New ways to target different types of clients will lead to more sustainable revenue.
With questions being raised among senior private banking executives about how to generate sustainable revenue in a tougher business environment, one of the options is to focus on new ways to target different segments of clients.
Until now, segmentation has been based on account size. Yet individuals within the same “tiers” of net worth exhibit diverse behaviour and have varying needs, regardless of their levels of wealth, says Gary Tiernan, global head of investment advisory and fiduciary at The Standard Chartered Private Bank. “If private banks are cognisant of the issues of a specific client type, relationship managers can then help those clients to get to the right place more easily in terms of their portfolio.”
Private banks will want to identify those clients which are more likely to generate higher revenue streams for the bank and actually need the service of a private bank to build and preserve their wealth.
Given that different banks have different capabilities and strengths, it might not be possible for them to service all prospective client types. For example, a small boutique private bank might not be able to offer the same access to specialised capital market products as a larger private bank which is connected to a global investment bank. While many private banks target clients above a certain asset size, the banks should also think about whether or not they can meet the expectations of the clients. “It is neither possible nor desirable to be all things to all clients,” says Tiernan.
One of the ways in which The Standard Chartered Private Bank, for example, as used segmentation has been to target the many private clients who are living outside their home countries – by creating propositions for certain expatriate populations, such as Indians, Australians and Koreans. Put simply, that means providing wealth management services in India, Australia or Korea to nationals of those countries who are living offshore, as well as looking after their international needs.
“These are individuals who have a global outlook but their approach and their needs are shaped by their roots in their home country,” says Tiernan. “The services we provide are designed to recognise their global, local and home-country perspective. To do this effectively requires deep and ongoing knowledge of the client and the home country so that not only can the initial decisions be taken properly but they can be regularly reviewed to ensure that any future changes are taken into account.”
From a geographical perspective, he says it can be more effective in some cases to handle clients from a relevant central point rather an as part of the local, onshore operations.
Making segmentation profitable
Being smarter at client segmentation is something which is often talked about at the management level of many private banks, but rarely acted on. When it has been implemented, efforts to put in place a clear strategy have tended to yield results which are far less effective than they should be.
“The consumer industries can teach the private banks a lot in terms of how to segment clients and then cater to their needs,” says Tiernan. For example, a lot of research done in consumer industries has indicated that it is much more cost effective to concentrate on improving service for existing customers than to chase new ones.
“The benefits are seen in terms of greater product penetration and more referrals,” explains Tiernan. “It may cost as much as six times more to sell a product to a new customer as to an existing one. Many industries divide the population into segments and then determine which ones they will target, and more importantly which ones they will not.”
Private banks should decide which client segments they want to cater to and then work on delivering the best service and advice that these segments require. “While it may be appealing to open an account for any wealthy individual, the bank must consider the extent to which it is capable of understanding and catering to the needs of that particular client,” adds Tiernan.
The desire to raise assets under management may sometimes override that, but banks must remember that if it accepts a particular client and then disappoints him or her, this client will become disgruntled and might spread negative views on the bank because of that. “Sometimes it is better not to take on a relationship if you understand that you cannot provide the necessary service,” he says.
Making segmentation successful requires private banks to be clear about their brand proposition and their values. “By understanding the clients that they can service best, they will also have more clarity on those prospective clients that will not be best serviced by them,” says Tiernan. “Being honest about this will lead to clients/prospects making the decisions that are best for them.” Those clients/prospects who decide their needs are better serviced by a different institution, will allow the bank to focus more time and resources on servicing the existing clients that are most suited to it.
Clients of all industries and professions recognise that they get what they pay for, and private banking customers need to realise they are no different.
“If a client is relatively inactive and does not require very regular interaction with a banker then there are different ways to use technology so that the client has enough information to match his or her needs while remaining cost effective for the bank,” explains Tiernan. “There are also clearly portfolio management services which are directed to less active clients. These can meet the investment requirements of the client and still generate revenue for the bank.”
There are many different ways for private banks to look at demographics; there are also groupings that could be made by lifestyle or by desire to use new IT. “The challenge with any approach to segmentation,” says Tiernan, “is to identify a homogeneous group that can be readily identified and which is of sufficient scale to be able to be profitably serviced. Account size is only one variable in looking at clients. A successful business will not restrict itself to looking at clients through a one-dimensional lens.”
* This article first appeared as a Case Study in the book "How to Prosper in the New World of Asian Wealth Management: a Best Practice Guide", published by Hubbis in mid-2009