Creating a balanced portfolio in a turbulent market means leveraging data to both manage risk and create long-term value.

Even the most optimistic outlook on today’s economic environment is uncertain at best. Interest rates are climbing, loan demand has slowed, and talks of a recession mount. What’s more, recent market volatility and threats to banks around deposit runoff only heighten the need for banks to adopt a balanced segmentation and portfolio management strategy — one anchored by data — that can help banks both attract and deepen relationships with their most valuable customers and mitigate risk of deposit runoff.

Banks will need to have firm customer segmentation, optimized to highlight where areas with the most revenue and cross-promotion can occur. Between different types of households, small and medium-sized enterprises, and larger commercial accounts, having a deep understanding of who each client is and what their potential revenue is will help teams prioritize and adjust the customer experience in a way that facilitates long-term relationship building and growth.

An environment of increasing interest rates and economic uncertainty amid heightened public perception concerns means banks must be able to assess critical aspects of their portfolio, including identifying their most loyal customers, early warning cues to signal deposit runoff and exposure to concentration risks.

Answering these questions with data-driven insights will enable banks to manage risk in the immediate term and gain customer engagement, retention, and value realization in the longer term.

Relationship Primacy Fuels the Need for Data-Driven Segmentation

Using customer data can provide insights into where potential revenue streams may lie within the existing customer base. Segmentation efforts assessing the share of wallet can also direct banks on identifying cross-sale opportunities. Reaching the right audience within the current customer base — and leveraging this information to acquire the right clients — will result in long-term growth and high customer retention. Banks have relationship primacy as an advantage, but current market forces at play are poised to diminish it.

Outside the bank, fintechs, digital currencies and neobanks are creating an increasingly fragmented industry with a myriad of digitally forward options for consumers. Given the sheer volume of non-traditional challengers to banks, the question of relationship primacy is increasingly in question.

The number of banking relationships per customer has increased exponentially, and the downstream impacts are starting to be acutely felt on bank balance sheets — with customers divvying up their deposits between traditional banks, digital currencies and wallets, and even retailers.

Where Banks Can Leverage Segmentation for Growth

Data fuels segmentation activity — but it also plays a critical role in driving exceptional client interactions. Bank customers are seeking more personalized products, services and experiences via multiple delivery channels. While digital tools and omnichannel experiences continue to deepen their hold, banks are still mapping out a nuanced experience for retail and commercial customers that balances digital and traditional interactions.

But that’s only half the battle. Regardless of the setting (digital or traditional), RMs need data-driven insights on customer interactions and engagement to know how to interact with their client in order to deliver the exceptional, personalized experience increasingly desired by commercial clients.

For banks seeking to better understand customer lifetime value and quantify revenue potential, data analytics does the following:

• Identifies and quantifies propensity of buy, upsell and cross-sell to accelerate revenue realization
• Understands revenue durability and forecasts to improve lifetime value
• Evaluates customer acquisition, retention, and conversion to reduce churn

Lending teams must shift strategies — to the offense — and find new ways to identify, expand, capture, and preserve existing relationships. Doing this successfully requires lending teams to continually identify growth opportunities and then focus their RMs’ time on those clients representing the greatest areas of growth.

Still, we find the majority of lending teams are still tied to old ways of selling. Many believe opportunities are evenly spread across the entire book of business. They assume RMs know how to find sales opportunities in their portfolios. Beginning with layered data-driven segmentation, RMs can identify high-growth and high-value client customers. Next, RMs must execute predictive sales activities to target specific clients and opportunities to deepen account penetration, identify the most valuable clients, and drive revenue growth.

Creating a Balanced Portfolio, Optimized for Growth While Protecting Deposits

In the wake of recent turmoil spurred by deposit concentration, banks are facing amplified threats and increased scrutiny to their financial stability. While customer segmentation is likely accessible in lending customers, is it as accessible with deposit customers? Targeted data insights will enable banks to proactively identify potential weaknesses, withstand uncertain market conditions and capitalize on opportunities for expansion.

Amid increasing interest rates, economic uncertainty, and heightened public concerns, banks must also answer:

• Who are my stickiest and most loyal customers?
• Are there early warning cues to signal attrition or runoff?
• Is our portfolio exposed to concentration risks?
• Are there channels most optimized for bringing in the stickiest deposits?
• Do we have an overconcentration of the customer base in a given vertical industry segment?

There’s an increasing need and sense of urgency for organizations to have a clear approach to finding and sharing data — macroeconomic conditions, heightened by industry fragmentation and the outflow of customers to non-traditional institutions, only further that need. But when these data elements work in concert with one another, banks experience increased upsell of products and services, reduced customer churn, decreased cost to serve, enhanced customer lifetime value, and mitigated risk of deposit runoff. Consider these strategies:

• Accelerate prospecting: Target the customers and personas that mirror your most valuable customers.
• Drive upsell/cross-sell opportunities: Position the right product for the right client at the right time.
• Align support to value: Manage costs by providing appropriate support to customers based on the value they bring to your business — while driving certain segments to self-service models.
• Improve investment targeting: Technology, customer engagement and talent.
• Provide accurate information: Use for assessing stability and opportunities for growth.
• Monitor Market Trends: Spot and reduce portfolio risk and integrate external trends into analyses.
• Optimize Opportunities: Generate balanced deposit inflow and predict deposit runoff.

Conclusion

The macroenvironment will pressure banks to grow and, ultimately, to effectively segment their customer bases. Banks will need to have firm customer segmentation, optimized to highlight where areas with the most revenue and cross-promotion can occur. Between different types of households, small and medium-sized enterprises, and larger commercial accounts, having a deep understanding of each client and their potential revenue will help teams prioritize and adjust the customer experience in a way that facilitates long-term relationship building and growth.

Bank lending teams will also be asked to grow portfolios in the face of a slower loan growth period. Knowing your customers and being able to predict their needs is more important now than ever. Just as important, the ability to leverage data and segmentation often reserved for lending and applying it to deposit management will be essential for any bank seeking to outperform competitors and serve both their clients and stakeholders.

Josh is a director in West Monroe’s banking practice, based in Los Angeles. He has over 20 years of experience driving enterprise transformation through digital enablement, business process optimization, and technology implementation. Josh specializes in creating digital strategy and roadmaps for mid-market banks, enhancing operating models, implementing enterprise-wide software, and data & analytics.