The Pursuit of Profitability. Insights and Strategies on Why and How You Should be Engaging Affluent Consumers

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1 The Pursuit of Profitability Insights and Strategies on Why and How You Should be Engaging Affluent Consumers

2 Capturing the Mass Affluent Opportunity William Trout, Senior Analyst, Celent Over the last five years, banks have shown heightened interest in serving the mass affluent segment. 1 This interest reflects fierce competition post crisis for the upper affluent and HNW client, and the corresponding saturation of that market. It speaks to a thirst for new sources of fee income, as well as to the favorable demographics that characterize the segment. It also reflects improvements in digital technology and automation that have made serving mass affluent customers via advisor-led delivery a more cost-effective proposition. Lower costs of delivery already have made the bottom tier of the mass affluent market, a substantial part of which are Millennial investors (born between the years 1982 and 2000), an increasingly attractive target. The challenge for banks will be to build out hybrid or self-directed advisory platforms (not least to compete with online brokerage firms as well as robo-advisors such as Betterment and Wealthfront) that channel product and other forms of complexity into a clear and accessible client offer. At the mass affluent level in particular, implications for traditional servicing models are changing quickly with the emergence of Millennial clients

3 Role of the Advisor To date, the largest banks have been at the forefront of the digital movement, deploying online and mobile platforms supported by social media outreach. Regional and community banks, lacking the resources to compete, have moved more slowly, relying on high touch service to differentiate themselves. This community-minded model has proven tough to sustain given persistently low interest rates and the marginalization of the branch network. As such, regional and community banks are starting to dip their toes into the digital world, typically via a hybrid model. The hybrid model is neither fully self-directed nor advisor-led. Rather, a bank deploying a hybrid model may offer online trading, planning, and retirement tools as well as access to a retail advisor or call center providing portfolio/asset allocation analysis, investment recommendations, and reviews of retirement plans. It may, for example, make use of registered in-branch representatives to provide investment guidance to self-directed clients, either for a fee or with the objective of up-selling. Bank of America was an early adopter of this approach, employing in-branch Financial Solutions Advisors to define goals, review portfolio allocations, and conduct portfolio reviews for the bank s self-directed Merrill Edge clients. Mobile Applications Over the past few years, the range of remote servicing options (e.g. video, tablet and chat) available to bank reps and advisors has increased dramatically. The positive impact on cost structure and scalability is one reason that national and super-regional banks have invested so heavily in these tools and platforms. At the same time, the embrace of front-office digital technology by bank reps and advisors has been driven by the expectations of clients, who are increasingly tech-savvy and likely to live at a distance from their advisors. At the mass affluent level in particular, implications for traditional servicing models are changing quickly with the emergence of Millennial clients. Their distinct behaviors and consumption patterns include greater self-reliance and a disinclination to want to meet in person with an advisor. Where in-person meetings are needed, however, desktop-on-the-go functionality is a must. As such, banks must invest in mobile (and particularly tablet) platforms that enable the advisor to prospect (and initiate onboarding) as well as deliver solutions and insight. Advisor portals with drill through capability (i.e. the ability to view data at multiple levels, and various levels of complexity) can provide instant access to client, market and portfolio performance data, for example. The next step is for banks to harness this data in direct support of on the go decision making and execution; that is, to make the advisor more nimble.

4 Segmentation as the Key It is worth noting that some institutions have launched apps for advisors and end users without a clear vision as to the purpose of the app. Mobile delivery cannot be one-size fits all. Tools for the self-directed investor or user of hybrid services should have different functionality than tools for customers with full service advisory relationships. Indeed, the size and diversity (both in terms of demographics and behaviors) of the mass affluent segment will require banks to invest more in identifying and qualifying their customers. Segmentation is in many respects the secret sauce for banks seeking to find a middle ground between self-directed and full service advisory delivery models. Robust segmentation enables the improved development of products and helps generate revenue by rationalizing service costs and preventing client attrition. It also allows for more effective branding and marketing, including the development of a value proposition that neither patronizes the client nor speaks to levels of affluence he or she has not achieved. The focus of segmentation must extend beyond delineating risk profile and assets to include needs and goals, stage of life, source of wealth, and frequency of trading activity. Increasing sophistication here is made possible by advances in CRM software and customer analytics, which incorporates structured and user-generated data, and allows bank advisors to offer customized products via the appropriate channel and price-point. Final Thoughts Bank wealth management has always been an industry built on relationships. In recent years, however, the traditional-advisor based model has come under price pressure. Banks must now embrace technology as a way to supplement the role of the advisor and enable scalable and cost-efficient delivery. While banks have recognized the threat posed by low cost technology based service models, they have been slow to realize the potential of technology for targeting previously underserved clients, i.e. those unprofitable to reach via conventional servicing models. Technology has opened the door to efficient enterprise platforms and the deployment of digital tools, but many banks are still unsure how to mesh self-serve approaches with their advisor-led delivery models. To succeed, banks must realize that technology is an enabler rather than an objective in itself. They have the opportunity, if they use it wisely, to extend their reach into the mass affluent segment, enrich existing client relationships, and boost their bottom lines. 1 Here defined as customers with liquid assets of between $250,000 and $1 million. The mass affluent segment comprises roughly 15% of the overall market, per Celent estimates.

5 Path of Economic Recovery Leads to Retail Banking Opportunities Soaring Growth Among Affluent Households and Higher Deposit Allocation Isio Nelson, General Manager, IXI Services, a division of Equifax As of June 2014, the personal investable assets of U.S. residents totaled more than $31 trillion a more than 60 percent increase since the Great Recession when it was at a trough of $19.2 trillion in December The recession hurt American consumers badly, but the economy has since trended up and markets have recovered. Here we focus on how it affected two key groups increasingly pursued by retail banks, the Affluent and Mass Affluent, exploring its impact on assets, and how households are investing differently as a result. A look back at the recession, its fallout and a robust recovery for most. The Great Recession, which started in December 2007 and officially ended in June 2009, caused significant economic harm to households in the U.S. A net 3.8 million adults lost their jobs, countless businesses, large and small, failed and homeowners lost over $7 trillion in equity in their homes, said Amy Crews Cutts, Equifax s Chief Economist. Likewise, it has had a lasting impact on how U.S. consumers invest their assets. Between June 2008 and December 2008, more than $4 trillion dropped out of investment markets partially due to market losses and partially from households moving money out of the market and into deposits. In fact, deposit holdings increased almost half a trillion dollars during this six-month time period. However, since the Great Recession, total U.S. invested assets have grown considerably, up 58 percent between June 2009 and June Notably, the gains were not shared equally across the three key asset tiers, namely the Affluent, Mass Affluent and Mass Market. Mass Market: <$100K in investable assets Mass Affluent: $100K - $1MM in investable assets Affluent: >$1MM in investable assets

6 The Rich are Getting Richer, and There are More of Them The Affluent group had an astounding 90 percent growth in assets between the end of the recession in June 2009 and June 2014, growing from about $10.8 trillion in assets to $20.6 trillion. This group also had astonishing growth in the number of households it represents: In June 2009, there were only about 3 million Affluent households controlling about $11 trillion in assets, which was about 55 percent of total invested assets. As of June 2014, there were almost 6 million Affluent households, which controlled almost $21 trillion in assets, which was about 66 percent of total invested assets. Within a recent one year period (June 2013 June 2014), the Affluent tier grew by almost 1 million additional households, adding $4 trillion to assets held by this tier. While there are almost certainly some households dropping out of the Affluent group, many more are coming into it. The Mass Affluent are Also Moving Up, Just More Slowly The Mass Affluent group also gained significant assets between June 2009 and June 2014, their holdings growing about 26 percent from $7.1 trillion to $9 trillion. More than 4 million additional households also became part of the Mass Affluent group during this time. Mass Market Asset Growth Has Stalled With minimal invested assets to begin with, the Mass Market group has fared less well. This population in fact lost assets between June 2009 and June 2014, declining 8 percent down to $1.7 trillion. Pre-Recession: June 2007 Total Assets: $23.8T During Recession: December 2008 Total Assets: $19.2T Current: June 2014 Total Assets: $31.4T 23% 31% 26% 77% 69% 74% Investments Deposits Source: IXI Services WealthComplete, 2007, 2008, 2014

7 Changing financial behaviors create opportunity for retail banks. In general, consumers have become more conservative investors. Although personal assets have increased significantly since the Great Recession and the stock market continues to achieve new highs, consumers still appear to be hesitant to shift their money out of deposits and back into investment markets. Deposits Remain a Safe-Haven After an uptick during the recession to over 31 percent of assets, the percentage of total assets held in deposits decreased between 2008 and Deposit allocation leveled off to between 25.5 percent and 26 percent between June 2013 and June 2014, which is still higher than the 2007 low point when just 23 percent of assets were held in deposits. This could indicate a new norm whereby consumers are a bit more cautious and keep a little more of their assets in deposits than they did before the recession. Does the shift toward a relatively higher percentage of assets allocated toward deposits create an opportunity? It could. For example, banks often have very loyal customers. Banks that want to grow their wealth management businesses have an opportunity to seek out their Mass Affluent and Affluent clients that have a relatively higher percentage of their assets in deposits and then promote their investment services. Similarly, financial advisors at banks can tap in to low-hanging fruit by analyzing their existing book of business to identify which of their clients are deposit-heavy and then encourage them to move more of their assets into the market. Affluent and Mass Affluent clients that have a high percentage of their assets in deposits likely present a good opportunity for financial advisors

8 Offer Proactive, Tailored Strategies to Affluent Households Post-recession, many households are holding more of their assets in deposits and taking a more risk-averse approach to their finances. However, given pre-recession deposit allocations, there is room for some of today s deposits to be shifted back into the market. This creates a ripe opportunity for financial advisors at retail banks to identify those deposit-heavy investors who have the potential to diversify and recommend strategies to move more of their money into the market. In addition, Affluent and Mass Affluent groups have steadily gained assets since As households gain assets, some remain loyal to their current financial institutions while others seek out new institutions and more sophisticated services. Retail banks may gain from exploring which of their current investors and potential prospects fit both of these profiles and which services are most in demand, and then tailor growth strategies to better meet the needs of today s investor and capitalize on opportunities for growth. The Foundation of Our Insights All data referred to in this article is sourced from IXI Services, a division of Equifax. For a more detailed analysis of U.S. consumer investment trends, request the full report. IXI Services specializes in helping clients expand their view of customers and prospects full financial wallet. Our insights are based on about $14 trillion in anonymous, aggregated measured consumer assets that IXI Services collects from leading financial services firms. This direct-measured data represents about 43 percent of all U.S. consumer invested assets and serves as the foundation of our unique measures of consumer financial capacity, investment style, behaviors, and characteristics.

9 Win Your Share of Affluent Households with a Data-Driven Approach Best Practices for Effective, Highly Targeted Marketing Jeff Hollander, Equifax Retail Banking Leader A small percentage of U.S. households hold the vast majority of the nation s assets, namely the Affluent and Mass Affluent. With Affluent households loosely defined as holding more than $1 million in assets and the Mass Affluent having $100,000 to $1 million in assets, these top-tier groups are prized among retail banks looking to grow their deposits. Yet, compared to the Mass Market, which holds almost no assets but accounts for seven out of 10 households, the top two tiers behave differently when it comes to financial management and investment. To win your share of their business, you need a data-driven approach for marketing to this discriminating audience, one that is founded on proven best practices. Here are tips for efficiently marketing to and winning Affluent and Mass Affluent households. Know where you stand, then set goals. Roughly 5.8 million U.S. households are Affluent and 28.4 million households are Mass Affluent, which puts the addressable U.S. market at nearly 35 percent of households, according to research from IXI Services, a division of Equifax. Of that universe, how many have accounts with you? Put another way, how many of your deposit accounts are Affluent or Mass Affluent, and how does that compare with other retail banks? What percent of your total deposits belong to this group compared to other accounts? A wide variety of analytic tools can quickly deliver these and other benchmarking insights across your retail banking organization and the national demand deposit account (DDA) landscape to reveal your precise share of wallet. From there, you can determine your ideal market share, and craft a strategic approach for achieving that goal.

10 Within your current customer portfolio, you can identify opportunities to increase deposit assets from existing Affluent and Mass Affluent customers and launch tailored campaigns that deepen those relationships by cross-selling other financial services and strengthening customer communications, brand awareness and trust. Outside your DDA portfolio, you can set realistic and attainable goals for targeting and acquiring new households within this highly desirable wealth band. Here are a few questions to consider as you get started: n Do you have real-time access to wealthdriven customer and market insights? n What consumer financial and economic insights are you using to empower your business and grow your deposit accounts? n Are you deploying outbound campaigns to help increase customer loyalty, and if so, are they helping you achieve your goals? Infuse your segmentation strategy with the latest data and analytics. After goals are set, consider how to identify and target existing Affluent and Mass Affluent households. The more focused your audience, the more interesting and compelling you can make your offers in order to drive stronger open rates. Many bank marketing efforts rely on segmentation systems that are built solely on demographic, life-stage or survey-based data, or that use only a few variables to segment millions of customers. But, this ignores key financial behaviors and targets prospects with limited financial potential. Also, working with broader wealth segments restricts your ability to optimize offers and cash incentives for higher response rates. Instead, effectively targeting the Affluent and Mass Affluent for deposit acquisition requires much more granularity to pinpoint their highly differentiated financial behaviors, needs and preferences across millions of prospective customers. Through the big data and analytics available today, you can define and segment customer households into dozens upon dozens of groups based on their financial tendencies and measures of income, spending and credit. From there, you can isolate the top-performing bands with significant deposit assets which will also likely have demographic and attitudinal similarities and make them highly targeted offers that are more likely to resonate and drive higher open rates. The same approach applies to new prospects. Adopting a more detailed segmentation strategy allows you to pinpoint Affluent and Mass Affluent prospects that mimic your existing best customers, and prioritize them to increase marketing efficiency, open rates and deposit assets.

11 Target the up-and-coming Affluent and Mass Affluent. Few people are born wealthy; instead, most consumers build their household wealth over time. The sooner you recognize households that are on a trajectory to become Affluent or Mass Affluent, the earlier you can connect with them, establish a banking relationship and secure their growing assets. You can achieve this trended and highly predictive view by bringing together incremental, disparate data from a multitude of sources to see the bigger picture of a consumer. Instead of seeing where John Doe is at one point in time, you can see where he s been over the past two years, how he s acquiring credit, paying bills, buying homes and trading vehicles. You can determine affluence based on how he s spending money, his deposit and investment balance trends and life events such as employment and promotions. Innovative tools designed specifically for retail banks can compile these insights into a single view to help you bridge information gaps in your customer and prospecting data and better understand the rising Affluent and Mass Affluent. You can proactively target these high-deposit groups before other banks, and optimize those customer relationships at account opening by making informed wealth and investment cross-sell offers in real-time. Conclusion Considering that Affluent and Mass Affluent households possess the majority of the nation s wealth, it makes sense to target them for deposit accounts. Start by clearly understanding your market share, setting attainable goals, launching a granular, data-driven segmentation strategy and continually seeking out budding affluence so you can get an early foot in the door with those rising households. A comprehensive approach to tapping into this small but high-asset market can help to drive a stronger return on marketing investment and increased DDA profitability for the immediate future and over the long-term. Here are a few questions to get you thinking: n How do you currently profile your customers? n Are you able to understand household behaviors, and predict how they will interact with you? n Do you effectively size markets for key target segments and to identify growth opportunities? Here are some questions to put you on the right track: n How do you determine total customer lifetime value? n What is your Affluent and Mass Affluent account acquisition strategy? n How are you growing wealth and investment accounts at the point of sale?

12 Help Grow Your DDA Portfolio with a Consumer-focused Acquisition Strategy Demand for household acquisition is an ongoing priority. What if you could refine your prospect audience and more effectively tailor marketing campaigns? Equifax can help you identify consumers who are more likely to become profitable households, with a better understanding of their existing or past banking relationships, estimated income, likely assets and other financial tendencies. Win more DDAs by integrating relevant financial insight into your acquisition strategy. Identify prospects that are more likely to become profitable, primary customers Grow your DDA accounts by making stronger, more precise promotions Help maximize account profitability with a better understanding of a consumer s propensity to purchase additional products Better insight for more targeted marketing. Learn how our services can help you unlock new sources of potential revenue. Contact Us Today retailbanking@equifax.com equifax.com/business

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