Banking is good business. Well, it must be or the Australians wouldn't have bought most of our banks. And there are newcomers, too - think of the TV advertisement playing at present that promotes Rabobank's new online account as a lucrative "bit on the side" for high net-worth customers. The ad campaign portrays Rabobank as an attractive and generous mistress, the perfect antidote to the rumpled boor that is your regular banker.
New Zealand banking surveys show that at any one time approximately one in four people think they'd like to change banks by cutting all ties, but in fact only between 4 and 10 percent of us actually do so - it's so easy to just add another one, as Rabobank is encouraging us to do. The New Zealand banking public now averages more financial suppliers than previously, which means more of us are dallying with a new interest while still getting our washing done at home, so to speak.
This shift in customer behaviour highlights a growing preoccupation in banking circles: how to cherry pick those customers with money that needs managing (at a tidy profit, of course). There's nothing new in segmented marketing, but banks have a particular challenge in that once taken on, a customer - particularly at the less profitable end of the scale - can be very hard to shake off. Contrary to popular belief, the loyal customer is not necessarily the profitable customer.
The trick for banks is to differentiate customer segments and then manage these segments in a way that attracts the high net-worth customers and minimises the numbers of low net-worth customers.
Analysis of data from one New Zealand bank reveals that a useful segmentation might involve brand loyalty (the length of time the customer has been with the bank), their share of wallet (how much business they put with the bank) and their (short-term) financial value to the bank.
Using this categorisation, we end up with strangers, friends, barnacles and butterflies. Strangers, in this study, make up around one-fifth of the bank's customers - they're loss-making customers who haven't been with the bank very long. Another third are friends, the bank marketers' dream. Long term and profitable, more than half of these are true friends, with all their business at the study bank. About one in six customers are categorised as unprofitable barnacles who stick like glue.
The remainder (around a third) are the ones that cause the biggest headaches for bank marketers. They're the profitable butterflies who flit from one bank to another. Definitely worth netting, butterflies ten to be younger with the highest current net worth and potential net worth.
Butterflies have in recent months taken on even more lustre for the banks as large numbers of fixed-term mortgages come up for renegotiation. Many mortgage-holders fit the butterfly stereotype - they're in their mid to late 30s, with a first or second home, higher education, two incomes in the household, high mortgages and borrowings, urban and metropolitan (Auckland / Wellington) based - and they have the highest number of banking relationships (a mean of 2.3 compared to just over 1.1 for strangers, barnacles and friends).
Renegotiation of mortgages can be a tricky time for both customers and banks, as both sides consider their options. It's no coincidence that most of the major banks have launched new ad campaigns with a strong refinancing message, in a bid to counter the lures of Mlle Rabobank and her ilk.
So what can banks do to net their butterflies? Well, they own some of the most sophisticated customer asset management technology available and are well aware through analyses of our monthly transactions how much of our money is going where. By their very nature, butterflies flit around; so the trick for the banks is to at least hold on to their share of butterflies in relation to their overall share of the New Zealand personal banking market. They'll do that by deciding which customers to target for retention and which might be allowed to fly - and that's where the personal bankers that each bank has for its' higher net-worth customers are probably most active at the moment.
So where does this leave the other customers - the friends, strangers and barnacles? The loyalty that long-standing customers show to their banks may be misplaced as bank executives are now increasingly becoming those who have honed their skills in a user-pays world where cross-subsidisation of one set by another set is fast disappearing. In the brave new world of the segmented market, there are no more free lunches.
Loyal customers will still be rewarded - as long as they are profitable in the bank's eyes - but rewards will be geared to retaining a share of their business. Strangers and barnacles are likely to get more of a cold shoulder from their banks, which will raise fees to try to recover some of the losses - making life miserable enough for these less preferred customers to vote with their feet and migrate to another bank.
All in all, being a butterfly has never looked so good. They're being courted on all fronts, with preferential rates and sweeteners for joining.
By Ron Garland