Study: Banks Need New Ways to Gauge Customer Payment Preferences

Banks can boost customer acquisition and retention by catering to consumers' payments preferences, according to a recent study from McLean, Va.-based BearingPoint. BS&T was given exclusive first access to the report, "Creating a Payments Strategy for the New Banking World," which outlines ways in which banks can improve their competitive position in the payments business.

According to Chris Hadorn, a managing director at BearingPoint and the study's author, it was the realization that banks are not being aggressive enough in their approach to exploiting consumer payments preferences that spurred the study. "In working with our clients over the last several years, we saw a radical shift to electronic payments," he explains. "But we began to notice that banks were not being particularly creative and responsive to new opportunities in the marketplace, both on the retail and corporate side."

The need for banks to offer consumers payments options is becoming more and more urgent as nontraditional players enter the payments space, Hadorn adds. "When I looked at the 2005 payments revenue across banks and nonbanks, nonbanks accounted for 38 percent of that revenue," he says. "They are often technology companies that don't come in with the traditional banking silos and philosophy around payments use."

BearingPoint interviewed 15 of the top 20 financial institutions (based on asset size) to "understand strategically how they approach customer segmentation in the payments business," relates Hadorn. The consultancy found that banks traditionally approach customer segmentation by specific lines of business, he reports, noting that as a result, they tend to develop and market one-size-fits-all products.

An Enterprisewide Customer View

"Consumers are traditionally viewed by one line of business, such as credit cards," Hadorn says. "But ... those consumers may have other accounts at the bank. If you look at customer preferences only through the card business, you can't get a broad idea of their [overall] payments preferences."

Banks need to break down their product-line mentalities and siloed IT infrastructures, Hadorn asserts. He espouses a behavior-driven model in which banks model customer behavior to design products for individual customers. "Banks must pull data from other lines of business and channels to fully understand customers' preferences," he says. "It's making the right offer at the right time [through] the right channel."

According to Hadorn, there are many analytics technologies available today to help banks understand customers' payments preferences. "There are technologies that enable you to pull data in real time into a decisioning engine that can incorporate the attributes relevant to individual customers," he says, adding, "Seibel and SPSS [Chicago] represent some of the solution providers [in the space]." [Ed. note: Seibel recently was acquired by Redwood Shores, Calif.-based Oracle.]

Hadorn stresses that there is no need to build elaborate data warehouses to store all this information since it may be extracted from existing data sources within the bank. Banks also can tap into publicly available data sources to glean more-specific attributes on individuals beyond demographic/geographic information, such as life-stage data, he notes. * --M.B.