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  1. Analysis
December 15, 2020

Segmenting credit card customers for insight and profit

By Evie Rusman

Credit card customer segmentation is now essential for a profitable credit card customer portfolio. Mohamed Dabo reports on a strategy that helps to uncover customer behaviour in credit card use

Segmentation in marketing is a technique used to divide customers  or other entities into groups based on attributes such as behaviour or demographics.

It is useful to identify segments of customers who may respond in a similar way to specific marketing techniques such as email subject lines or display advertisements. This gives businesses the ability to tailor marketing messages and timing to generate better response rates and provide improved consumer experiences.

Customer segmentation is one of the most fundamental building blocks in getting to know customers. It is essential for industries where customer interaction is frequent and varied, as each interaction provides insight into opportunities and risks for every individual.

The credit card industry is on par with telecommunications, e-commerce, and retail from this perspective, and the industry gains significant ROI from segmentation initiatives.

Surprisingly, all around the world, there are many banks still not taking advantage of this opportunity, frequently due to a lack of tools or in-house resources to process and digest big data sources, sitting on top of a gold mine that erodes each day when left untouched.

Gaining insights into customer behaviour in credit card usage

An example of a credit card micro-segmentation model could group customers based on their preferences for shopping time, resulting in segments such as weekend shoppers and late-night spenders.

Another model could look into lifestyle perspective and identify segments such as fashionistas and tech-savvy shoppers.

In addition to delivering finer details on specific customer behaviour, these models also provide vast targeting opportunities when crossed with each other, e.g., targeting fashionistas who are also weekend shoppers for a weekend fashion show.

Credit card issuers have traditionally targeted consumers by using information about their behaviours and demographics.

Behaviours are often based on credit bureau reports on how a person spends and pays over time; customers are typically categorised 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.

Behaviour and profitability of clients in the credit card portfolio

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.

However, with the dramatic decline in acquisitions over the past five years, issuers competing in similar segments with similar products are finding it hard to differentiate themselves: The total number of accounts at top issuers has declined by an average of 4% over the past five years according to The Nilson Report. The result is a race to attract new accounts.

Some issuers have offered as much as $400 to customers signing up for a new card, and the top five US issuers are spending over $100m a year on advertising campaigns. But as switching incentives rise, profit margins inevitably fall.

Issuers do have an alternative: they can maintain a profit margin and generate demand for their product by providing only the benefits that customers value.

The challenge for issuers is aligning the right value proposition with the right consumers. The question is: how do issuers develop a suite of credit cards that fulfil customers’ needs more precisely without piling on features that add needless complexity or are not valued by users?

The answer lies in a more nuanced and powerful approach to customer segmentation — one that can, by extension, be adopted across a range of consumer finance products and markets.

This approach has already been used successfully for two recent credit card launches in the US, as well as one in Brazil, where a large issuer identified three distinct customer segments and shaped an integrated approach to the design of new products, messages and channels; the bank expects to see new accounts grow by 2 to 5% as it rolls out the cards in the coming months.

Opportunities to create innovative, targeted marketing strategies

A new twist on needs-based segmentation — attempting to develop a deeper and more rounded view of consumers is nothing new.

Institutions have long sought closer connections with customers, but have struggled with limited data and arm’s-length interactions.

However, the two-way communications opened up by online and mobile channels enable today’s issuers to capture much more information about each customer. This information can be used to execute a sophisticated needs-based segmentation.

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