aba banking journal - october 2008 - rethinking segmentation

8/12/2019 ABA Banking Journal - October 2008 - Rethinking Segmentation

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ONTENTSD E P R T M E N T S

BRIEFINGFAN/FRED FALLOUT A banker's view of FHA'sHope for Homeowners. program 7What you must know now about thenew federal anti-foreclosure effort.By Bill Streeter Covered bonds gain interest

after GSE takeover 12How this successful European tool canhelp U.S. rebound. By ]erry MarlattSnapshot: Branch sales sagto ten-year low 8By Maria TorRemembering Joe Kizzia, veteran editorof ABA Banking ]oumal 63

100th Anniversary:Then & Now 64Late-'60s saw the birth of thatlong-lasting favorite- Reg Z

ABA RESOURCES 15COMMUNITY BANKINGHot, web, and green . . . . . 18i l llA Internet deposits may be

1 \,r 1 hot, but a new auction siteand two additional thirdparty, internet-based services just mightshow you the money. By Steve Cocheo

TECH TOPICSMortgage IT: Not thisyear's hot property 54What types of technologieswill sell now that lending ison the slow track?By Lauren BielskiCase in Point: Looking for sales in all

the right places 56COMPLIANCE CLINICPut your BSA/AML programinto shape 58Common sense plus hard work makes abeginning. By Steve CocheoMailbox 59

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COVER STORY: RETAIL BANKING REPORTRethinking segmentation 26By Stephen Onufrey and Howard Moskowitz Common sense tells you thatno two customers will react to what's in your branch in exactly the sameway. But predicting who willlike a new service requires a look at a customer's self-service style and situational objectives. Research from two industry experts offers surprising findings on engineering a banking experiencethat resonates.

i l l i i : : ' ~ u : r - : - : : : : : Still pushing the envelope 36By Lauren Bielski For Umpqua Bank CEO Ray Davis,an out-of-the-box retail banker, culture and empowermentare what have made the Oregon-based bank consistentlysuccessful, not its offbeat branch designs.

D.C. DIALOGUEKeep regulation functional 42By Ed Blount It's legislative karma: As a congressman,Christopher Cox helped pass Gramm-Leach-Bliley-as SECChairman, Cox had to sort out implementation of Reg R. In aninterview, Cox holds forth on the roles of the SEC and the Fed.

- - BASEL IMPACTCapital windfall? 46By GeoffreyRubn and William Nayda A majority of bankscould see reduced capital requirements under the optional BaselStandardized Approach. Sorne, however, would be required tohold more capital. Here's why.

B BANKINGJOURN L ? fWEB EXCLUSIVES ON ABABJ COM U nderstanding the digital native In the Talking Credit blog: creditcommittees; CRE exams

OLUMNSEditor s Column 4P.T. Barnum capitalismABA Chairman s Position 5Our competitors just won't takeno for an answer

Banker's Mart 0To advertise/Index of advertisers 62[ The Economy appears this monthin the Digital Magazine, p 64a,www ababj com]

Coming in November s ABA 8 OOth Anniversary Special lssue Profile of incoming ABA Chairman Arthur Connelly Paul Volcker, Dick Kovacevich, Ed Yingling, Jim Culberson, Billlsaac, Walter Shipleyand a CEO panel discuss historie issues, current trends, and banking's future

ABA BANKING JOURNAL/OCTOBER 2008 3


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RETAIL BANKING REPORT

Rethinkins gmDemographics are only part ofthe story. H ow customers reactto a series of vignettes helpsbanks get inside the customer smind, heart, and emotions.ere s how the process wasapplied at one large retail bank

n their seminal work The ExperienceEconomy, Joseph Pine and James Gilmore identifiedCustomer Experience as the emerging key differentiatorin today's services economy. That was almost a decadeago. Yet a positive, differentiated, memorable and engaging customer experience continues to remain an undefined and elusive goal for most banks. More than ever,banks recognize that their products and services areviewed as commodities. Bankers, vendors, technologists, consultants, customer advocates and industrypundits all have opinions on what the key elements are of anexceptional customer experience. But how are those opinionsvalidated with the customer who will actually have the finalvote? Usually, it is done with a series of focus groups that finetune financia products and services after they already have beenbuilt, when the major decisions are cast in stone.W e present in this article a new approach to solving the issueof creating an exceptional customer experience in banking. Thepredictive analytic techniques are not new. They have beenproven in successful use in the consumer goods and manufactur

ing sectors for over 25 years. What is new is the application ofthese techniques to the banking and financia services industry,and to the realm of experience engineering. And, they deal withthe newly emerging notion of "addressable minds." Knowingy Stephen Onufrey and Howard Moskowitz, PhD. Onufrey

is retail banking solution executive for the SRO Group, LLC.He spent 38 years wit h I M and two with Unisys working onretail banking solutions. Moskowitz is president of Moskowitz]acobs, Inc. A pioneer in the field ofpsychophysics (the studyof perception and its relation to physical stimuli), he wasinducted into the Hall of Fame of New York s MarketResearch Council in 2006.

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experience for that customer.

the 'mind' ofthe individualcustomer lets thebank create the exceptionalThe article is based on our work with a large retail banking

company. The work focused specifically on questions relating tocustomer acceptance of new technology-based services.The chief technology officer of that bank was faced with thetask of recommending new technologies that will be cost justifiedand will also provide an exceptional customer experience. A predictive analysis study was performed in order to determine thepotencial impact of specific new technologies (including RFID-radio frequency identification) to the customer experience.The resulting data is useful in its own right, but more important, we feel is the methodology and approach to customerexperience research. Other banks can measure their own effortsagainst the approach used here.Here are four broad findings from the project1 No future experience really strongly appealed to or repelled. the average person. The "average person," as we will see is amyth. Experience can be engineered, but not by looking ateveryone in the aggregate. In fact, the average reaction to "newideas," the substance of the new experience, was neutral tosomewhat negative. Scratch winning ideas for everyone W ehave to dig deeper to engineer a better experience.2 With the traditional subgroups-sex, age income we saw. sorne differentiation. The new, technology-based ideasappealed more to men under the age of 40 who had an income inexcess of $40,000 per year, for example. Still, there was something missing. l t was clear that going about dividing people the

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Roberto E. Jalon GardellaEXPERIMETRICALAv. 11 de Septiembre 1881 ofic 1620 ProvidenciaSantiagoChileTel: (56-9) 90684003http://www.mji-designlab.com/index.php?id=15&L=0


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way we'd always done it just wouldn'tgive us the big hits for the future that weneeded.

3 W e began to hit sorne pay dirt with self-explicated groups who definedthemselves as technophiles and techno-phobes. The technophiles, as you mightgather, liked the new tech-basedexperiences. But still there was somethingm1ssmg.4 Response-based segmentation- where we divide the group into smaller segments based u pon how they react tofuture ideas was where we found thereal pay dirt; things that really excitedpeople. W e uncovered windows of des ir efor different customer experiences, andgroups of people who would relish them.As described later on, we found four radically different groups, for which wecould develop different experiences.The customer survey results were eyeopening. A new offering would create acustomer advocate in one market segment, yet that same offering couldbecome a customer detractor to anothermarket segment. For example, using cellphones to identify customers when entering a branch received the highest votefrom one group and the lowest fromanother. The important thing was thecombination of specificity to knowexactly the feature to offer, and to knowprecisely the response from the segment.That allowed the prediction of the optimum customer experience, or experiences.The key to using this predictive analysis technique is to reflect each bank's owncorporate DNA. Surveying existing andtarget market segments and using bankunique questions will help the bank to notonly define its exceptional customer experience but also to help ensure success ofthese initiatives.N ow let' s move to the details of predictive analysis and addressable minds inthe banking industry.Customers design the futureIn this particular case we were not dealingwith physical products, nor were wefocused on the world of today. Rather, wewere dealing with the near-future worldof banking as people would like to have it,but at the same time a world so full ofnew technologies that it's hard for peopleto say what they want.28 OCTOBER 2008/ABA BANKING JOURNAL


h t l p / / 1 1 5 9 1 0 G 5 3 H 6 J i w f r l l l l 8 o s p lollcrosoft Internet [xplorer

Connect onhne in real me with e customer rep Yia instant messeging ,voice cwer IP or\lid oconfarenong Vla your computerWe offer a bank.lssued smart card so we can recognize you entenng lile branch and process your needsrasterNew technology tnsures constslent bankmg elCpenences onyour computar, PDA or cell phone. at ATM Scwer lhe phone

Use one encrypted password roran banking se > i c e s \lia Internet. cell phone or PDA

GJ(D[D[I)[Dsffi(D(Dill -Jm)hlnking a.bout vour curren Banking Eperience, howwould yo ufee l if your bank offered these expa.nded servlces? 1-LESS satJS lil d. 5-TIIe SAME,10 sousfil d t-

Figure 1: Screen shot of a typical concept or vignette for the next-generation bankAt an early point in the developmentcycle the issue on the table was simplyhow to get into the mind of a bank customer to find out what was appealing. twas pretty easy to define customers bytheir banking patterns, and even by theway they described themselves when itcomes to technology in banking (e.g.

bank by internet). What wasn't so clearwas whether lurking in the backgroundwere unexpected mind-sets.The team turned to systematics-a disciplined experimentation with ideas usingan approach called RDE, or rule-developing experimentation.RDE shows the 'algebra of the mind.'The goal was quite simple learn therules of the bank customer's mind, whenit comes to bank-related technology.Furthermore, it was important to get itright not just get politically correctanswers that are often obtained whenbank customers go through batteries ofquestions asking 'would you like or dislike this feature.' Instead, we presentedbank customers with a variety of vignettescontaining descriptions of a bankingexperience as the customer wouldencounter it. W e could then discoverwhat particular features in a vignettedrove acceptance of the experience.For the bank in question, we created 24tech-related service options (experienceideas that the bank could feature), fallinginto six different broad customer categories (e.g. "Online collaborative"). The

24 elements were the basis for an onlinesurvey that presented one or more elements as a vignette (see Figure 1). Each of267 participants saw different vignettesand rated each one.Note the rating question at the bottomof Fig. 1: "Thinking about your currentbank experience how would you feel ifyour bank offered these expanded services?" W e put the question as a responseto an actual combination of features. W edidn't ask the customers, "Would youwant it or not?" because most people willsay they want most things.The vignettes describe a complex situation, often with sorne elements thatappeal, and other elements that don'tappeal. So the vignettes force the participant to integrate all of the informationand make a judgment. Even though thecombinations looked random, they werenot. Rather, the combinations were developed in a systematic way so that the 24elements really appeared as independentagents. Statistically we could discern whateach of the elements contributed to therating.Further, in the rating question we hinted that this vignette would be a set ofexpanded services. The participants arereacting to something that could be notsaying whether they would like it to be.That is, in the interview we're acting as ifthe services already exist, and the participant is rating the set of services, ratherthan selecting from a "wish list."



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Finally, rather than having the participant grade degrees of goodness, we havethe scale move from less satisfied to indifferent to more satisfied. We actually allowthe new ideas to be far worse than the current ideas, which happened in sorne cases.Further, we ask the participants to compare the new vignette implicitly to whatthey currently are experiencing.Different strokes for different folksTo keep things simple, we divided the 67participants into four different segmentsor groups, looking at the patterns for each.(Don't divide people into more groupsthan is absolutely necessary, becausewhen it comes time to create new services,fewer segments are better from the viewpoint of operations and marketing).Individuals in a specific segment showedrelatively similar patterns in the specificsthat appeal to them. Individuals from different segments showed relatively dissimilar patterns.Whenever we divide people by theirrevealed mind-sets (i.e. by how theyreact to things, not by what they sayabout themselves), we have to keep threethings in mind. First, we want to be ableto work with mind-sets that differ radically from each other. Second, we want tobe able to interpret these mind-sets.Third, and most important, we want tofind opportunities to create a stellar banking experience by discovering whichmind-set a particular customer has, andoptimally addressing that mind-set.The four segments for this particular

Table 1


research project (again, focused on technology-related services) are as follows:Segment 1self-reliant online

banking seekers)This segment comprised around 40%of the participants. They really didn'trespond to much. About the only strongelement is the real-time feature ( W e willanswer all your requests in real time byemail, instant or text messaging ). It'simportant to realize that not everyonewants the next-gen bank. This first segment provides us with a dos e of reality-and cautions us not to think that everyoneis waiting for this new bank.Segment 2

technology and highsecurity seekers)This segment was about 20% of theparticipants. They respond strongly tosecurity, and to security backed up bytechnology. Thus they will really feel thatthey have an improved experience if thebank can facilitate transfers safely andelectronically (e.g. Securely access andmanage accounts or funds transfers byPDA, Internet or automated telephone ).They also feel strongly about security.Segment 3collaborative online seekers)This segment comprised about 20% ofthe participants. They like working withthe bank's staff, in a collaborative mode-e.g. Faster loan application process.

Segment 4personal touch withtechnology seekers)This segment also comprised about20% of the participants. They want sornefeeling of connection with the bank, butalso want a feeling that they are recognized as individuals. This idea appeals tothem, for example: Manage all you banking needs with self-service state-of-the artkiosk and be confident that live help isavailable if needed.The segments liked different things, but it'simportant to realize that each segment exceptself-reliant online banking seekers can bet TTIIy delighted by the correct choice of offerings from this next-gen bank. This is what wewere looking for the breakthrough ideasthat touched sorne of the customers, if not allof them. Now we had the building blocks,which could be assembled in any way wewished. Plus, we hadan advantage-we hadareal sense of how the world works in the customer's mind for these features.Dialing a bank opportunityWe'd like to end this piece with a visionof how a bank might engineer the futureusing the knowledge obtained from thisand other similar projects. Let's do anexercise that this bank's planner mightfollow, to create three features, which intotal appeal to our three responsive segments-segments 2, 3 and 4, respectively.(We won't bother trying to satisfy segment 1 because there was nothing in thisparticular project that really appealed tothese people.) Continued on page 4

How a set of messages given toa customer will perform for customers overall and customers in the four mind-sets.Choose a secure eye We have a secure Securely access and Base interest Total: Base plusor finger security electronic signature manage accounts (constant) element contributionsean to identify you for all in-branch or funds transfersimmediately in- services and by PDA. Internetbranch and at ATM transactions. So or automatedbanking can be done telephoneanywhere at any time

All segments 4 2 3 31 40Segment 1 Self-Driven 3 -4 -3 34 30Online seekersSegment 2 Technology/ 10 -2 18 28 54High-Security seekersSegment 3 Collaborative 1 4 6 31 41Online seekersSegment 4 Personal Touch 3 17 -2 26 43with Technology seekers

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T o do this, we use a concept optimizer, a tool to sift through lots of ideas, andfind combinations that work togetherwell. Then, we'll finish by developing atyping tool. The objective is for a bankrepresentative to sit with a new customer,figure out which segment the customerbelongs to, and then look on the computer to find out what features, what messaging, what tonality appeals to this segment. This is where the notion of addressable minds earns its keep. The bank representative speaks now to the customer inthe way the customer wants, addressingthe mind-set of this particular individual.Thirty minutes later, the customer andthe bank representative should be deep inconversation about the cross-sellingofferings that appeal to the segment towhich the customer belongs.Keep in mind we're not creating anaverage experience. Instead, we are creating a far-better-than-average experience,knowing that our target customer groupsare looking for different things. The bankplays the role of master blender of thesedifferent needs.Table 1 (p.30) shows the results of sifting through the data. The top row showsthe three elements which together drivethe response, and which attract the different mind-set segments. We see immediately that, in this case, there are no big hitsthat appeal to everyone, which preventswasting time looking for a magic bulletthat does not exist.W e see that each of the three elementsdoes either well or poorly in a particularsegment. N ow that we have chosen thesethree elements we can take their utilitiesor impact values and add that to the baseinterest. The total represents the proportion of people who would say that theyfeel more satisfied.If we didn't have to satisfy all three segments, but rather only two, we might fea-ture a different, even better combinationof elements. W e wouldn't worry so muchabout satisfying everyone. In fact, whenwe look at Table 2 we find that the morewe focus on one segment, the more likelyit will be to create far more spectacularexperiences because we will have isolateda group with a specific mind-set, knowwhat appeals to them, and not need toworry about the other segments that maybe less satisfied. That is a business decision to appeal to a larger group with agood experience, or a mind-set segmentwith a great experience.

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Final step: "Typing" a new customerto create an addressable mind"Let's now fast forward a bit, say threeweeks after the experiment has been run,the data analyzed, the segments determined, and the selling messages developed. We know from looking at Table 1that we can select a product offering andexperience for any segment, or any combination of segments.When a new customer comes in, thebank can type this new customer asbelonging to one of the four segments,and then dial up the offer for the customer, once it is known to which segmentthe customer belongs.To continue the example, let's use theactual data to create four questions totype the customer. We see these questionsin Figure 2. Each question comes fromthe original experiment where we discovered the hot buttons, and the segments.The typing engine calculates the composite score and discovers the segment towhich that customer belongs. The customer has just turned into the addressable mind, whose responses to newofferings can be predicted.Depending on the segment, the appropriate products and services are presentedto the customer with the selling messageswhich were previously determinedUltimately, the bank representative now

knows what to offer and how to presentthe offer.What comes next?l t s clear that those banks that can differentiate themselves with an excepcionalcustomer experience will set themselvesapart from the perception of commoditythat customers have of banks.Banks can change their advertising,marketing and branding, but without theindividual customer experience to drivethose changes, the customer will seethrough the facade and vote with theirfeet by leaving. Today through systematic measurement, experimental design,customer typing, and creating addressableminds, it is possible to create that wonderful customer experience which incorporates the customer needs with thebank's unique DNA. BJ

For more information about the tech-niques described here, read the full whitepaper on www.ababj.com Follow:Content Central Retail Ranking/"Inventing the future o retail banking").For further reading, try Selling BlueElephants: How to make great productsthat people want before they even knowthey want them, by Howard Moskowitzand Alex Gofman (www.SellingBlueElephants.com)

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No more paper mall - we wlll send you cop ies of stataments by secura e-mall

Socurely manage your account by PDA , Internet of automatad lelephone

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Manage all your banklng needs wl th a state of the art klosk and be confldenttha.lltve help ls avallable lf you need

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Figure 2 Four questions to be presented to a customer by the customer service representative Thecustomer rates each question and the typing engine determines which segment he or she is in basedon the composite response


aba banking journal - october 2008 - rethinking segmentation

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