“The more you engage with customers the clearer things become and the easier it is to determine what you should be doing.” – John Russell, Harley Davidson
In order for your company to be competitive you need to clearly define the value you provide. The more customized your company can make their relationship with the consumer the more likely it is the customer will buy from you. This is true of any industry and banking is no different.
This article is the first article in a 3 part series
Consumers want to work with a financial company that understands who they are, what they need, when they need it, and how they prefer it to be delivered. Just like Amazon or Google customizes your buying experience with them, you should customize the lending experience for your customers.
So, where do you start?
Do you start by A/B testing messages on your website? Do you start with personalizing emails to your customers? Do you start by customizing the in-person experience at the branch? Do you start by producing a targeted campaign?
Although all of these items are things you should be thinking about and implementing, they are not the starting point. The starting point for lending customization is by understanding what your customers need by organizing them into financial states.
Financial states are essentially groups of customers segmented by their “financial maturity”. Financial maturity in this context represents a combination of a person’s experience with financial products, current stage of life, and existing relationship with your financial company.
Demographics, such as age and marital status, and financial experience, such as products owned, balance histories, transaction histories, etc., all play a role in determining a customer’s financial maturity and therefore their financial state.
There is no “right” way to create financial states. It is suggested that the optimal number of financial states should be between 3 and 10, but some institutions will have less and others may have more. Keep in mind that the more financial states you have the more difficult it is to manage and organize each of your customers into one of these states. Minimizing the number of financial states also forces you to think carefully about what truly comprises a financial state and makes it easier to perform predictive analytics.
Because financial states can be organized in so many different ways we suggest you start by grouping individuals with the following common demographic and financial metrics:
Experience with Financial Products
- Current Products Owned – this includes all products the customer owns (i.e. Checking, Savings, CD’s, Credit Cards, Loans, etc.).
- Number of Credit Applications – The total number of credit applications the customer has applied for over their lifetime (credit report)
- Number of Loans Over Lifetime – Total number of loans the customer has had with your institution.
Stage of Life
- Age – is current age of the customer.
- Marital Status – is whether or not the customer is married.
- Own vs. Rent – Whether the customer owns or rents their primary residence.
- Education Level – The level of education the customer has (High School, Bachelors, Masters, PhD, etc.)
Relationship with Company
- Tenure of Customer – measures the length of time a customer has been a customer.
- Monthly Interactions with Company – The number of times your customer interacts with your company on a monthly basis (Internet Banking, Visiting Branch, Receiving Email, Receiving Mailers, etc.)
- Number of Complaints – Total complaints customer has placed against your company
One general approach to creating groups using multiple variables is cluster analysis. There are several different types of cluster analysis such as Hierarchical, Centroid, Distribution and Density based. Often the best method for a given situation must be determined by experimenting, but ideally clustering can be used to identify the number offinancial states and which customers belong in which state.
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