4 Segmentation Strategies to Improve People’s Financial Health

Traditional data analytics techniques may sort consumers into neat categories, but to truly understand people's financial needs banks and credit unions may need to build a completely different way of evaluating them using their attitudes towards money and their present financial pulse. The effort begins by asking them to answer probing questions about themselves.

Financial marketers traditionally analyze and segment their customers based on the kinds of measures that census takers and demographers use. They slice and dice data pools by generation, asset holdings, income level, marital status and similar one-dimensional factors.

Aurélie L’Hostis, Senior Analyst with Forrester, suggests a better approach, especially in the wake of the Covid-19 pandemic, which shook up many consumers and made them more aware of their financial vulnerabilities. L’Hostis believes a superior form of segmentation will separate consumers on the basis of factors that, once understood, will help banks and credit unions improve consumers’ financial well-being.

Several factors impact how consumers behave regarding their finances, says L’Hostis. “I look at three things: people’s attitudes, their psychological attributes, and the perceptions they have about their finances. All three will influence how they manage their finances.”

These three factors are influenced, in turn, by two others, according to L’Hostis. One is the external factors a person faces where they live — political stability or lack thereof, economic conditions, natural disasters and health crises are key ones.

The other broad category is life issues. “Here, you want to understand what personal situations would affect someone’s financial possibilities,” L’Hostis says in an interview with The Financial Brand. “They might lose their job or have a baby or lose their lifetime partner. They might have physical or mental health problems.”

Why This Matters:

Over the years, banks and credit unions have tried various approaches, like PFM, to helping people attain or maintain financial well-being. Many have flopped.

L’Hostis points out that everything about traditional Personal Financial Management tools makes sense, but for many people the benefits don’t materialize and institutions feel they have been spinning their wheels.

“The problem is that people were not necessarily using the tools at all, or they did initially and then stopped engaging,” says L’Hostis.

Clients began asking her why PFM wasn’t taking.

“It’s the problem of one-size-fits-all design,” explains L’Hostis. “These tools failed to drive behavioral change and deliver tangible outcomes for consumers because they were very static and not necessarily super-relevant to their very specific needs.”

4 Real-World Categories Banking Consumers Fit Into

In a Forrester report by L’Hostis, “Understand Your Customers To Help Improve Their Financial Well-Being,” research enabled the firm to devise four groupings of consumers that each have different levels of financial resilience and different feelings about financial security. Every financial institution will have people from the four groups in their customer base.

“There isn’t anyone who doesn’t need help with their finances to start with. Even people who have a lot of money still need financial advice to be sure they are making the right decisions going forward,” says L’Hostis. “Each of these four segments have different levels of financial management needs and financial institutions can help with different tools and services.”

The four Forrester groups, adapted from the firm’s report, are as follows:

  • Stretched Spenders: They face anxiety over their finances, living paycheck-to-paycheck, and have trouble handling living expenses and debt payments, as well as saving money. Many lost their jobs and their ability to pay during the pandemic.
  • Carefree Spenders: While these folks also live paycheck-to-paycheck and have trouble handling debt and savings, they actually feel their lives are comfortable and stable.
  • Security Seekers: They are not on the edge, as the first two groups are, but they worry about money. While the pandemic didn’t impair their ability to pay bills, some lost income or saw losses in investments. A common worry in this group is having enough money to retire comfortably.
  • Cushioned Savers: They don’t live from one paycheck to the next and don’t angst over their finances. In fact, they face few financial hardships. “While Cushioned Savers perceive their current financial situation as stable and comfortable, more than one-third say they’re anxious there will be a multiyear recession due to the pandemic.”

These four descriptions illustrate how different people’s needs would be, no matter what basic demographics suggest about them.

“You have to have a better understanding of not just people’s circumstances, but also their mindset,” says L’Hostis. “That’s what makes such segmentation useful. Some are very disciplined with finances. Some have good financial literacy. Others are not very engaged with finances, some finding it complicated and some simply avoiding it.”

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Ask People to Describe Their Money Attitudes

The more that a bank or credit union can gauge which of the four groups a consumer falls into, the better they can tailor their approach to that consumer’s needs. One step she recommends is conducting surveys among customers concerning their financial attitudes and their feelings about money.

“Often such little quizzes help people discover their own money habits,” says L’Hostis, “and the process gives the institution an understanding of how they behave with money.”

Two People, One Wallet:

An everyday complication in money management is that when two get together, they rarely synch completely over how to spend and save.

The analyst says such surveys can also help couples quantify how their own attitudes about money differ. Some institutions encourage couples to take these surveys together, to solidify their understanding of how the other thinks. L’Hostis says some institutions have been developing apps that approach personal finance on the basis of couples managing money jointly.

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How the Analysis Can Shape Institutions’ Strategies

“Institutions will find it helpful to be able to map their customer bases and gain behavioral profiles of individual customers,” says L’Hostis. For each segment identified through the financial well-being filter described, different aids can be applied.

For some, involvement by an expert may be appropriate. Others may be helped using a robo-advisor. In other cases product design may adapt bank or credit union services to special needs.

In a recent blog, L’Hostis suggested adopting tools that can address issues such as emotional spending — when people binge spend for the “retail therapy” — and for gambling addiction. She notes in the blog that Monzo has created a blocker that prevents gambling spending.

How that works is interesting, given that neobanks like Monzo usually promote how they reduce friction. The gambling block feature, according to Monzo’s website, actually increases friction to help addicted customers.

People can activate the feature through their app or by asking a staff member to set it up. Once activated, the Monzo account can’t be used to pay any recognized gambling charge, unless it is deactivated.

If it were just a matter of switching the feature on or off, that would not be much help. The user must call someone in customer support before they can deactivate it.

“We might use that conversation to ask you questions like, ‘Has your situation changed since you first switched on the restrictions?’ to help you think through your reasons for turning it off,” the website states. “If you decide that you do want to turn off the block, we’ll give you 48 hours before you can switch it off from the app yourself.”

That’s called positive friction, an electronic equivalent of some consumers’ practice of literally freezing their credit cards in a block of ice to prevent spending.

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