Marketers have been segmenting audiences for hundreds of years. Initially, demographics distinguished brands focused on gender-related offerings. Today, with big data, many firms deploying addressable advertising, web traffic-informed, programmatic marketing and machine-learning can design customized offers to individual consumers. In other words, segmenting to one.
While the ability to ingest mass amounts of data has improved with technology, it’s only as useful as the strategy deployed to monetize it. For the most part, a majority of companies, including financial institutions, have focused on customer acquisition. Using data and analytics to get new customers based on the net present value (NPV) of each customer origination should incorporate pricing for the overall contribution of the relationship, not just a static allowable acquisition cost.
The cost to retain, service and capitalize a lending account must also be considered. Underlying any segmentation for a financial services product must consider pricing for risk and ultimate dollar losses. Historically, to the extent financial institutions have addressed this, they have used FICO® scores and credit bureau exclusion criteria to avoid marketing to high-risk segments. Conversely, some of these institutions are assessing exorbitant bounced check fees to the same audience they feared lending to, resulting in a negative brand experience.
This overall lending ecosystem has led to the rise of high-cost, short-term lenders to fill a market need. The subprime market, while pricing for the associated risk, is more often than not a cheaper solution than bouncing a check. Segmentation strategies have been informed by new data sources to better dimension risk such as alternative credit bureaus. They include Clarity, FactorTrust and others to better profile prospects with data not collected by traditional credit bureaus.
Affordability is a primary driver to maximizing long-term profitability. Open-banking products providing access to a prospect’s primary checking account have gone a long way to mitigating risk while allowing customers to gain access to more credit.
Creative Solutions has been successful in advising clients and implementing marketing campaigns to high-risk lending markets in the U.S., U.K. and Latin America for years. All countries have unique regulatory schemes while the underlying consumer situation needs seem to run across markets. It largely centers around getting the cash in the hands of the consumer as quickly as possible. The funds are most often used for appliance repairs, hot water heaters, auto repairs and other related emergencies.
No one likes to be spoken down to, so creating points of differentiation through positive imagery and product naming is an important ingredient to mitigating adverse selection and increasing life-time value (LTV) of the customer.