Credit card issuers have traditionally targeted consumers by using information about their behaviors and demographics. Behaviors are often based on credit bureau reports on how a person spends and pays over time; customers are typically categorized as transactors, revolvers or subprime. Demographics are derived from census reports and other non-financial databases and cover facts such as income, age and geography. This model has served the industry well for decades, enabling it to offer three main card types—rewards, low-rate and subprime—to cater to different users.

Issuers do have an alternative: they can maintain a profit margin and generate demand for their product by providing only the benefits that customers value. The challenge for issuers is aligning the right value proposition with the right consumers. The question is: how do issuers develop a suite of credit cards that fulfill customers’ needs more precisely without piling on features that add needless complexity or are not valued by users? The answer lies in a more nuanced and powerful approach to customer segmentation—one that can, by extension, be adopted across a range of consumer finance products and markets.

This approach has already been used successfully for two recent credit card launches in the U.S., as well as one in Brazil, where a large issuer identified three distinct customer segments and shaped an integrated approach to the design of new products, messages and channels; the bank expects to see new accounts grow by 2 to 5 percent as it rolls out the cards in the coming months.

Attempting to develop a deeper and more rounded view of consumers is nothing new.  Institutions have long sought closer connections with customers, but have struggled with limited data and arm’s-length interactions.

However, the two-way communications opened up by online and mobile channels enable today’s issuers to capture much more information about each customer, information that can be used to execute a sophisticated needs-based segmentation. (See previous article, “Digital banking: Winning the beachhead,” for more on leveraging customer behavior data for more advanced segmentation.) By connecting data on how people spend, save, shop and travel, banks can bridge the gaps between business lines, enhance their customer knowledge and improve cross-selling.

To do so, they need to have the right message and product available in the right channel when a potential customer comes looking. This is the new frontier of segmentation, channel and product strategy.

Targeting customers more precisely through smarter segmentation is easy to agree with but much more challenging to pull off. The secret lies in a hybrid approach that segments customers primarily by their needs and attitudes—exposing the underlying reasons why customers use their credit cards—but also takes into account a small number of financial behaviors (see sidebar, pages 14 and 15).

Adding these measures to the mix provides further representation of underlying needs and makes the segments easier to score in an issuer’s database. Armed with this segmentation, card issuers can not only craft better value propositions but also identify groups that are not well served by current offers.

McKinsey’s Global Concepts Consumer Life Survey provides an example of how adding financial behaviors into the mix results in segmentation that is more sharply differentiated:

People in this segment keep their finances in

order, use credit cards for 59 percent of their

debt. They look for convenience and

minimum effort, preferring to “set it and forget

it” rather than get closely involved with

banks or card issuers. This is the wealthiest

segment in the McKinsey segmentation,

with an average of $503,000 in household

financial assets, five times the average for

credit card holders. It also has the highest

concentration of premium network card

users at 17 percent, twice the average.

Getting a card into this segment’s wallet involves

offering rewards. To differentiate their

card, issuers should position it not merely as a

spending instrument but as a tool that facilitates

financial success through ease of use. For

instance, if a credit card could offer a means

of steering a large purchase straight into a

low-rate installment loan, it could meet this

segment’s occasional borrowing needs without

the stigma or higher interest rates associated

with revolving credit.

Armed with enhanced segmentation, card issuers can not only craft better value propositions but also identify groups that are not well served by current offers.

With average revolving debt of $3,802—

twice the average—these cardholders move

their balances around to chase the best

transfer rates. This segment is the most likely

to have a cobranded card (24 percent compared

with 17 percent overall) and to pay an

annual fee for a reward card (19 percent

highly involved with financial products and

are nearly as satisfied with their financial situation

(34 and 37 percent respectively,

compared with 20 percent overall), and rank

second in both income ($65,000 median)

and financial assets ($150,000). Despite carrying

higher debt, they are confident about

managing it and view the economic outlook

as positive. They use online banking frequently,

with half making online transactions

three times a week.

Acquiring and keeping these customers calls

for a balancing act, as they see themselves as

pitted against issuers in a win-or-lose game.

Always striving to borrow at the lowest cost,

they try to steal the bait from issuers’ traps

without triggering fees or higher rates

through mishaps or oversights. To build fidelity,

issuers could foster a sense of partnership

rather than competition by making

these customers feel they are getting the best

deal and occasionally satisfying their appetite

for a great new offer; all, of course,

while ensuring the product remains profitable.

A big sign-up or annual bonus can be

justified, for instance, if a customer is likely

to spend heavily and fund the offer through

interchange revenue.

People in this segment carry heavy credit

card debt—nearly four times the average, at

$7,453—and consider themselves unable to

control their spending or stick to a budget.

Some are chronic spendthrifts; others are

mired in circumstances that force them to

borrow on credit cards to pay for essentials.

They seldom shop around for better places

to put their outstanding balances and doubt

they will ever get out from under their burden

of debt. They expect financial trouble

for themselves and the wider economy. This

is the poorest among the segments, with just

a quarter of the financial assets (a mean of

$44,000) of the average cardholder.

Credit plays a crucial role in satisfying this

group’s day-to-day needs: keeping a roof

over their head, paying for their daily commute,

keeping a prescription filled. This is

not a sustainable path, but they are unable

to abandon it just yet. They value simplicity

and transparency in fees, rates and terms,

but their biggest need is for something that

no credit card offers: a mechanism allowing

them to impose their own spending limits.

This would enable them to carry a credit

card for larger purchases that take time to

pay off without fearing they might be

tempted to use it for non-essentials.

McKinsey’s Consumer Financial Life Survey is an ongoing survey taken three times a year since

2009. Since the survey began, 24,000 U.S. consumers have taken the 30-minute self-administered

interview. Topics explored include financial behaviors, preferences and motivations, with an emphasis

on payments.

The data from the survey were used to create a needs-based segmentation of U.S. credit card holders

that yields a more comprehensive picture than traditional demographic- and behaviors-based segmentations

(Exhibit A).

The five groups identified by the segmentation are distinguished by members’ economic circumstances,

household money management style and reasons for using credit cards on various purchasing occasions.

In addition to needs and attitudes, the segmentation takes into account certain spending behaviors

that can be identified from customer data—namely, the volume of household expenditure, the proportion

spent on credit cards and the proportion of revolving debt to income—in order to score

customers and prospects more accurately into segments. Notably, these behaviors correspond to underlying

needs that can be addressed by a credit card product.

Since needs-based segmentation does not divide customers into profitable and unprofitable groups, issuers

must also evaluate indicators of profitability to determine whether and how to execute on each

needs segment. Exhibit A lists spending behaviors typically used for this purpose. Looking at combinations

of these traits at an individual level enables issuers to spot not only clearly profitable customers

but also “diamonds in the rough” who are financially desirable yet overlooked by competitors.

In Exhibit B we see sharp differences between segments for certain attitudes and behaviors. The green

bars indicate higher-than-average intensity of a given attitude or behavior; red bars indicate lower than

credit cards for day-to-day purchases” because members of this segment use credit cards as often as

cards more than other segments do.

Percent of U.S. credit card holders in segment 23% 18% 19% 22% 18%

Median annual household income $85,000 $65,000 $45,000 $45,000 $55,000

Percent of segment with revolving credit card balance 29% 81% 93% 64% 64%

Mean credit card revolving balance per household $890 $3,802 $7,453 $1,726 $1,969

Most-used instrument for POS payments Credit Debit Debit Debit Cash

Share of credit card in POS spending 59% 24% 20% 11% 19%

Most-used credit card does not earn rewards 8% 37% 52% 45% 43%

Source: McKinsey/Global Concepts

Consumer Financial Life Survey

2012–13

Exhibit A

–100 +100

–100 +100

Move money around to get the best return

Want personal interaction with financial institution staff

Disciplined at saving and spending; avoid debt

Stick to a budget and keep finances in order

Card hop or transfer balances to keep rates & fees low

Finances are tight; feel in a hole & stressed

Credit card’s share of total POS spend

Avoid credit cards for day-to-day purchases

Want personal interaction with financial institution staff

Move money around to get the best return

Credit card’s share of total POS spend

Stick to a budget and keep finances in order

Card hop or transfer balances to keep rates & fees low

Disciplined at saving and spending; avoid debt

Avoid credit cards for day-to-day purchases

Believe issuers cause people to accumulate too much debt

A comparison of two segment examples

Source: McKinsey/Global Concepts

Consumer Financial Life Survey

2012–2013

Exhibit B

These individuals have become avid budgeters

who pride themselves on keeping

their financial house in order, although they

still revolve an average balance of $1,726.

Wary of financial institutions, they avoid the

stock market as too risky, fear their bank deposits

are unsafe and blame issuers when

consumers accumulate debts and fees they

are unable to pay off. Cardholders in this

segment avoid using credit cards for routine

purchases and seldom respond to zero-percent

teasers or high-reward offers. They prefer

to deal with bank staff in person and are

less likely than other segments to use online

banking, with just 49 percent doing so.

This group’s adversarial view of issuers suggests

they need reassuring that they can use

a credit card without stumbling into a

“gotcha” fee or triggering a penalty rate.

They need a product that helps them budget

and manage their spending—for instance, by

allowing them to define spending “buckets”

for various merchant types with monthly

limits (e.g., $200 at grocery stores, $80 at

mass merchants and $150 at restaurants).

As they approach one of these limits, a purchase

could trigger an SMS text or email

alert to warn them. An issuer could allay

fears of triggering a penalty fee by adding a

one-time “forgiveness voucher” to its card

offer, and attract a greater share of spending

by positioning the card as appropriate for

everyday purchases. This is an active, engaged

group that wants to control their

spending and are looking to companies that

can provide the necessary tools.

segment avoid using credit cards, although

they blame themselves rather than issuers

for their debt problems and worry about the

damage they could do to themselves with a

credit card. They use debit cards and cash

for three-quarters of their POS purchases,

but still carry an average revolving debt load

of $1,969 per household. They are slightly

for that matter, average cardholders—in

terms of income and wealth.

consumers are likely to respond to simplicity

and transparency in fees, rates and

terms. Bolstering their confidence that they

can use credit cards without mishap for certain

purchases, particularly for short-term

borrowing, will make a credit card more viable.

Similarly, they would feel more in control

if they could understand the payoff

horizon for major purchases. Cards that

could instantly calculate the scale and duration

of monthly payments for a given purchase

at the point of sale would better meet

this group’s needs.

A limited array of features can be assembled in different combinations to create a unique value proposition for each segment.

A limited array of features can be assembled in different combinations to create a unique value proposition for each of these five segments

The first step for issuers is to reach alignment on their business objectives: what problem are they trying to solve with the segmentation, and how will they use the segmentation?

When segmentation efforts fail, it is often because more energy has gone into deriving the segmentation than thinking through the implementation.

When an issuer’s objective is to attract new

customers and drive revenues and growth, it

should use the segmentation to structure not

just product design but the whole acquisition

process from customer targeting to segment

positioning to delivery. That means

starting with a needs-based segment, developing

a card with features to meet those

needs and promoting it by explicitly communicating

how the features satisfy the needs.

The segmentation described above is well

suited to helping issuers design value propositions

with maximum appeal to distinct

consumer groups and frame how these

propositions are delivered.

(If, however, an issuer is more concerned

with revenue leakage, it could increase the

ratio of behavioral to attitudinal measures so

as to optimize scoring efficiency rather than

needs-based differentiation among the customers

it is trying to retain.)

Once objectives are set, deriving the segmentation

is typically a two-part process

combining qualitative research to uncover

needs and attitudes and quantitative research

to cluster and measure customers. Issuers

should use professionally moderated

qualitative research involving one-on-one

interviews, focus groups or online groups to

inform the design of the quantitative survey

and bring segments to life. For survey purposes,

issuers should recruit individuals

from market panels as well as existing customers

to help them understand how their

customer base differs from the wider market

and how they might increase share among

particular segments. Issuers can also append

their own data and create database proxies

to help type the segments in their database.

By using such methods, some issuers have

managed to increase their targeting ability

within a segment by up to 100 percent.

Having derived the segmentation, an issuer

must then hard-wire it into the business. To

be effective, segmentation must become

part of the rhythm of the organization, embedded

in its planning, measurement, goals

and incentives.

Rewards

Balance transfer offers

Easy account management

Low fees and interest

Occasional special deals discounting or

rewarding existing balances

Simple and transparent fees, rates and terms

Self-imposed spending limits

Budgeting within distinct purchase categories

“Daily needs” positioning

Avoidance of mishaps that trigger fees

Payoff horizon for each major purchase

Swipe to installment loan

Prosperous

and content

Deal

chasers

Financially

stressed

Recovering

credit users

Self-aware

avoiders

Source: McKinsey Payments Practice;

Global Concepts

Exhibit 1

* * *

By building a richer, deeper view of customer segments, financial institutions can sharpen their value proposition, integrate cards with other lending products, reduce channel confusion and clarify positioning and promotions.

This approach helps to break down silos and rally business units around a common goal and a single company-wide view of the customer.