Consumer Segmentation Expands in Banking Sector

What Are Its Benefits, Drawbacks?

As competition in Ethiopia’s financial sector increases, banks are looking for ways to maintain a competitive advantage. As a result, some have introduced segmented banking for high-end customers – a form of customer service that revolves around targeting clients with lucrative portfolios. Research suggests that this method helps banks increase their profit, but that it isn’t entirely foolproof. EBR’s Ashenafi Endale spoke with banking insiders to learn more about this form of specialised banking and how it’s being implemented locally.

Although the banking industry in Ethiopia is one of the least developed in sub-Saharan Africa, it has started to evolve gradually by adopting marketing models that are widely used throughout the rest of the world. One of the models that is being pursued by commercial banks is a customer segmentation strategy, which involves marketing bank products and services using specialised branches.
At the beginning of November 2016, Bank of Abyssinia (BoA) opened a specialised branch that serves the Bank’s high-end customers on Africa Avenue. The new branch, called the Habesha Branch, serves normal customers on the ground floor of the Hansem Office Park, while higher-end clients, which they call premium customers, will be entitled to use the offices on the first floor of the building.
The size of the new premium branch office is 500 square metres and has 40 employees. It has meeting halls and kitchens, in which customers can work with their relationship managers. Premium customers and shareholders can use the facility for free, which includes Wi-Fi access, for their own purposes. The premium office can serve 200 customers per day.
“Customers who deposit over ETB15 million, take out loans over ETB15 million, have significant foreign currency deposit records, worked with the Bank for over 10 years and have remarkable transactions and relationships with the Bank will have cards that enable them to be a premium customer,” says Mulugeta Asmare, President of BoA. “The Bank aims to get 80Pct of its income from 20Pct of such premium customers.”
International experts agree that this is a sound approach to modern banking. According to a research paper entitled “Customer Segmentation and Profitability” by Pitney Bowes, a United States-based consulting group, targeting high-end clients is an effective banking model in the post-recession era in which clients are looking for efficient, tailor-made banking solutions: “While most consumers need a banking relationship, the top 25Pct of customers account for nearly all of a financial institution’s profits. Financial institutions require reliable ways to identify revenue potential, assess needs, personali[s]e cross-sell and up-sell activities, build loyalty, and offer convenient, effective service to the targeted, high-yield accounts.”
Other banks in the sector have taken cues from this model of banking. One of the biggest private banks, Dashen, opened a specialised branch a month ago around Wollo Sefer on Africa Avenue. Unlike the Bank’s other branches, this one provides services exclusively for its high-end customers, which are classified as premier and corporate.
Dashen provides different packages for its customers under the two schemes at this new branch. The minimum threshold to open an account at the branch as a premier customer is ETB5 million, while the minimum monetary threshold for corporate accounts, which is designed for corporations and institutions involved in commerce and trade, has yet to be determined.
According to Mulugeta Alebachew, Marketing and Communication Manager at Dashen, customers in the premier service receive quality and timely banking services; consulting from bank experts; discount facilitation upon transaction; an American Express Gold Card, which enables a person to spend ETB100,000 per day; and the ability to withdraw up to ETB60,000 per day from ATMs. Normal customers have a spending limit of ETB8,000 when using an American Express Card and may withdraw up to ETB5,000 from an ATM per day.
“These high-end customers comprise up to 15Pct of the bank’s 1.5 million account holders,” Mulugeta told EBR. “Of the Bank’s 433,000 cardholders, 10,000 are American Express cardholders, which are divided into gold and green.”
He says the majority of the Dashen’s clients below the premier customer threshold generate relatively lower revenue. “We are working on ATM and branch expansion so that clients at the lower end can be served through normal branches, ATMs, cards, mobile and agent banking,” he explains. The Bank currently has 220 cash-withdrawing ATMs, 29 agent banking partners, 260 branches, as well as 1,000 mobile and 3,000 Internet banking customers.
In recent years, the National Bank of Ethiopia (NBE) has been pushing commercial banks to open more branches, especially in rural areas, in a bid to accelerate financial inclusion throughout the country.
However, stakeholders say the increasing operational cost makes it difficult for them to perform their basic functions. “We cannot cover the highly increasing cost just by the revenue generated from the new branches we open,” argues Mulugeta. “Therefore, it is important to focus on customer segmentation and provide customised services for our high-end customers in order to uplift our performance.”
Dashen Bank’s profit after tax has decreased to ETB727 million in the 2015/16 fiscal year from ETB729million the previous year. However, its assets climbed to ETB28.5 billion, up from ETB24.7 billion; shareholders have also decided to raise the paid-up capital of the Bank by ETB510 million, up from its current ETB1.5 billion, during the annual shareholders meeting held at Sheraton Addis on October 27, 2016. This will help the Bank meet the NBE’s requirement of ETB2 billion before the 2020 deadline.
“Uncollected loans from coffee exporters in the Southern region, liquidity problems, declined export performance and commodity prices in the international market impacted Dashen Bank in the 2015/6 fiscal year,” Asfaw Alemu, President of the Bank, told the shareholders during the annual meeting.
To bypass such external and internal obstacles, Mulugeta says it is important to strengthen the use of technology alongside the adoption of different marketing strategies. “Branch expansion has a big cost,” he says. “So, specialisation and segmentation are needed now.”
Financial and marketing experts stress that in industries like banking, where there is stiff competition and unique client needs, segmentation becomes an important issue for institutions that are trying to maximise their profit by following an atypical way of doing things. Globally, segmentation is viewed as the process of arranging diverse markets in to smaller, homogeneous parts called a segment.
According to a study entitled ‘Segmentation in Financial Services Marketing’ published by Z. Eren Kocyigit (PhD), a marketing lecturer at Bahçeşehir University, although segmentation is much harder in the financial sector, addressing the unique needs of heterogeneous customers is important to maximise profit.
Literature written on the subject reveals that market segmentation can be made based on five variables. The first is geography, and the second is based on demography. Segmentation based on demographics revolves around categorising people according to their gender, age and family size, among other things.
Commercial banks in Ethiopia have been using these two modes of segmentation for years. In fact, since it is usually members of a particular ethnic group or religion that establish banks, they tend to serve customers that share a similar ethnic background.
Segmentation based on demography has been practiced in Ethiopia’s banking sector as well. For instance, the Commercial Bank of Ethiopia (CBE) introduced teen, women and youth accounts in 2013 in a bid to encourage more deposits. Other private banks also segment their customers using demography as a tactic.
The other basis for segmentation is based on geo-demographic and psycho-geographic factors. Both factors, which deal with lifestyle, attitude, beliefs and preferences, have yet to be as a significant basis for segmentation in the local banking sector.
However, the fifth factor, which is dividing customers based on socio-economic status, is emerging in the local context. This method uses variables such as social class and income to arrange customers into different groups.
This strategy, argues Kocyigit, has been in practice in the West and has proven to be a successful model for mobilising deposits. For instance, in Europe, customers that can benefit from segmentation and customised as well as specialised services are referred to as high-net-worth individuals and ultra high-net-worth individuals. The minimum transaction or saving requirements for high-net-worth individuals and ultra high-net-worth individuals is above USD1 million and USD30 million, respectively.
Kocyigit argues segmentation enables banks to meet clients’ needs, which in turn increases customer satisfaction and loyalty. Additionally, by adopting this approach, it is possible to perform an efficient match with resources, which leads to cost reduction.
Industry players in Ethiopia’s banking industry that have tried to adopt a customer segmentation marketing approach also laud its rewards.
“Our high-end customers feel honoured and well treated because of the specialised and customised service they receive at our branches,” says Ephrem Mekonnen, Communications Manager at the CBE. “Due to its benefits, they work hard to maintain their status and other customers also get motivated to join that status.”
The CBE began providing priority privileges for its high-end customers in all of its branches three years ago. While the CBE’s package is not the same as Dashen’s, Ephrem says it has helped in treating customers that have invaluable contribution to the Bank: “These customers get priority for any service if they have large deposits, take out big loans and access large foreign currency.”
Of their 13 million clients, 15Pct deserve premium services, according to Ephrem. “The rest are business class. We are conducting studies on customer segmentation to introduce additional facilitations and service packages for customers that constitute 15Pct of the CBE’s clients,” he says. “So far, we did not set a threshold, and we are giving [priority services] at all of our branches.”
The state-owned CBE has 1,100 branches of the 3,500 total operational bank branches in the country. Its asset has also reached ETB384.6 billion as of June 2016.
While the CBE is a titan in Ethiopia’s banking sector, it was Zemen Bank, which joined the industry with a minimum ETB25,000 threshold for savings account holders, that was the first to evolve from the retail banking trend and incline towards serving the high-end customers. The Bank, which was known for its single branch model of operation for years, currently has 12 branches.
“Customer segmentation has helped the Bank immensely,” says Ojeuna Mekconenn, Marketing Department Manager at Zemen. We will introduce additional service packages based on detailed customer segmentation, within a few months.”
This model has worked well in the past for Zemen. According to a study conducted at the Pan African University in Yaoundé, Cameroon, Zemen experienced impressive growth between 2009 and 2014. By most metrics of measuring profitability, including return on assets (ROA) and equity, their financial performance continuously improves due to the Bank “efficiently managing its assets for generating revenue. In particular, Zemen’s return on asset ratio “implies that the Bank has shown a better level of efficiency in utili[s]ation of assets to generate profit….[demonstrating] a 2.84Pct [average growth] of ROA.”
Other banks also seem to follow this trend. “Studies are underway to introduce new products for high-end customers that focus especially on providing premium services for Diasporas, among other services, which we hope to introduce by the end of this fiscal year,” says Daniel Gebre Egziabher, Business Development and Corporate Planning Director at Lion International Bank.
However, experts like Kocyigit argue that the returns of marketing approaches like segmentation based on socio-economic status do not come easily, since the average cost per customer will increase.
Mulugeta agrees with this assessment. “The cost to open the new branch is higher than normal branches,” he argues. “The expensive furniture, dedicating relationship officers to each customer and the service packages makes these branches costly.”
According to research published by A.T. Kearney, an American global management consulting firm, entitled ‘Beyond Segmentation’, this is because classifying customers into predetermined groups does not necessarily bring true returns.
The research bases its argument on the observation of banks operating in countries like Brazil, which have been pursuing a customer segmentation strategy. Since the 1990s, financial institutions in Brazil have divided their customer base into different sub-groups in order provide customised products. However, the strategy has not always delivered on its promises.
The reason is simple, according to the research: “An ‘outside-in’ way of service delivery by offering a customi[s]ed product for [a] predetermined group of customers does not guarantee that a customer’s entire experience with the bank will carter to their distinct needs.”
Research from the Harvard Business Review (HBR) supports this claim. According to an article entitled, ‘What Loyalty? High-End Customers are First to Flee’, researchers at Harvard found that “customers you think are your best and most loyal are likely to be the first to cast you aside when a challenger to your service superiority barges into the market.”
The A.T. Kearney research suggests banks should develop an ‘inside-out’ view of their customers, which not only focuses the entire organisational set-up, such as employees, processes and functions on the banks segmentation strategy, but also on the most profitable customer segments.
Specifically, the HBR article suggests that banks should focus on overall efficiency in service delivery: “High-end businesses must avoid complacency and continue to proactively increase relative service levels when they’re faced with even the potential threat of increased service competition…. Even though high-end customers can be fickle, a company that sustains a superior service position in its local market can attract and retain customers who are more valuable over time.”
Ojeuna says Zemen is known for an ‘outside-in’ view of its customers. “Any segmentation strategy should be part of the organisations structure rather than an extension of activities,” he argues.
Studies also support such a narrative, arguing that a marketing strategy such as segmentation will only be successful if there is a strong internal support structure. Citing the experience of banks in other countries, they stress that customer segmentation works for banks when the entire organisational setup focuses on the strategy and improved efficiency. EBR