Traditionally, niche banking has been pursued as an alternative to the typical large regional and national bank business model, which focuses on mass markets but offers little innovation around sales or service models.
Today there is an added impetus for a niche strategy: the realization that trying to meet the needs of a broad customer base is expensive and has taken on increased complexity given recent changes and demands mandated by legislation such as the Dodd-Frank Act.
One of the most significant potential benefits of pursuing a niche strategy is that it is much easier to limit the number of supporting strategic initiatives to a vital few. As a result, these initiatives can be more easily articulated, defined in terms of success metrics and demonstrably aligned with the bank's vision.
For example, over the past few years, several banks have chosen to serve high-net-worth or mass-affluent customer segments. For the most part these banks have created relationship and service models that are very different from the conventional retail and commercial banking model. The emphasis of these new models is in creating a unique customer experience, as reflected in delivery channels, relationship managers that function as concierges and extraordinary levels of service, particularly in support of phone and online channels.
It is easier to develop the business case for capital expenditures related to technology when the desired outcomes are highly specific. For example, implementing a customer relationship management system that only captures crucial information about a customer — such as what products and services they use and when and how (through what channels) they transact business with the bank — is somewhat helpful. In a niche model it can be much easier to establish hypotheses that can be tested and measured against specific objectives and therefore result in making better investment choices and getting superior returns on investment.
One of the most significant potential benefits is an ability to dramatically increase profitability. For banks seeking to enhance their performance, developing offerings targeting specific customers may be the key to raising their profile and reducing their efficiency ratios.
For example, the higher average asset and deposit balances of some segments justify the costs of introducing more expensive offerings.
This highly positive customer economic model often arises from the deeper relationships that niche banks are able to develop with their customers. Given that niche banking models focus on customer preferences, there may be a greater likelihood that customers will look to a niche provider to meet more of their banking needs.
This phenomenon is related to business connections (such as an industry affiliation), a common ethnic heritage or a social cause or awareness (e.g., banks that promote themselves through or create social networks). Whatever the source of the attachment, there is a two-way connection and shared passion between the bank and its customers.
Given their focus and affinity-based relationship with customers, niche banks have traditionally had exceptionally loyal customer bases. These models emphasize and successfully execute higher and more personalized service levels. Meeting customers at their home or office, assisting family members of the customer and other actions underscore niche banks' commitment to this important competitive differentiation. Bankers who know a customer's business can gain a significant competitive advantage.
The potential benefits identified above highlight why niche banking can be an attractive model. These benefits also explain why successful niche banks tend to get more, and higher-quality, referrals from their customers.
Moreover, as national and regional bank customers have become more dissatisfied on several levels — whether related to service, products, channels or the ability to meet lifestyle needs — it has been easier for niche banks to solicit and obtain referrals. The ability of niche banks to offer an alternative banking model more attuned to all of a customer's needs and preferences is a powerful driver of customer referrals.
In the past, a small number of banks that understood the success factors critical to niche banking did very well on many levels, generating profitability, deep relationships and customer loyalty. As large national and regional banks continue to be distracted, banks that can create a niche-oriented, customer-based business model — one that is focused on a particular segment of customers, leverages a unique or well-developed expertise, offers targeted products and services or does all of the above — have a great opportunity to create value and drive profitable growth.
