4 Segmentation Strategies To Improve People’s Financial Health
Financial marketers traditionally analyze and segment their clients based on the types of metrics used by enumerators and demographers. They break down data pools by generation, assets, income level, marital status, and other similar one-dimensional factors.
Aurélie L’Hostis, Senior Analyst at Forrester, offers a better approach, especially in the aftermath of the Covid-19 pandemic, which shook many consumers and made them aware of their financial vulnerabilities. The Hostis believes that a higher form of segmentation will separate consumers based on factors that, when understood, will help banks and credit unions improve the financial well-being of consumers.
Several factors influence consumers’ financial behavior, says L’Hostis. “I’m looking at three things: people’s attitudes, their psychological attributes, and their perceptions of their finances. All three will have an influence on how they manage their finances. “
These three factors are in turn influenced by two others, according to L’Hostis. The first concerns the external factors that a person faces where they live – political stability or lack thereof, economic conditions, natural disasters and health crises are the main ones.
The other big category concerns the problems of life. “Here you want to understand what personal situations could affect a person’s financial possibilities,” says L’Hostis in an interview with The financial brand. “They could lose their jobs or have a baby or lose their lifelong partner. They may have physical or mental health issues. “
Why this is important:
Over the years, banks and credit unions have tried various approaches, such as PFM, to help people achieve or maintain their financial well-being. Many flopped.
The Hostis emphasizes that everything about traditional personal money management tools makes sense, but for many people the benefits do not materialize and institutions feel like they are spinning the wheels.
“The problem was that people weren’t necessarily using the tools at all, or they did so initially, then they stopped engaging,” says L’Hostis.
Clients began to ask him why PFM was not taking.
“This is the problem of universal design,” explains L’Hostis. “These tools failed to drive behavior change and deliver tangible results for consumers because they were very static and not necessarily very relevant to their very specific needs.
4 real-world categories in which banking consumers fit
In a Forrester report from L’Hostis, “Understanding Your Customers to Improve Their Financial Well-being,” the research allowed the company to design four groups of consumers who each have different levels of financial resilience and different feelings about financial security. Each financial institution will have people from all four groups in its customer base.
“There’s no one who doesn’t need help with their finances to get started. Even people with a lot of money still need financial advice to make sure they are making the right decisions in the future, ”says L’Hostis. “Each of these four segments has different levels of financial management needs, and financial institutions can help you with different tools and services.”
The four Forrester groups, adapted from the firm’s report, are:
- Stretched expenses: They face financial anxiety, live paycheck to paycheck, and struggle to manage living expenses and debt payments, as well as saving money. . Many have lost their jobs and their ability to pay during the pandemic.
- Carefree spenders: Although these people also live paycheck to paycheck and find it difficult to manage debts and savings, they actually feel that their lives are comfortable and stable.
- Security researchers: They are not at the limit, as are the first two groups, but they are worried about the money. While the pandemic has not affected their ability to pay their bills, some have lost income or suffered losses in investments. A common concern in this group is having enough money to retire comfortably.
- Amortized savings: They don’t live paycheck to paycheque and worry about their finances. In fact, they face few financial difficulties. “While amortized savers perceive their current financial situation as stable and comfortable, more than a third say they are worried about a multi-year 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 not only of people’s situation, but also of their state of mind,” says L’Hostis. “This is what makes such segmentation useful. Some are very disciplined with finances. Some have good financial literacy. Others are not very interested in finances, some find it complicated and some simply avoid it. “
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Ask people to describe their attitudes towards money
The more a bank or credit union can assess in which of the four groups a consumer belongs, the better it can tailor its approach to that consumer’s needs. One step she recommends is conducting customer surveys about their financial attitudes and feelings about money.
“Often these little quizzes help people discover their own financial habits,” says L’Hostis, “and the process allows the institution to understand how they behave with money.”
Two people, one wallet:
A daily complication in money management is that when two meet, they rarely fully synchronize on how to spend and how to save.
The analyst says such surveys can also help couples quantify how their own attitudes about money differ. Some institutions encourage couples to participate in these surveys together, in order to solidify their understanding of how others think. The Hostis says some institutions have developed apps that address personal finance based on couples managing their money jointly.
How Analysis Can Shape Institutional Strategies
“Institutions will find it useful to be able to map their clients and obtain behavioral profiles of individual clients,” says L’Hostis. For each segment identified through the described financial well-being filter, different aids can be applied.
For some, the involvement of an expert may be appropriate. Others can be helped by using a robot advisor. In other cases, product design may tailor the services of banks or credit unions to specific needs.
In a recent blog, L’Hostis suggested adopting tools that can address issues such as emotional spending – when people overspend on “retail therapy” – and gambling addiction. She notes in the blog that Monzo created a blocker that prevents gambling spending.
How it works is interesting, given that neobanks like Monzo usually promote how they reduce friction. The game blocking feature, according to Monzo’s website, actually increases friction to help addicted customers.
People can activate the feature through their app or by having a staff member set it up. Once activated, the Monzo account cannot be used to pay recognized game fees unless it is deactivated.
If it was just to turn the feature on or off, that wouldn’t help much. The user must call a customer support person before they can turn it off.
“We could use this conversation to ask you questions like, ‘Has your situation changed since you first turned on the restrictions? to help you think about why you are turning it off, ”the website says. “If you decide to turn off the block, we’ll give you 48 hours before you can turn it off yourself from the app.”
It’s called positive friction, an electronic equivalent of some consumers’ practice of literally freezing their credit cards in a block of ice to avoid spending.