Changes in financial system and economic conjuncture have affected the motives of the customers, and have changed their needs in the financial markets. As a result of this, customization emerged as an essential issue for financial services and treating all customers equally became a service philosophy of the past. For this reason financial institutions, especially commercial banks, started to cluster their customers in order to meet different needs of the customers while they are optimizing their market share, value and profits. This grouping process is defined under the name of ‘segmentation’ and applied in different methods among different financial organizations. As a result of such segmentation processes, a niche segment has been established by the financial companies to serve wealthy individuals and provide them tailor made products and services according to their unique needs. Type of banking which is serving these types of novel customers is called ‘Private Banking’. This paper will analyze main characteristics and key aspects of services marketing, financial services marketing, segmentation in financial services marketing, private banking and re-segmentation in private banking subjects. While dealing with private banking subject, study will try to answer the following question: Are private banking customers already segmented and they have to be served similarly or do they have to be re-segmented within each other?
Aim and Methodology of The Study
This study will be aiming to investigate the key aspects of services marketing, financial services and segmentation. While dealing with these concepts, study will also try to analyze the private banking concept as the most precious segment of financial system and try to investigate whether there is a need for re-segmentation for private banking. The study will start with a literature review about services marketing, financial services marketing and segmentation, and then undertake financial marketing services concept and its main characteristics. After analyzing the key concepts in financial services marketing, private banking will be handled.
In this section literature of services marketing, financial services marketing and segmentation will be reviewed.
- Services Marketing & Financial Services Literature Review
As Harrison mentioned in his book (2000); ‘financial services sector’ is forming a part of the wider ‘services sector’, that’s why it is necessary to take into account the ‘services marketing concept’ in order to analyze the ‘financial services marketing concept’. This section will review both the services marketing and financial services marketing concepts.
The early history of the marketing discipline (Bartels, 1988) focused on selling agricultural products. Subsequently, the discipline’s scope expanded to marketing physical goods (Brown et al. 1994). So early marketing thought was depending on and dealing with the goods, and evaluated marketing as the exchange of goods. But starting from the 1950s scholars began to ‘break’ services marketing ‘free from goods marketing’ and started to build the domains of services marketing. This breaking free began by trying to construct the appropriate definition of services marketing and broadened through putting forward the basic differences of services marketing from goods marketing, which are intangibility, inseparability, heterogeneity, and perishability (Vargo and Lusch 2004).
At the beginning period of the services thought, approximately between 1950 and 1980, which has been defined as ‘Crawling out’ stage by Fisk, Brown, and Bitner (1993) there had been debates about the definition of services marketing. Judd (1964) recommended to define services by excluding it from products because he believed that definition of services exhausts the category of economic goods when services is defined together with a product definition, because he claimed that nothing can be learned about the essentials of a service. In 1966, Rathmell mentioned about services marketing as; “most marketers have some idea of the meaning of the term ‘goods’ . . . but ‘services’ seem to be everything else”. Similar to Rathmell’s definition after 1980’s till present day, services marketing have been defined mostly in a way by seeing services as what tangible goods are not. For instance, Solomon et al (1985) asserted that “services marketing refers to the marketing of activities and processes rather than objects” and Lovelock (1991) defined service as “a process or performance rather than a thing.” Today, there is still not a generally accepted definition of services marketing and as Gummesson (2000) said: “We do not know what services are, nor do we know what goods are in a more generic sense.”
In addition to the definition and main characteristics of services marketing, there has been alot of studies about the fundamental differences between services marketing and goods marketing. In their study Zeithaml, Parasuraman, and Berry (1985) analyzed all the marketing literature dealing with the differences between goods and services marketing and they came to a conclusion of 4 basic differences intangibility, inseparability, heterogeneity, and perishability. In addition to these 4 basic differences, Mckechnie (1992) put forward 2 more characteristics which are specific to financial services; fiduciary responsibility and two-way information flows.
Zeithaml, Parasuraman, and Berry (1985) asserted that the fundamental difference cited by authors (e.g. Bateson 1977; Berry 1980; Lovelock 1981; Rathmell 1966; 1977) is intangibility and according to them services can be evaluated as performances, rather than objects and unlike goods they cannot be touched, felt, seen or tasted. In all the studies that were prepared about intangibility issue saw this characteristic as the most crucial distinction between goods and services. In the area of financial services alone, Harrison pointed out that (2000); not all services are intangible and man financial services contain tangible elements.
In addition to intangibility, Zeithaml, Parasuraman, and Berry (1985) put forward inseparability concept as the second distinctive characteristics between goods and services. They pointed out that in most of the services production and consumption process took place simultaneously in an inseparable manner. To support their ideas about inseparability concept they cited several authors like Regan (1963), Carmen and Langeard (1980) and Upah (1980). They asserted that as Regan told (1963) goods are first produced, then sold and then consumed but services are first sold, then produced and consumed simultaneously. They also presented Carmen’ and Langeard’s (1980) ideas which is: inseparability forces the buyer for a contact with the production process because he/she must be present during the production of many services like haircuts, airplane trips. Depending on Upah’s study (1980), Zeithaml, Parasuraman, and Berry (1985) told that inseparability also means a direct distribution since the producer and the seller is the same entity. According to Harrison (2000), for financial services, characteristics of inseparability may only apply to a few financial products.
As a third distinctive concept between goods and services, Zeithaml, Parasuraman, and Berry (1985) analyzed heterogeneity concept and related studies to this concept. They defined heterogeneity as variability and claimed that heterogeneity can be a problem for labor intensive services since the quality of a service can vary from producer to producer, from customer to customer, and from day to day. They added that; as Langeard et al.’s told (1981), there is a consistency problem in services because many different employees may be in touch with the same customer. Finally, Zeithaml, Parasuraman, and Berry (1985) mentioned about how Knisely (1979) dealt with this inconsistency problem by claiming that there is not a consistency in communication to the customer that service marketers can count on because the performances of individuals may differ because of fluctuations in the individuals’ performances within daytime, service performance from the same individual may also differ. Thomas (1978) claimed that degree of variation is affected by the extent to which the services organization is ‘people-based’ or ‘equipment-base’ and Harrison (2000) classified financial services as ‘people-based’.
Finally, Zeithaml, Parasuraman, and Berry (1985) mentioned about perishability concept and defined it as ‘services cannot be saved’ (Bessom and Jackson 1975, Thomas 1978). Zeithaml, Parasuraman, and Berry (1985) emphasized that ‘motel rooms not occupied, airline seats not purchased, and telephone line capacity not used cannot be reclaimed because services are performances that cannot be stored.’
Mckechnie (1992) added 2 more distinctive characteristics for services sector which are specific to financial services; fiduciary responsibility and two-way information flows. Fiduciary responsibility was defined by Mckechnie and Harrison (1995) as ‘the implicit responsibility of financial service organizations for the management of their customers’ funds and the nature of financial advice supplied to customers’. Harrison mentioned about ‘two-way information flows’ concept by claiming that financial services shouldn’t be evaluated with one-off purchases but involves regular two-way transactions over an extended time period.
- Segmentation Literature Review
This section will both review the literature for market segmentation on general basis and also deal with the studies presented under the segmentation in financial services subject.
Segmentation is firstly defined by Smith (1956) as ‘viewing a heterogeneous market as a number of smaller homogeneous markets, in response to differing preferences, attributable to the desires of consumers for more precise satisfaction of their varying wants’. Goal of the segmentation was defined as solving the conflict between the intentions to satisfy customer needs as individually as possible but also to allocate marketing resources as economically as possible (Wind, 1978).
Within the literature, authors proposed variety of different criteria that should be met in order to talk about market segmentation. These different approaches bunched in 6 criteria by Alfansi and Sargeant (2000) after reviewing several studies that had been presented about market segmentation (Frank et al., 1972; Loudon and Della Bitta, 1984; Baker, 1988; Kotler, 1988; Hiam and Schewe, 1993). These 6 criteria are identifiability, substantiality, accessibility, stability, responsiveness; and actionability.
Another popular topic that has been discussed by the scholars is the basis of segmentation. Alot of reseach has been made on this topic and alot of variables have put forward by academicians. Alfansi and Sargeant (2000) followed Frank et al.’s (1972) and Wedel and Kamakura’s (1998) approach because they believed that these 2 studies had facilitated the most pertinent approach to financial service sector. Frank et al.’s (1972) and Wedel and Kamakura’s (1998) suggested classifying segmentation variables according to whether they are “product-specific” or “general” (i.e. independent of products/services), and also by the extent to which each variable might be deemed observable (see figure 1).
In observable general bases; variables such as gender (Dickens and Chappell, 1977; Frank, 1989), position in the family life cycle (Wells and Gubar, 1966; Lansing and Kish, 1957; Reading, 1988; Jonak, 1988), culture (Joy et al., 1991), income (Allt, 1975; Slocum and Matthews, 1970; Chisnall, 1992; Monk, 1970) and geographic location (Lunn, 1978), have been presented as the potential basis for segmentation. In the financial service context, number of studies had found differences in purchase behavior between different demographics (Stafford, 1996; Bobinski and Assar, 1994). However some studies asserted their concern about demographics criteria because they had evaluated this criterion ‘too small’ (Frank, 1968; Frank et al., 1972; McCann, 1974; Minhas and Jacobs, 1996). Alfansi and Sargeant (2000) told that despite the criticisms about demographics, this concept is a popular basis for segmentation because of 2 reasons; first of all, there is an easy conjunction possibility with demographic variables with the other variables and secondly, demographic variables can easily be obtained. Among financial services sector, when banking sector is the issue; according to Machauer and Sebastian (2001), customer segmentation is largely limited to categories of corporate and retail customers. Within these categories; corporate customers are distinguished by their geographic range of activities (regional versus international) or by their sector that they are involved and being affected. In personal retail banking, demographic criteria such as profession, age, income or wealth are often being preferred for basis of segmentation (Meidan, 1984; Harrison, 1994).
In observable – product-specific bases, variables such as user status (Khermouch, 1993; Spotts and Mahoney, 1993), usage rate (Twedt, 1964; Goldsmith et al., 1994), loyalty (Cunningham, 1956; Tucker, 1964) and stage of adoption (Frank et al., 1972) have been presented as the potential basis for segmentation. Most of the studies confirmed the utility of this segmentation variable when marketing the financial services. (Jain et al., 1987; Meidan and Moutinho, 1988; Laroche and Taylor, 1988)
In unobservable – general bases, variables such as personality ( Evans (1959); Koponen (1960); Massy et al., 1968; Pizam, 1972; Veldhoven, 1973), personal values (Kahle et al., 1986, Mitchell, 1983) and psychographic/lifestyle variables (Ziff, 1971; Harrison, 1994) have been presented as the potential basis for segmentation. An example of psychographic segmentation is presented by Harrison (1994) by using such variables; individuals’ own perceived knowledge and understanding of financial services, the perceived confidence and ability in dealing with financial matters and the expressed level of interest (involvement) in financial services. After this study, Harrison identified four customer segments; “financially confused”, “apathetic minimalists”, “cautious investors” and “capital accumulators”.
In Unobservable product-specific bases, variables such as as product-specific psychographics (Dhalla and Mahatoo, 1976), product benefits (Haley, 1968; Miller and Granzin, 1979; Brown, 1992), brand attitudes (Yankelovich, 1963; Frank et al., 1972) and behavioural intentions (Fishbein, and Ajzen, 1975; Ginter and Pessemeier, 1978) have been presented as the potential basis for segmentation. Of these, the importance of benefit segmentation is perhaps most well established in the literature (Tynan and Drayton, 1987; Loker and Perdue, 1992; McDougall and Levesque, 1994; Minhas and Jacobs, 1996) and benefit segmentation has proved its usefulness in services markets (Calantone and Sawyer, 1978; Soutar and McNeil, 1991). Benefit segmentation has also been studied in financial services context, for instance, McDougall and Levesque (1994) applied benefit segmentation in their study to retail banking and performed a cluster analysis. They identified two customer segments: a performance segment and a convenience segment.
Financial Services Marketing
In this part main characteristics of financial services will be presented and then segmentation in financial services will be taken into account
- Definition of Financial Services
Financial services can be defined as any activity which can be considered ‘financial’ in nature (Brown, 2005), or it can be shortly defined as activities provided by the finance industry. Financial services deals with money management. Most important sector which is providing financial service is the banking sector. In addition to banking sector activities related to insurance, investment, leasing, factoring and etc… are also located in financial services concept.
- Main Characteristics and Features of Financial Services
As it was mentioned in literature review section of the study; according to Harrison (2000) financial services can be considered as a part of services sector and conveys similar characteristics with services sector. In addition to the 4 basic differences between goods and services which are intangibility, inseparability, heterogeneity, and perishability, Mckechnie (1992) mentioned about 2 more characteristics which are specific to financial services; fiduciary responsibility and two-way information flows.
When intangibility is analyzed under financial services content, it can be told that financial services aren’t purely intangible if tangible elements like branches, ATMs which are involving to the serving process is taken into account (Harrison, 2000). Although there are tangible products in the process of a financial transaction, it shouldn’t be forgotten that the essence what is sold to the customer is the performance (service) which is backed by the tangible products. About inseparability concept, it can be told that; since the basic premise of this concept is service is produced and consumed simultaneously in services sector, when financial transaction like saving account (basically putting money on a bank and taking the money with an interest paid after a certain maturity) is considered, the premise of inseparability concept vanishes (Mcgoldric and Greenland, 1992). If heterogeneity is the issue; from Thomas’s (1978) view financial services can be evaluated both ‘people-based’ and ‘equipment-based’. Since most of the customers chose to interact with the tellers in the branches, it can be told that financial services are people-based and this characteristic increases the variation of the service standard in a financial institution. But also when the technology that is being used in financial services sector is taken into account, it can be told that financial services are also equipment-based and this characteristic decreases the variation of the service standard and provides more standardized service quality through different channels like ATM, online branch and etc… Another concept that should be analyzed is perishability. Although there are several transactions occurred in financial system which must be considered as perishable, there are also examples which show that not all of the financial services are perishable. For instance, when a credit card and a dinner reservation are compared, a credit card’s supply is adjustable to meet the demands of customer than dinner reservation because credit card will be there when the customer wants one, but if more than one customer request a reservation for the same table on the same day, at the same hour, only one of them can get the table (Ehrlich and Fanelli, 2004).
In addition to these 4 common characteristics with services, financial services have 2 more characteristics according to McKechnie and Harrison (1995); fiduciary responsibility and two-way information flows. Fiduciary responsibility is needed between a financial institution and customer because in a financial services marketing exchange, customer is essentially buying a set of promises from the financial institution about taking responsibility for taking care of customer’s funds. Also when such processes like visiting branch, using ATMs and etc… are taken into account, it can be asserted that financial services transactions take place in a two-way form. Institutions can use this factor on their advantage by collection information, data and feedbacks through these two-way interactions.
Some other concepts that can be classified as ‘unique characteristics’ for financial services are; first of all, comparing to regular services sector, regulation is an essential characteristic for financial services . As Harrison (2000) implied; to sustain systemic stability, to maintain the safety and soundness of financial institutions and to protect the consumer regulation is applied to financial services. Secondly, when the prices of products and services are compared, it can be told that pricing in financial services is more complex than regular services sector.
Ehrlich and Fanelli (2004) considered financial services as both goods and services. When separability (many financial products can be separated from their consumption), lack of perishability (Unlike a dinner reservation, a credit card will be there when the customer wants one) and mass production (some financial services like college savings accounts can be mass-produced and mass-marketed) are taken into account, financial services can be considered as goods. At the same time, when low cost of entry (There is little or no cost to manufacture to create a new financial product), speed to market (after structuring the financial services, they can be distributed as soon as the ink is dry on the offering plan) and lack of exclusivity (financial services can be duplicated easily) production are taken into account, financial services can be considered as services.
- Marketing Financial Services
Since there are several unique characteristics that financial services involve, marketing of financial services is a unique and highly specialized branch of marketing and involves unique characteristics.
For instance, constructing the marketing mix is much harder in financial services marketing compared other forms of goods and services marketing. (e.g. In consumer goods marketing, a marketer can easily target consumers and position the brand with the confidence that all samples of their products are manufactured to be the same. However in financial services marketing, a marketer cannot assume the same and since the experience that customers have differ from employee to employee and from day to day (Ehrlich and Fanelli, 2004). Marketers may face several unique problems in positioning and promoting financial services offerings because these offerings are intangible (Kanuk and Schiffman, 2010))
Furthermore, because of the specialization and customization in the sector, in order to meet the needs of customers, financial services marketing started to be more complex and challenging, comparing to other forms of goods and services marketing. (e.g. because of the increased competition in investment sector, there are millions of different structured financial products (which can be defined as ‘tailor-made’ products that are structured in many complex forms according to the customer’s risk appetite) are being launched in the market (Kocyigit, 2007) but in a product based sector, let’s say in an automobile sector, new models of cars are not being launched everyday and the models that are being produced are not in complex forms. )
In addition to these unique characteristics Ehrlich and Fanelli (2004) put forward some more key aspects that financial services marketing involves as the followings:
- Since financial services are about the money and money contains a lot of psychological baggage, it can be told that financial services marketing is closely related to psycographics.
- Since the money is so personal, relationships is very important in most areas of marketing financial services. For instance, in financial services sector customers don’t buy a brand but they buy an individual.
- There are multiple sales channels in financial services which provide customers to reach the services directly or indirectly, and all of these channels require a different marketing strategy.
- Unlike most forms of goods and services marketing, in financial services marketing decisions are made without comparison shopping and most of the time cost of a given service is a less important parameter for customers than convenience and reputation.
- Most financial services can be considered as ‘sticky’ that means once a purchase decision has been made, the buyer tends to stay with the product even when the reason for the initial decision is no longer valid. That creates a higher loyalty and retention ratio to the sector comparing to other sectors.
- Since financial services sector is the most regulated industry, most of marketing decisions are affected from that.
From all of the key aspects above most of the contemporary financial services marketers are dealing with the increasing competition and need of customization in the financial services industry. Thus, clustering customers in other words segmentation have been a critical issue among financial services market thinkers and doers.
- Segmentation in Financial Services
Since there is an increase in the competition climate of the financial services sector and customers’ unique needs ‘segmentation’ becomes an essential issue for financial services marketers in order to specialize and customize their services to meet unique needs of customers.
Market segmentation can be defined as a process of viewing a heterogeneous market as consisting of a number of smaller and more homogeneous parts, called segments (Harrison, 2000). Utopia of segmentation is serving each customer differently which can be also considered as individual marketing.
Benefits of Market Segmentation
Financial services apply segmentation process for the following benefits of segmentation process (Harrison, 2000):
- By the help of market segmentation, it is possible to perform an efficient match with the company resources and market requirements, and thus, costs can be reduced.
- Segmentation provides an opportunity to meet the customer requirements, and thus, customer satisfaction increases.
- Segmentation also provides to anticipate the needs of new customers by projecting known segment characteristics onto new customers.
- Customer retention can be improved by segmentation, especially bu increasing customer satisfaction via segment migration.
In addition to these benefits, segmentation can also provide to foresee the changes in the buying behavior of target market and to respond it with new promotions and offerings. Also as a result of segmentation, segments that are small in number but have large potential (i.e. niche segments) can be detected. Private Banking segment which will be analyzed in the next section is a kind of this ‘niche segment’.
Bases for Financial Services Segmentation
There are variables that shape buying decisions of customers in each sector. These variables are; individual differences, consumer resources, knowledge, attitudes, motivation, personality, learning, values and lifestyle, environmental influences, culture, social class, reference groups, family and etc… (Schiffman and Kanuk, 2010). These variables are important since the aim of segmentation is to group individuals into segments accordingly to their differences and similarities in product needs (Harrison, 2000).
A segmentation basis can be defined as ‘the characteristic or groups of characteristics of consumers used to assign consumers to segments’ (Wedel, 1990). Although there are infinite number of variables which can be used as segmentation bases, that doesn’t mean they are all applicable to all segments and markets (Harrison, 2000). Wind (1978) suggested some preferred bases for segmentation like benefits sought, needs and product usage patterns.
Since the subject of ‘bases for segmentation’ is a popular topic and have been analyzed by a lot of academicians, there appeared a lot of different approaches to this topic. Bases of segmentation can be analyzed 5 major categories as; geographic, demographic, socio economic, geodemographic and psychographic (Harrison, 2000).
Geographic bases: It can be classified as the first used segmentation variable in the history (Haley, 1968) and emerged due to the lack of infrastructure. Some popular geographic segmentation styles are regional segmentation (country, city, and etc…), segmentation based on size of population and density segmentation (urban, rural and etc…)
Demographic bases: It consists of grouping people according to gender, age, family size, family life cycle, etc… This type of segmentation involves some advantages such; information can be easily interpreted and transformed from one study to another, it provides measurability and accessibility to markets (Harrison, 2000)
Socio economic bases: It consists of grouping people according to socio economic variables such as their social class and income.
Geodemographic bases: It can be defined as a multivariate system which combines geographic and demographic information. Most of the marketers believe that they say more about lifestyle than traditional demographics (Whitehead, 1987)
Psychographic bases: This variable can be defined as internal characteristics of cutomers such as attitudes, beliefs, preferences, knowledge, personality and etc… As Harrison (2000) told; this variable ‘pinpoints thinking, not just being’
Segmentation Strategies for Financial Services Marketing
Segmentation varies from one financial institution to another one because of different strategies. According to Abell (1980) and Kotler (1997) there are 5 different strategies for the selecting and targeting the market segments;
- Single segment concentration: In this type of segmentation, only one segment is being targeted by the organization and most of the sources are used for this segment
- Selective specialisation: This type of segmentation can also be defined as multi-segment coverage and applier of this strategy attempt to reach a number of segments.
- Product specialisation: It occurs when a firm concentrates on marketing a certain product to several segments.
- Market specialisation: In this type of segmentation, company concentrates on serving the many needs of a particular customer group.
- Full market coverage: In this type of segmentation, company attempts to serve all customer with all products they might need
In this section, definition, general characteristics, bases and strategies of segmentation in financial services were analyzed. Among the financial services industry, if the banking sector is taken into account about segmentation issue; it can be told that: ‘Customer segmentation is largely limited to categories of corporate and retail customers. Within these categories; corporate customers are distinguished by their geographic range of activities (regional versus international) or by their sector that they are involved and being affected. In personal retail banking, demographic criteria such as profession, age, income or wealth are often being preferred for basis of segmentation.’ (Meidan, 1984; Harrison, 1994; Machauer and Sebastian, 2001).
Next section of the study will deal with personal retail banking category and its most precious segment (i.e. Private Banking) which is obtained after a segmentation that is based on personal wealth.
Private banking constitutes the upper side of the retail banking when a value based segmentation is taken into account. It can be defined as high quality of financial services that are offered to wealthy clients. Type of service offered to customers by private banking is consisting of traditional banking services and some other premium and ‘tailor-made’ services. Type of services provided by private banking departments vary from bank to bank, nation to nation and customer to customer. As they are labelled as ‘tailor-made’ services, type of service that is provided by a private banking department is mostly shaped by the customers’ needs. Most popular type of services providers by private bakers are; portfolio management, investment advisory, real estate advisory, tax advice, art consultancy and etc…
Customers (in private banking jargon client is used instead of customer) that can benefit from private banking services is named as High Net Worth Individuals (HNWIs) and Ultra High Net Worth Individuals (UHNWIs). Minumum limit for being a HNWI and UHNWI can vary between different banks but most of the Europen Banks determined this limit as 1 million US $ for being a HNWI client and 30 million US $ for being a UHNWI client (Capgemini & Merrill Lynch, 2010)
Some other main characteristics of private banking are (Molyneux and Omarini, 2007);
- In some countries like Switzerland, private banking services are provided through traditional private banks (like Pictet) and universal banks (such as UBS and Credit Suisse), but in countries like US and UK main operators in private banking are both commercial and investment banks
- Like retail banking, private banking can also be considered as personal-oriented service level. Where retail banking focuses on offering standardized products and services to a wide range of customers by giving individual relationship less importance, private banking focuses on offering more specialized products and services to a small number of customers by caring much about relationship.
- Private Banking clients usually have multiple financial relationships. For example, a HNWI may have a relationship with his or her local retail bank for a simple checking account; with a full service broker for investment management; an insurance agent for life insurance and annuities; and a tax accountant for tax planning.
- Depending on the financial institution and entry requirements, the level and complexity of private banking services can vary widely. As can be seen from figure 2, mostly, a segment which is named ‘mass affluent’ is located between mass market and HNWI. Although, criteria to be a mass affluent client also varies from organization to organization, widely accepted range for mass affluent segment is between 300.000 US $ and 1 Million US $.
- Overview of the Private Banking Market
According to the World Wealth Report 2010 that was published by Capgemini & Merrill Lynch, the private banking sector can be overviewed like following:
- The world’s population of high net worth individuals (HNWIs1) grew 17.1% to 10.0 million in 2009, returning to levels last seen in 2007 despite the contraction in world gross domestic product (GDP). Global HNWI wealth similarly recovered, rising 18.9% to US$39.0 trillion, with HNWI wealth in Asia-Pacific and Latin America actually surpassing levels last seen at the end of 2007 (see figure 3).
- For the first time ever, the size of the HNWI population in Asia-Pacific was as large as that of Europe (at 3.0 million). This shift in the rankings occurred because HNWI gains in Europe, while sizeable, were far less than those in Asia-Pacific, where the region’s economies saw continued robust growth in both economic and market drivers of wealth (see figure 3).
- The wealth of Asia-Pacific HNWIs stood at US$9.7 trillion by the end of 2009, up 30.9%, and above the US$9.5 trillion in wealth held by Europe’s HNWIs. Among Asia-Pacific markets, Hong Kong and India led the pack, rebounding from mammoth declines in their HNWI bases and wealth in 2008 amid an outsized resurgence in their stock markets (see figure 4).
- The global HNWI population nevertheless remains highly concentrated. The U.S., Japan and Germany still accounted for 53.5% of the world’s HNWI population at the end of 2009, down only slightly from 54.0% in 2008. Australia became the tenth largest home to HNWIs, after overtaking Brazil, due to a considerable rebound (see Figure 5).
- Is Further Segmentation Needed in Private Banking Sector?
As it is told before; private banking clients are already clustered and chosen customers from the retail clients of the banks. But the question is ‘should private banking customers be served equally between each other?’ or ‘should there be a re-segmentation within private banking clients to determine sub-segments for a more customized service?’
In most cases private banking clients are segmented by geography, demographics, wealth, income, asset class holdings and preferences, domicile, and so on… (Maude and Molyneux, 1996). In addition to these factors; risk preferences of clients and their professionalism, in other words, sophistication level of their needs are also taken account as bases for re-segmentation (Molyneux and Omarini, 2007).
Molyneux and Omarini (2007) asserted that; most complex types of private banking clients’ demands are depending on such factors like; life choices, investment/product choices and provider choices. They proposed a combination of segmentation approach by taking into account both these factors and other factors, and presented a segmentation strategy based on a combination of factors including;
- Criteria based on the source of wealth
- Criteria based on client needs and sophistication
- Criteria based on the inherent advantages of lifestyle services
- Criteria based on price sensitivity; and
- Criteria based on customer value.
When re-segmentation is the issue there are infinite numbers of variables that can be applied on segmentation process. Also variables of re-segmentation are most likely to vary from one country to another, depending on the characteristics of existent clients and country’s economic conjuncture. Variables like past purchase behaviors about investment products, type of needs and lifestyle can be evaluated as efficient variables for this re-segmentation. Past purchase behaviors about investment products is important because this determines the risk appetite of the private banking clients and provide valuable information to the private banker in order to contribute the product tailoring process for clients with similar risk appetites. Type of needs can also be considered as an important variable for private banking re-segmentation because grouping clients with the similar needs provide advantage in managing these clients and thus, efficiency and customer satisfaction rises. Finally, since private bankers are aiming to provide exclusive and premium services to their customers they should cluster them according to their lifestyles and construct their marketing strategies like promotions, service channels, pricing and etc… by taking into account their lifestyles.
Paper examined the main characteristics and key aspects of services marketing, financial services marketing, segmentation in financial services marketing, private banking and re-segmentation in private banking.
Services marketing were handled by analyzing the differences of services marketing and goods marketing. Through an extensive literature review, it is detected that according to most of the authors there are 4 major differences between services and goods marketing; intangibility, inseparability, heterogeneity, and perishability.
Study also pointed out that; when financial services are the issue, some more unique characteristics like fiduciary responsibility, two-way information flows, extensive regulation and product complexity should also be considered as key aspects of financial services which provide discrimination between financial services and other form of products and services sectors.
Study also examined the segmentation concept both in broader perspective and special for financial services sector. While dealing with segmentation concept; benefits for segmentation, bases for segmentation and segmentation strategies were presented. From infinite number of segmentation variables; 5 of them evaluated as major bases for segmentation which are geographic, demographic, socio economic, geodemographic and psychographic variables. Also from different segmentation approaches, study took into account such strategies like single segment concentration, selective specialisation, product specialisation, market specialisation and full market coverage.
Finally study analyzed the private banking sector as the most precious segment of banking industry. After observing main characteristics of the sector it was asserted that although private banking is consisting of clients that are already segmented, for a better quality of service and customization on more individual basis, a re-segmentation process is needed. While performing this re-segmentation process multi-segmentation approach should be applied. Since variables that should be used in re-segmentation may vary from nation to nation, variables like; past-purchase behaviors (especially for investment products), level of sophistication regarding their needs and lifestyle were presented as main suitable re-segmentation variables in order to increase client satisfaction, service quality and bank efficiency.
Author: Z. Eren Kocyigit – 22.01.2011
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