At RFi we have recently been doing some work calculating the revenue represented by various consumer segments to retail banking organisations. Taking product penetration by age, overlaying it with average balances and taking into account net interest margins across the different types of banking products that consumers hold, we are able to not only look at current revenues but how these will change over time.
Age is always my favourite lens through which to assess consumer data. For all the fantastic segmentation that can be done across attitudes, behaviours and product holdings, age is often the only reliable variable on which banks can cut their own data; this, therefore, makes it the most relevant parameter.
"Age is also something that we can all relate to as consumers. In particular, we are interested in and react to generational monikers and stereotypes more so than we do with other segment definitions."
So, what does the age lens tell us about how valuable our customers and potential customers are when it comes to retail banking? Let’s start with definitions.
Now that we all know which one we belong to and are happy/ indifferent/sad about that and the associated ‘descriptor’, let’s take a look at where we should be focusing our attention.
RFi’s modelling tells us that on a per capita basis, Gen X is the most valuable segment for a bank to be focusing on and has been since 2009 when the group overtook Baby Boomers on RFi’s Consumer Value Index. Personally, as I enter my 41st year, I just think it's nice to have some focus and attention because Gen X always gets forgotten (see stereotype).
However, this time in the sun is not going to last forever and inevitably Millennials will take over as our most valuable customer segment. The inflexion point will come in the year 2024. Granted 2024 is six years away, but, according to PwC, that is only just longer than the tenure of the average Australian CEO at 5.5 years, which is why we see the smart firms focusing on how they are engaging the next generation.
"Couple this with the fact that RFi Research has shown time and time again, that when it comes to MFI ( main financial institution) switching, the vast majority of consumers (more than 90%) will switch MFI before they are 35 years of age, but now afterwards. If you miss the window, then it's too late."
Importantly, Millennials will be the segment that drives retail banking revenues to a greater extent than any other from 2024 to 2043 – almost 20 years. This effectively means that pretty much every senior banking executive will be relying on targeting and engaging Millennials for their organisation’s success for the rest of their careers.
In light of these factors, the question is, are banks doing enough to focus on this generation? Of course, the answer to that varies by bank, but on the whole, I would say that with a few exceptions, many are missing a trick. I still regularly hear the comment that “we aren’t a brand that appeals to the Millennial generation” and that is a very dangerous statement to make.
If you don’t appeal to them now, then you have a limited window of opportunity to engage them before you lose out completely. Gen X may be great now, but after 2024, their revenue contributions will fall off a cliff. We don’t need to build a model to know what impact that will have on a bank that hasn’t thought ahead.