Busting Barriers to Growth for Small Banks & Credit Unions

Smaller banks and credit unions struggling to reach their growth goals need to embrace the power of data, analytics, segmentation and personalization.

A year ago, industry predictions for 2014 were generally optimistic. Bank and credit union executives have embraced the realities of the new economy and are once again setting their sights on growth. But their efforts haven’t paid off, and the results haven’t materialized. In fact, institutions with less than $500 million in assets (that’s approximately 79% of community banks, and 93% of credit unions) have struggled the most with profitability and languid loan growth.

Why do smaller institutions fall short of their growth goals? Some of the most persistent barriers to growth are not the ones created by external forces. While the evolving business landscape continues to make growth challenging for smaller institutions, two of the more frequent obstacles are self-created: 1) unrealistic or misaligned growth expectations, and 2) a “shot gun” approach to marketing.

Barrier #1: Unrealistic or misaligned growth expectations

It is often too easy for financial institutions to set their goals arbitrarily, without accounting for the realities of the institution’s core strengths, major weaknesses, array of products, market conditions, brand stature, competitive pressures, along with a myriad of other factors.

There’s a financial institution that set a goal across for each of the branches in its network: bring in 500 new customers less than 35 years of age. It might sound like a reasonable goal — every financial institution wants to attract younger consumers, right? But they didn’t realize that there were not enough prospective customers in their market footprint that fit the target profile to achieve their goal. Seems like a simple mistake, yes? But this isn’t the only example. Smaller financial institutions frequently overreach when establishing goals.

Some set goals based on random calibrations (e.g., grow checking accounts by 5% per year, originate 30 new mortgage loans per month, etc.) that, once again, overlook market realities such as customer behaviors, channel preferences, or product penetration. And perhaps most frequent, are the times when goals are established across all branches without considering that each branch’s market area is different — especially when setting short-term growth goals, such as those measured by month or by quarter.

Barrier #2: A “Shot Gun” Approach to Marketing

Shotguns, unlike rifles, blast over a broad area with the hope of a critical hit. In marketing, the term “shot gun” approach is used to describe a campaign or strategy where the “aim” is to cover as wide an area or population as possible. Unfortunately, this is usually the most expensive option… with the lowest response- and conversion rates.

We now live in a world with tailored product offers, where hyper-targeted messages are based on variables like prior purchasing habits and web history. Nearly every grocery store has a rewards program, where customers scan their rewards card in order to receive certain discounts. The store subsequently sends coupons to customers, but only for the products they routinely purchase. We have all had similar experiences — retail, eBooks, shoes, etc. Consumers are becoming increasingly accustomed to offers that speak directly to them… except for those from banks and credit unions.

It’s Not The Size of Your Data, It’s What You Do With It

Data volume and complexity have erupted in recent years, giving birth to metaphors like “drinking from a fire hose”; no matter your thirst or capacity to gulp gallons of water (data), you’ll be overcome by the volume and forced to give up or drown. Fears over tackling “big data” paralyze many banks and credit unions, and many don’t even bother using the data they have.

Hopefully things are beginning to change. Bank Director’s 2014 Growth Strategy Survey this past summer revealed that 52% of directors and officers want to better understand business intelligence and analytics. Another study by Celent found that data analytics are underused, and that 88% of banks have, or expect to have analytics projects in marketing. In simple terms: it is time smaller banks and credit unions put data to work to achieve their growth goals.

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Use Data to Calibrate Growth Expectations

Every market tells a story, but that story is constantly evolving. If you are still making growth decisions based on data from 2010, you could be missing significant trends. Demographic data can be pulled from a variety of sources allowing you to look at a market or branch specific area by race, sex and age ranges, household size, type and value, household income details, etc.

The quick analysis of the market-specific data above would not only have helped the client mentioned earlier avoid the frustration of unmet goals, but would help narrow the scope (and expense) of marketing. By holding up this market data against existing customer profiles, smaller community-based institutions can easily build growth models with greater accuracy.

A closer look at their complete market data, well beyond demographic variables, may have revealed a better, more profitable opportunity. Two basic areas to measure include:

  • Penetration – Calculate your current household and business penetration by comparing number of households/businesses assigned to a branch or cost center vs. the overall market.
  • Products – Take checking accounts as an example. Measure the checking account usage (% using) for households in your market – Are there enough unsold households left in the market?

Use Data to Establish Target Segments and Fine-Tune Marketing Accordingly

Financial institutions have been slow to embrace the practice of segmentation and tailoring marketing messages to specific audiences. Even when presented with relevant data, it is so easy to fall back on what has always been done: marketing to the masses with a single message. But things seem to finally be shifting. Instead of the shotgun, data can be used to help sharpen your aim. Conversion optimization expert Alex Harris was recently quoted in Forbes saying “2015 will be the year of data-driven marketing. All design, advertising and social media will focus on driving measurable results using cutting edge tracking and predictive analytics.”

Segmentation is the process of breaking down your customer base into smaller groups based on shared demographic and psychographic (behavioral) characteristics which are strong indicators of product/service behavior and channel behavior based on life stage. Segmentation data can be used to optimize the customer experience — and it can allow a bank or credit union to pinpoint the most receptive set of consumers for a reverse mortgage, a mobile offer for a credit card, or a coupon for a financial planning seminar. The smaller the audience size, the more specific your marketing message can be.

The table below offers a snapshot of how opportunities can be identified through segmentation in a market. By segmenting the current customer base into twelve distinct life stages for a given area (Younger Years, Family Life and Mature Years) as well as degree of affluence (1-5 with 1 being the most affluent), a story begins to emerge. When comparing the difference between the distribution of customer segments against the total households (non-customers) in the market by life stage, the greatest areas of opportunity arise. In this sample market, for instance, the Y1, F2, and Y2 segments offer the greatest opportunities for outreach to new customers.

Size of Market
Y1: Upwardly Mobile 161 3,103
Y2: Metro Mainstream 90 1,710
Y3: Fiscal Fledglings 10 134
F1: Flourishing Families 93 722
F2: Upscale Earners 176 2,032
F3: Mass Middle Class 92 1,155
F4: Working-Class USA 55 84
M1: Financial Elite 68 498
M2: Wealthy Achievers 159 1,092
M3: Upscale Empty Nests 158 719
M4: Midscale Matures 153 711
M5: Retirement Blues 29 216

Use Existing Customer Data to Identify Cross-Sell Opportunities

A few years ago a small, east-coast credit union mined it’s member data and discovered approximately 1,100 members who had paid off auto loans within the prior 24-month period and who didn’t have a new auto loan with the credit union. With their target identified, they segmented the data further to develop a specific offer that was delivered through appropriate marketing channels (e.g. personalized direct mail postcards) designed to promote the refinancing of auto loans held at other institutions. The return over a six-week campaign well exceeded the marketing dollars invested.

This article outlined three simple ways to use data to derive actionable insights and begin setting realistic and achievable growth goals, including:

  • Begin with available demographic data on your markets(s) to test a particular hypothesis (i.e.: are there additional younger customers or checking account relationships available?)
  • Conduct a segmentation analysis of your customer/member base and compare the distribution against your market(s) to identify the segments with the greatest opportunity for additional penetration
  • Select 2 or 3 small segments as your targets and delve into their life stage needs, their values (which helps with messaging), and their product needs.
  • Mine your existing customer/member data files and identify specific product opportunities (i.e.: members with paid off auto loans who may be in the market for a new car, etc.)
  • Align your marketing with the channel preferences of your target segments.

As The Financial Brand has pointed out previously, “data analytics is the new marketing battlefield, and the arms race is only going to intensify.” Small banks and credit unions cannot allow themselves to be overwhelmed. You can derive actionable insights from data you already possess, or that which is easily acquired. Optimal growth is not possible without it.

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