Retail marketing is the stepchild of banking, slighted and subverted for so long that its original charter - to frame the policies and decisions that govern the entire sales effort - has been almost forgotten. But all this is beginning to change.

Savvy banks are turning their organizations into customer-knowledge- based marketing vehicles capable of countering those forces that have crimped the industry's revenue momentum.

These banks are outliers in an increasingly skewed distribution of lending growth. While bank-based consumer lending as a whole is growing at only about a 5% compound annual rate, the better banks are posting double- digit growth rates, and their faster growth has been accompanied by lusher returns on equity.

A number of other institutions, however, are wallowing in negative- growth numbers and anemic ROEs.

What are the components of the marketing savvy that are being cultivated and refined by the swift and nimble? Four primary components can be cited:

First, a different approach to customer segmentation. All across the country banks are talking about segmentation and data mining, but few understand what this entails.

Most banks segment by demographics or income. That's traditional but simply inadequate. The fact that someone has the wherewithal to buy doesn't necessarily mean he or she will buy - or will do so in quantities that guarantee an adequate profit to the bank.

In addition, most banks fail to formulate credible segmentation hypotheses, contenting themselves with accumulating raw data. As a result, the junk-in, junk-out rule prevails.

Finally, much senior marketing and line management talent is being diverted to the frustrating search for a single, all-encompassingsegmentation scheme that:

*Creates a common view.

*Explains all observed behavior and profits/losses generated.

*Is broad enough to accurately categorize 80% or more of the customers.

*Is sophisticated enough to pass senior management probing.

*Is simple enough to explain to $25,000-a-year front-line employees.

As a result, senior management often endorses a segmentation scheme that is intuitively appealing but ultimately unusable.

The faster-growing banks filter their data through the sieve of rigorously analyzed hypotheses. Such hypotheses lead to a multiplicity of workable segmentation schemes. In fact, a dynamic segmentation process flirts with the notion of mass customization, aiming ultimately at a segment of one.

This tendency, however, runs up against the iron constraint of scarce resources. Nevertheless, the search for new microsegments is a healthy reflection of the view that segmentation is a never-ceasing, self- sharpening quest that yields only partial answers but progressively more interesting questions.

The better institutions gather data not only on income, but also on current behaviors, needs, and/or responses to trigger events. Many feed these data into neural network models that correlate given customer characteristics with likely financial-product purchases.

The search for viable data inputs is not confined to traditional sources. Thus, a few years ago, Signet discovered the value of magazine subscriptions as a predictor of consumer borrowing behavior - then an unorthodox idea.

When properly applied, the segmentation process suggests promising sales campaigns, each of which is prioritized according to an estimate of its financial impact, expressed in net present value terms.

Use of net present value criteria leads the growth leaders to shy away from "moon shots" - big campaigns that take a year or more to either succeed or fail. The emphasis is instead on reduced campaign cycle time, which, by facilitating quick learning from a rapidly evolving marketplace, maximizes payback.

Thus, hypotheses spawn small parallel-market tests that provide feedback for hypothesis refinement that leads to a brief campaign. Then the results of this campaign provide the yeast for new hypotheses and future campaigns - all in rapid succession.

Second, a leaner cost structure. This is in large part an outgrowth of microsegmentation. Because the growth leaders are segmenting finer and more imaginatively, they can avoid blunderbuss spending on advertising. Knowing whom to target and, just as important, the value propositions that will induce the target to buy ends up being a recipe for a lean business system.

The growth leaders in consumer lending are, in effect, the Vanguards of the banking industry - i.e., every spare basis point of excess cost is being squeezed out. Thus the top card companies can steal share with low prices and still record enviable ROEs.

A different service proposition. This point can be subsumed under microsegmentation and lean cost structure, but it deserves special mention.

The segmentation process can be made to reveal what service qualities are important to the consumer.

Here is where lackadaisical segmenters often lose their way. They blithely assume that the customer wants, say, 24-hour access to information, whereas many may prefer more information to more frequent access to limited information.

Knowing instead of assuming what the customer wants promotes heightened customer satisfaction while reducing spending on unimportant service bells and whistles.

A different organization. This is a big one that's often underappreciated. The faster-moving banks feature an organization that differs from the norm in three respects: resources, a team-project focus, and compensation.

The growth leaders prize brains. They seek out technical quality in quantitative and artificial intelligence disciplines, and they don't stint on the numbers of employees skilled in such disciplines.

They encourage these bright young people to identify underserved market niches and to develop plans to fill those niches. The talent is often grouped into teams whose role is to conceptualize, formulate, and monitor business plans, with the aim of achieving the highest project net present value.

Each team member gets a slice of the expected net present value. And when reality exceeds expectations, they also share in the bonus NPV.

These teams are periodically formed, disbanded, and then reformed. The process blends an investment-banking-cum-consulting culture with an existing commercial-banking one.

That kind of hybrid culture is difficult to establish, but when established it works, since it simultaneously challenges the intellect, appeals to self-interest, demands considerable precision of execution, and offers the opportunity to confront new and different challenges.

Some years ago, a clever man wrote a book titled "The Gods of Management." Its thesis was that business organizations can be roughly categorized by their resemblance to Greek deities. Thus, overly hierarchical companies were said to worship Apollo, while those that were more experimental and fluid were classified as devotees of Athena.

From all indications, the faster-growing consumer lending banks appear to have changed religions, shifting from an Apollo to an Athena cult. It has proven a most profitable conversion.

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