing specific and tailored campaigns based on customer segmentation data, financial providers get relevant and actionable insights into the hands of their customers when they need it. 

2. Boost Cross-Selling Opportunities

Segmentation allows financial institutions to identify opportunities for cross-selling relevant products to their customers. As customers progress in their lives and financial journeys, they move through different segments and their needs change. By understanding how individuals progress through segments, financial providers can meet consumers where they are and provide actionable insights for their customers’ next steps. 

3. Improved Engagement, Retention, and Loyalty

Personalized services, relevant product offerings, and proactive customer support help build stronger relationships, which in turn increases customer loyalty. Satisfied customers are more likely to engage and remain with the institution for the long term, increasing satisfaction and reducing churn.

4. Optimized Product Development

By analyzing customer segments, financial institutions can identify gaps in the market and develop new products tailored to specific groups. By actively assessing customer segmentation data and looking for trends and changes, financial institutions can have a head start on where the industry is headed and be the first to market with new products and services that will serve customers in the future. 

How Does MX Support Financial Institutions with Customer Segmentation?

At MX, we believe that by leveraging consumer-permissioned data, we can help empower the world to be financially strong. This belief is reflected in the products and tools we create to help financial providers deliver better money experiences to consumers. 

For instance, our Customer Analytics solution enables financial institutions to surface deeper insights about their customers with world-class data, clear segmentation, and unified data sets. It combines consumer-permissioned and enhanced transaction data into a centralized, comprehensive set of intelligent models, dashboards, and analytics tools all of which can be easily embedded into marketing automation platforms and CRMs. Our approach enables a new way to retrieve data and break analytics down to a set of actionable attributes.

But, "..having the data is just the beginning — you have to do something with it. Those who can effectively drive that next action will see tremendous results," says Billy Gast, Senior Director of Mobile and Experiences Products at MX. 

MX also helps financial providers transform that data into action — with personalized insights, proactive recommendations, and more.