Dynamic Segmentation: Bringing the digital age to corporate banking

By: Gordon Gray
October 2015

GORDON GRAY

GLOBAL HEAD – FINANCIAL SERVICES
INDUSTRY PRACTICE SUNTEC BUSINESS
SOLUTIONS

Gordon is responsible for thought leadership on transformational business solutions both internally within SunTec and across the Industry informed by over 20 years of innovative marketing and revenue management experience in financial services As a former Managing Director at Charles Schwab where he drove the development of comprehensive, omni-channel offer management, he selected SunTec as a key strategic partner in streamlining and controlling revenue management across multiple business lines and subsequently joined the firm. 

Today’s rush to develop real-time customer-centric mobile channels mesmerizes retail banks’ boards. Newly recruited Chief Digital Officers are funding transformation projects to catch up with digital native brands such as Apple, Facebook and Google.

Investors are piling over $12 billion into financial technology ventures annually, leaving the bank’s usual annual IT project budget seriously outgunned. Other strategies include TD Bank’s partnership with Moven, BBVA’s acquisition of customer experience design firms and the rise of ‘Challenger banks’ in the UK and India funded by government fiat.

Clearly dynamic high-tech challengers with deep pockets and e-commerce roots have set their sights on high-profit retail financial services such as peer-to-peer payments and personal loans. Soon, these disruptors will press their low cost, streamlined experience advantages on corporate and SME banking markets.

Customer expectations across retail, corporate, and investment business Lines already far surpass what banks can consistently provide. The jarring transitions which customers have to navigate as they move from smartphone enabled real-time experiences to interact with banks in other channels, thanks to batch-based, siloed, legacy system architecture, create frustration.

This digital divide around customer experience is the challenge and the opportunity for corporate bankers of tomorrow. Those who learn fastest stand to gain the most.

Joined-up thinking

A key concept from retail banking is dynamic segmentation or the ability to customize offerings to individual customers’ needs in real-time. But can the manual corporate banking processes even be digitized? It turns out they can and indeed need to be.

A dynamic segment could for example be created for corporate clients whose cash on hand increases more than 30% over a three month rolling average. Past experience may prove such firms are ready to expand and need additional services to match their increased business flow. Systematically enrolling a firm in this dynamic segment could enable a series of internal alerts to their relationship manager and offers can be systematically or manually presented.

At first glance, this is akin to the highly-tailored service levels which corporate banking promises now. In reality, though relying on individual relationship managers to track such a broad range of dimensions for their book of business using current manual procedures is unworkable.

Complicating matters, each corporate banking customer typically negotiates specific deals based on certain volumes of business. Because each product and service area is typically run independently and coordinating appropriate real-time changes is impossible.

Even visionary corporate bankers struggle to provide exactly what the customer needs, whilst maximizing profits for the bank. This can have unintended consequences.

For instance, negotiating a simple corporate Lending facility requires several different interest rates for each customer, even when their immediate needs are identical, because each customer is valued differently by the bank. Without such customer relationship oversight, one-off deals may be poor ones for the bank.

Interest rates are of course directly Linked to bank profitability, so an inability to look at the holistic risk profile of a client is a prelude to margin compression and foregone profits. Equally if a bank cannot move customers into and out of offers systematically, sometimes there is no ‘best next deal’ to counterbalance earlier poor decisions. It’s bound to become a lose-lose situation.

Dynamic segmentation offers a much more personalized, touch. Banks who can transparently and at scale regularly match appropriate offers to customers make them feel more valued. Faster responses give the bank more opportunities to demonstrate how well they understand their customers, accelerating the customers’ success and increasing profits.

Earning the right to be a strategic partner to your customer

At present many corporate customers, typically treasurers and CFOs, are frustrated with and even suspicious of their corporate banking relationships. As a result, they regularly take their banking business out to tender splitting their business among two or more corporate banks to gain short-sighted pricing advantages.

This adversarial relationship prevents corporate relationship managers from serving their customers holistically and strategically. On-demand analytics and reporting allows banks to win back the trust of their customers by demonstrating that ‘they are on the same side’.

Better corporate customer offers improve customer service and gain better loyalty. But even the best deal for both sides can degrade overtime as circumstances, interest rates and profits change on either side. So how often should offers be reviewed?

From a customer point of view, the simple answer is that cadence should be minimum and only when the business’ banking needs change.

Ideally offers should change as often as the market changes to the customers’ significant advantage or disadvantage. Fixed quarterly or even monthly cycles are exactly not what customers need and this demonstrates the difference between operational or static and dynamic segmentation.

Unmanaged incentives drive unintended consequences

A clear challenge to achieving relevant and timely offer management is that corporate banks today are set up to operate along disparate product and service lines. Banks force customers to compartmentalize their relationship based on the bank’s organizational operating model, unintentionally denying them the chance to capture customer requirements fully and in time to make truly appealing offers.

Hidden and unmanaged incentives is the elephant in the room. Relationship managers focus on customer signatures while product managers dream up ways to maximize the profit on their specific products. This stops coherent offers that effectively maximizes the lifetime value of the customer to develop. If only a big picture approach was taken, the upside could be relevant insights, greater customer intimacy, and ultimately greater profits.

Systematic aggregation and Big Data monitoring aligns offer management incentives with customer needs. Such segmentation requires the most current information including the best key behavioural, demographic, and market relevant data set available.

Next best chance to impress a customer

Another tactic that corporate bankers can borrow from digital age disruptors is predictive Next Best Offer development. However, in corporate banking this

is trickier than a retailer suggesting a new book or offering discounted garments during every interaction.

Many consumers do not Like being overtly sold to. It is therefore fair to assume that a senior corporate finance executive would behave no differently when she is at work or at home. Notably though, as a digital consumer, she may not mind a business partner understanding more about her daily challenges and politely suggesting a range of relevant ideas or offers.

Next Best Offer development for corporations requires a new level of service and salesmanship. Today’s basic Next Best Offer cross-selling tactics, where automated programmes select and contact retail customers automatically fall well short.

Sophisticated and programmatic outreach, with perhaps a trusted human front end, can be much more effective. As social media proves and psychologists have known for ever; being known is actually like a dopamine hit. Delivering this ‘high touch’ feel in a scalable, cost effective way enables dynamic segmentation deliver real value to corporate bank customers.

Deal value management and the importance of rapid closure

Imagine that a relationship manager has negotiated an optimal deal for the customer and the bank. Typically they need to go through several approval procedures to get the deal approved, often giving the customer a chance to shop their business around. If a deal needs to be renegotiated, the magic dies. As all sales teams know, returning to the table means another chance to lose a deal.

Alternatively, systematic deal value management rapidly models benefits for the customer by negotiating within pre-set limits taking into account the customer’s total margin contribution.

We recently worked with a largest European banking institution to arm their relationship managers with the ability to negotiate and finalize deals in front of customers. They know that the speed at which sales questions can be answered are directly linked to sales success. In this case, we created ‘the ultimate kit bag’ for a salesperson to walk into the room with. This includes:

• Discounts pre-approved with product managers to speed time of closing

• A big picture view which guarantees optimal margin contribution and averts revenue leakage

• An improved speed of response to customer questions for faster closure of business deals

• Rich ‘What if’ scenario planning to provide transparency and help speed customer decisions

In some cases we have seen banks attempt to use a front end CRM to attempt this type of deal management.

Such systems are not designed to track transactional data in real-time with rules based on the entire customer relationship. The limitations of this approach are rooted in the legacy CRM systems they typically rely on, based on batch process data marts which were never designed for the real-time data aggregation, mediation, and rules application needed to support dynamic segmentation for corporate customers.

Corporate banks which deploy this dynamic segmentation with revenue management capabilities recover on average 5% of annual revenue. The devil though is really in the detail. Disruptors are not held back by outdated technology, they are often more innovative around segmentation and customer lifecycle management.

In a world of bespoke corporate banking deals, retail concepts such as dynamic segmentation, systematic deal value management and next best offer development may seem to be out in the future. Corporate clients are shopping around for and approach combining high-tech and high-touch, and the winners will be those who can provide this.