Customer Segmentation in the Banking Industry Year One – Chief Retail Officer Perspective Dr. Robert L. Underwood

Executive Banking School Roadmap GROWING Capability Confidence Courage YEAR THREE Chief Executive Officer Perspective YEAR ONE Chief Retail Officer Perspective YEAR TWO Chief Financial Officer Perspective

Executive Banking School Roadmap GROWING Capability Confidence Courage YEAR THREE Chief Executive Officer Perspective YEAR ONE Chief Retail Officer Perspective YEAR TWO Chief Financial Officer Perspective

Year One – Chief Retail Officer Perspective Retail Strategy Curriculum Leadership Communication Leading the Retail Line of Business via a Balanced Scorecard Discovering Customer Segments & Consumer Behaviors Successfully Communicating & Advertising in Retail Banking Developing and Pricing Profitable Bank Products Modernizing & Optimizing Delivery to Meet Customer Requirements Facing Ethical Dilemmas in Banking Applying Concepts Learned to Today’s Market Chief Retail Officer Perspective

Year One – Chief Retail Officer Perspective Retail Strategy Curriculum Leadership Communication Leading the Retail Line of Business via a Balanced Scorecard Discovering Customer Segments & Consumer Behaviors Successfully Communicating & Advertising in Retail Banking Developing and Pricing Profitable Bank Products Modernizing & Optimizing Delivery to Meet Customer Requirements Facing Ethical Dilemmas in Banking Applying Concepts Learned to Today’s Market Chief Retail Officer Perspective

This Session’s Critical Topics Segmentation: A Critical Imperative Fundamental Illustrations of Segmentation Across Business & Consumer Markets Review of Student Perspectives of Bank Segmentation Strategy

Segmentation: A Critical Imperative

Segmentation: Our Approach Today Segmentation: A Critical Imperative Segmentation: Our Approach Today Recognition of variance in experience/understanding among CBA students Begin with a broad understanding of segmentation and narrow it down to a focus on banking Consider industry trends/issues, discuss strategic options

Segmentation: A Critical Imperative What is Segmentation? “The subdividing of a market into distinct subsets of customers, where any subset may conceivably be selected as a target market to be reached with a distinct marketing mix” Philip Kotler, Northwestern University

Why is Segmentation Critical? Segmentation: A Critical Imperative Why is Segmentation Critical? Enables the firm to design a strategic marketing plan that more precisely meets the needs of the customer in a specific market segment Determines resource allocation (i.e., In which markets should we compete?) Enhances a firm’s focus, competitiveness, communication, retention and profitability.

Illustration of Segmentation Variables for Consumer Markets Segmentation: A Critical Imperative Illustration of Segmentation Variables for Consumer Markets

Fundamental Illustrations of Segmentation Across Business & Consumer Markets

Illustrations of Segmentation Michelin Product Segments – Meeting Mobility Needs of Varying Business & Consumer Markets

BMW Customer Segmentation – Sedan Market Illustrations of Segmentation BMW Customer Segmentation – Sedan Market

Requirements for Effective Segmentation Illustrations of Segmentation Requirements for Effective Segmentation To be useful, market segments must be: Measurable Accessible Substantial Differentiable Actionable

Illustrations of Segmentation BMW Electric Cars Is the segment measureable? Is it accessible? Is it substantial? Is it differentiable? Is it actionable?

Review of Student Perspectives of Bank Segmentation Strategy

Perspectives of Bank Segmentation Brief Review of 2016 Class Case: Students’ Reflections on Current Bank Segmentation Strategy First year students were asked the following questions regarding their bank’s segmentation strategy: How clearly defined and delineated are your bank’s customer segments? On what variables are the bank’s customers generally segmented (e.g., geographically, demographically, behaviorally)? What are the major segments? Do you believe your bank is consciously evaluating data/trends to identify existing and/or growing segments? Is the bank missing out on some segment opportunities? Is there a solid understanding of the differing behaviors, needs and desires of these segments by bank management?

Current Bank Segmentation Strategy Perspectives of Bank Segmentation Current Bank Segmentation Strategy 3. How relevant is the growing millennial population to your bank’s customer base? Is there a significant variance in the bank’s customer base in terms of consumer digital banking usage at this time? Is your bank effectively adapting their market offering to deliver value to both heavy and light digital banking segments?

How Clearly Defined and Delineated are Your Bank’s Customer Segments? Perspectives of Bank Segmentation How Clearly Defined and Delineated are Your Bank’s Customer Segments? 73 out of 78 responses stated that customer segments were clearly defined and delineated. Segments were generally based on demographics, consumer behaviors & product type. “The consumer segments at PNC have historically been separated into four groups. Mass, Upper Mass, Mass Affluent, and Wealth. Household income levels, which I believe is determined by geographical locations and income data by zip code, have been a determining factor for segmentation.”

How Clearly Defined and Delineated are Your Bank’s Customer Segments? Perspectives of Bank Segmentation How Clearly Defined and Delineated are Your Bank’s Customer Segments? “Citibank is currently coming out with a new segment strategy to redefine our target customers. Primarily, customers are segmented by deposit and investment balances to determine which banking package fits their needs the most, but demographics and behavior also play a big role. There are three major segments - Citibanking, Citi Priority, and Citigold. Citibanking is our mass market package, Citi Priority is for Emerging Affluent, and Citigold is for Affluent clients.”

How Clearly Defined and Delineated are Your Bank’s Customer Segments? Perspectives of Bank Segmentation How Clearly Defined and Delineated are Your Bank’s Customer Segments? “The bank's customer segments are delineated relatively clearly, by occupation. The primary segment is the market of the parent company's (TIAA) participants, or individuals who serve primarily in the academic, medical, governmental, cultural and research institutions. “There has been some discussion on segmentation by customer life stage, as follows: (1) 'dollar stretchers,' or those just starting out, (2) 'life builders,' or those who are beginning to save for various goals, (3) 'accumulators,' who earn enough to live comfortably and to accumulate assets, (4) 'transitioners,' or those who are preparing for retirement and (5) 'established,' those who feel generally prepared for retirement.”

Perspectives of Bank Segmentation Is Your Bank Evaluating Trends to Identify Segments? Is the Bank Missing Out on Segment Opportunities? “I do believe we are consciously evaluating the changing segments, but we are struggling with sophistication in both data and delineation. We seem to be missing most on customer segments that are strictly online users as a result of our agency model, and I can't help but wonder if that is also putting us at odds with the younger generations.” “Our understanding of customer behaviors is robust, but understanding how those behaviors will correlate with purchases, product preferences, and servicing needs has proven much harder for our management than I would have guessed.”

Perspectives of Bank Segmentation How Relevant is the Growing Millennial Population to your Bank’s Customer Base? “The millennial population is extremely relevant to Bank of the West. This rapidly growing customer segment influences decisions in regards to capital expenditures to enhance the bank’s digital platform and staffing in branches. Millennials are more inclined to use digital channels than customers of different generations.” “The bank is proactively focusing on users of the bank’s technology and is preparing to launch the “Digital Ambassador Program”; an initiative designed to drive customer and team member adoption of digital channels.”

Perspectives of Bank Segmentation How Relevant is the Growing Millennial Population to your Bank’s Customer Base? “The Millennial's have greatly impacted the way Union Bank does its business and how it plans for the future. Bank wide, transactions within the traditional brick-and-mortar branches are dropping substantially as a result of technology and consumer/business trends.” “Union Bank is in a great position to align its customers needs with improved technology and access. Digital Adoption is at the forefront of our long-term strategy and within the coming year, great advances will be seen in most of our branches and with most of our products.”

Perspectives of Bank Segmentation Retail Bank MarketSim Consumer segmentation in the MarketSim is a function of a multitude of factors: Demographic Characteristics General Characteristics Geographic Variables Behavioral Variables Psychographic Tendencies Buying Decisions Channel Usage Reactions to Technology

Team Assignment

Bank Segmentation Strategy Assignment - Team Room Team Assignment Bank Segmentation Strategy Assignment - Team Room Evaluate the segmentation strategy of one of the following five banks in the U.S. Bank 1: Ally Bank Bank 2: Frost Bank Bank 3: Regions Bank Bank 4: Umpqua Bank 5: USAA Review the annual report, recent investor presentations, and industry articles to best identify the bank’s customer segmentation strategy.

Bank Segmentation Strategy Assignment - Team Room Bank 1: Ally Bank Team Assignment Bank Segmentation Strategy Assignment - Team Room Bank 1: Ally Bank https://www.ally.com/about/investor/ Bank 2: Frost Bank https://www.frostbank.com/pages/investor-relations.aspx Bank 3: Regions Bank http://ir.regions.com/ Bank 4: Umpqua https://www.umpquabank.com/ask-us/investor-relations/ Bank 5: USAA https://www.usaa.com/inet/ent_logon/Logon?skipredirect=true Note for USAA: Instead of an Annual Report the generate a Report to Members.

Bank Segmentation Strategy Assignment - Team Room Team Assignment Bank Segmentation Strategy Assignment - Team Room On what variables are the bank’s customers generally segmented (e.g., geographically, demographically, behaviorally)? What are the major consumer segments for the bank? Is the bank decidedly targeting and interacting effectively with these various consumer segments with different products, promotion, pricing and distribution? Can you identify the core strategy of the bank? What is it? Is the segmentation strategy arguably consistent with the core strategy of the bank?

Bank Segmentation Strategy Assignment - Team Room Team Assignment Bank Segmentation Strategy Assignment - Team Room How relevant is the growing millennial population to the bank’s customer base? Is there a significant variance in the bank’s customer base in terms of consumer digital banking usage at this time? Is the bank effectively adapting their market offering to deliver value to both heavy and light digital banking segments?

Year One – Chief Retail Officer Perspective Retail Strategy Curriculum Leadership Communication Leading the Retail Line of Business via a Balanced Scorecard Discovering Customer Segments & Consumer Behaviors Successfully Communicating & Advertising in Retail Banking Developing and Pricing Profitable Bank Products Modernizing & Optimizing Delivery to Meet Customer Requirements Facing Ethical Dilemmas in Banking Applying Concepts Learned to Today’s Market Chief Retail Officer Perspective

Executive Banking School Roadmap GROWING Capability Confidence Courage YEAR THREE Chief Executive Officer Perspective YEAR ONE Chief Retail Officer Perspective YEAR TWO Chief Financial Officer Perspective