The market for personal financial services in Asia’s emerging economies is maturing: customers want more products and better service from their financial institutions. Can these demands be satisfied by local banks? To date, though most of them still offer a "one-size-fits-all" service, they have managed to hold their own against competition from foreign banks and companies specializing in credit cards and investments. Indeed, 95 percent of Asian customers still have their primary banking relationships with local providers.

But the days when a bank in an emerging Asian country could thrive by offering the same service to all customers are passing. Growing numbers of people are seeking financial services tailored to their specific needs—especially in the more profitable banking products—and few local banks have the skills to maintain a lead in such a marketplace. To fight on, these banks will have to follow the path taken by financial institutions in developed economies and manage individual customers, customer segments, products, and channels in ways specific to them.

A growing opportunity in Asia

Despite the Asian financial crisis and the global economic slowdown, the market for personal financial services in Asia is in good shape.¹ Holdings of financial products have increased: the average high-income Asian consumer owned 3.2 of them in 2001, up from 2.7 in 1998, although this is still less than half the number held by comparable consumers in the United States. The balances maintained in these products have risen as well in Asia. People in general are more willing to borrow and to search for higher investment returns, particularly to finance their retirement. They are also more sophisticated than they were in 1998, with a better understanding of risks and rewards and of the need to diversify their assets. These changes have enabled some financial institutions to shift customers away from less profitable transactions and deposit products and toward more profitable ones, such as credit cards, life insurance, and equities.

The use of credit cards, for example, is rising steadily across the region; in Taiwan, 62 percent of households used them in 2001, up from 44 percent in 1998. Half of the users don’t pay off their balances at the end of the month, and these profitable "revolvers" also spend up to three times as much on their cards as do prompt payers (Exhibit 1). In addition, savvy marketers are targeting the many people who now value convenience or brand appeal more than price (Exhibit 2). In Hong Kong, Aeon’s offer of a 30-minute credit approval for affinity cards (such as the "Hello Kitty" card, targeted at female office workers) is quite popular, even though they bear higher interest rates than do products from most competitors.

More people now realize that a cash balance in a low-yielding basic savings account is unlikely to provide for their future needs. In China, the percentage of personal household assets and liabilities held in such accounts fell from 86 percent in 1999 to 78 percent in 2000 as consumers moved their funds into securities and increased their use of debt. Similar declines in cash deposits occurred in Indonesia, Malaysia, and South Korea, though Asia still has a long way to go: in the United States, just 13 percent of household assets were kept in low-yielding accounts in 2000. Meanwhile, the proportion of individuals who say they are interested in planning their finances has sharply increased—from 44 percent in 1998 to 57 percent in 2001. Most have yet to consult a professional, suggesting another opportunity for banks.

Start with a simple segmentation

If their markets are growing so well, why should Asian banks worry? The main reason is dwindling loyalty, especially among affluent customers (Exhibit 3). More than half of the consumers who opened accounts in 2001 didn’t do so at their primary financial institution—a sign of growing dissatisfaction. Further bad news for primary banks: they are stronger in products with lower profit margins; for example, 94 percent of local-currency savings accounts are held at the Asian consumer’s primary bank, but only 50 percent of the more profitable credit cards, 33 percent of mortgages, 25 percent of the unsecured personal loans and car loans, and 15 percent or less of pensions, life insurance, and mutual funds.

Local banks will require stronger marketing skills than they exhibit today if they are to increase their share of the markets for such profitable products. In particular, these institutions should use segmentation to identify the differences between groups of potential customers and to decide which groups can be served best and most profitably. Segmentation has long been part of the banker’s marketing kit in developed countries: it is common for financial institutions in North America and Europe, for example, to invest in expensive systems that can handle many microsegmentations and sophisticated customer relationships. Some banks in Asia’s emerging markets, having exhausted the usefulness of the one-size-fits-all approach, are now beginning to target specific market segments with tailored services. For the time being, a basic customer segmentation will be a sufficient first step toward developing a more customer-driven approach. As long as the Asian market remains significantly less differentiated and less competitive, the region’s local banks won’t have to rush to match the cutting-edge tools deployed by their counterparts in the developed markets of the world (see "Emerging marketing," The McKinsey Quarterly, 2002 Number 2, pp. 62–71).

Using a combination of personal attitudes to finance and demographic data as distinguishing criteria, we have identified four principal segments of middle- and upper-income consumers in the majority of Asian emerging markets (Exhibit 4).

Simplifiers

As the name suggests, simplifiers dislike the complexities of modern finance and want someone to make it plainer. They are looking for basic savings products, one-stop shopping, face-to-face contact, and low risk. Usually older, less educated, and less affluent blue-collar employees, the simplifiers are also the least frequent users of bank services and the least sensitive to price. Local banks are the natural owners of this segment because they already offer the products that those in it seek. It wouldn’t make economic sense to try to persuade simplifiers to embrace higher-risk products or more diversified portfolios, which are not what these people want. Indeed, the very attempt could drive them away.

Advice seekers

The advice seekers also prefer one-stop shopping, but, unlike the simplifiers, they are highly receptive to advice and to more sophisticated products and services. They prefer face-to-face sales help but would use remote channels for services such as transferring money between accounts and checking their balances. Of the four segments, advice seekers hold the greatest number of products, are the most willing to pay for advice, and are the most open to using foreign banks. They are also the most sensitive to price and conduct the largest number of transactions, making them expensive to serve. This segment, consisting mostly of well-educated men, is dominated by professionals and the affluent. Its members are natural customers for international banks with a pervasive local presence as well as for well-established, top-tier local banks.

Self-directed planners

Self-directed planners think they know better than the providers how to interpret information, so they want access to it rather than advice. As a result, they are the most open to remote sales assistance (including the Internet) and do not demand live service. Self-directed planners are well-educated, mostly white-collar workers with slightly above-average incomes. They use bank services frequently, have sophisticated portfolios, are investment oriented, and will accept reasonable risks. On the whole, their current relationships with several institutions satisfy them; although they shop around, they are looking for information and insight, not lower prices. Such customers are a natural market for product specialists such as Fidelity, a mutual-fund company that uses remote channels as well as retail branches to deal with customers.

Fickle shoppers

Fickle shoppers have accounts in several banks and care little for advice. With less money to invest and more need for cash than the people in the other segments, they want plain transaction products and credit. While they like face-to-face sales help, they rely on ATMs or telephones for service. But despite the modest needs of fickle shoppers, they, unlike simplifiers, are dissatisfied with their current banks: they shop around for the best interest rates and have accounts with several providers. The segment consists mostly of housewives who enjoy this quest, viewing it as their contribution to the family economy. Given their low loyalty and desire for basic products, making money from these customers can be a challenge—one that might best be tackled by financial institutions with recognized brand names, especially in credit cards, which fickle shoppers particularly like.

Choosing the right business system

Many Asian banks will find all four segments represented in their customer base. Which should they pursue, and how? The answers will differ accord-ing to each bank’s view of the relative attractiveness of the segments and the bank’s ability to develop an offer that can profitably meet the needs of customers in the most attractive ones. Each bank must analyze not only the needs of all segments and the economics of serving them but also the strength of its current skills and assets as well as those it could realistically develop—all in relation to the skills and assets of its competitors.

So, for example, a bank with a narrow product range and a network of branches offering basic services would be well equipped to concentrate on simplifiers or fickle shoppers. But a bank that could develop more sophisticated products or offer products (such as mutual funds) from third parties might target advice seekers and self-directed planners by using a slim branch network, remote channels, and, for the advice seekers, face-to-face contact. Banks can choose to tailor their offerings to one segment or more, depending on the match between their capabilities and their growth ambitions. We have identified three models such banks might use.

Focus

Focus involves building a bank around a dominant segment and giving customers in it what they want while limiting the bank’s investment in what they don’t. Say a bank decides that its best option is to focus on simplifiers because this is the segment it can serve most profitably with its existing skills and assets. The bank would require a no-frills back office to process only the basic banking products that simplifiers prefer and a low-cost network of branches where customers could make deposits, withdraw cash, and pay bills. By contrast, a bank that decides to focus on self-directed planners requires a back office extensive enough to provide the many product options and extensive product information they demand, as well as a more sophisticated front office to deliver the information.

The focused approach is less straightforward than it seems, because the bank will have to reshape its frontline force to suit its chosen segment. While advice seekers, for example, require well-trained and knowledgeable frontline staffers, using them to serve simplifiers would be uneconomical and off-putting, for simplifiers prefer automated minibranches staffed with only one or two salespeople who can handle basic transactions. After years of instruction to the contrary, it will be hard for banks to train employees to serve some customers better than others. Against the investment in staff training, however, banks will be able to set the savings from shedding unnecessary elements of their former offerings.

Standard Bank of South Africa has successfully employed the focused approach by targeting urban low-income customers—a niche that is probably closest to the simplifiers in our segmentation—and offering basic savings accounts, debit cards, and personal loans.² The bank also provides nontraditional but lucrative products, such as funeral-insurance policies and prepaid mobile-telephone contracts, that appeal to low-income people.

The bank’s branch and ATM processes are fashioned to make them efficient and simple to use: customers can open accounts and get cards issued rapidly; ATMs have pictures on the screen. Branches are located in high-traffic venues, such as main streets and malls, and each typically has two ATMs and two or three assistants to teach customers to use them. Each stripped-down branch supports 8,000 to 10,000 customer accounts on its rolls, with costs that are usually 30 to 40 percent below those of traditional branches because it requires fewer employees to operate and uses more ATMs. Standard Bank, in its first five years (1994 to 1999), attracted 2.5 million customers and was recently adding 50,000 of them a month. Although their balances are relatively low, the bank achieves a net positive contribution on the average account, largely because it has succeeded in focusing on one segment and in offering these customers only the basic, streamlined services they actually want.

Aeon, targeting fickle shoppers with its credit card, uses a similar approach in Hong Kong, while Expatriate Financial Services aims to attract advice seekers in Malaysia and elsewhere.

Two brands, one system

Banks that take the "two-brands, one-system" approach aim to serve a range of segments from a common back office, using the various channels—branches, ATMs, and sales agents operating outside branches—to tailor the delivery of services to the needs of each segment. DBS Bank, in Singapore, provides a good example of this model. In 1998, DBS acquired POSB (formerly the Post Office Savings Bank), along with its vast customer base; some 90 percent of Singaporeans have a banking relationship with POSB. DBS Bank now maintains two networks of branches and ATMs. One bears the century-old POSB name, by far the most powerful in Singapore for general banking, and concentrates on the low-cost services—cash deposits, bill payments, and home loans—that simplifiers and fickle shoppers want. The other bears the DBS brand and offers a broader range of services and products, along with the on-line and telephone-banking services that appeal to advice seekers and self-directed planners. DBS and POSB products are processed through the same service center.

To attract a number of segments in this way, a bank might have to make an acquisition, as DBS did. But it would be a mistake for the acquirer to take the familiar course of merging operations in search of synergies: the two-brands, one-system approach depends on enhancing the strengths of the banks, not on blurring the distinctions between them. Alternatively, a bank could create separate units with distinct brands, an approach taken by Banco Comercial Portugues, based in Lisbon. BCP has launched ten brands, each aimed at a different segment; NovaRede, for example, offers basic transactional banking to the mass market, while Banco7 targets affluent customers with direct channels. Generally, the two-brands, one-system model is more expensive than the focus model because the former involves the additional cost of making acquisitions or creating start-ups, though a common back office does allow for some economies of scale.

An umbrella brand

The most difficult approach for a bank is to serve many customer segments through the same front and back offices. Few banks can succeed at this, because it requires world-class skills in product and service branding to ensure that the products have a distinct identity in each segment—and such skills are rare in retail banking. Banks that wish to take this road have to invest a good deal of money not only in developing products and services but also in marketing communications to ensure that the different brands attract distinct segments and don’t degenerate into a multiplicity of confusing names for the same products. In addition, branch staff must be highly trained to recognize the segment in which customers fall and to direct them appropriately.

It would be easy for a former one-size-fits-all bank to go awry with this approach. In the worst case, amorphously branded products would be sold to the wrong customers by staff unable to recognize their proper segments. Suppose, for example, that a simplifier, looking for basic products, is attracted into a branch by an advertisement touting "mutual funds made easy." A frontline employee unable to distinguish among segments might direct this person to an investment counselor—wasting time and money for all concerned.

When the umbrella approach works, however, scale effects can make it profitable: a bank can push several kinds of customers through the same physical branch and process the products they buy through a single back office. One bank that is applying this model, in both Asia and elsewhere, is Citibank. Although it uses the Citi name and blue logo for all segments, it has developed subbrands for each one; the CitiGold channel, for instance, is intended for individuals with assets of more than $100,000. Although Citibank’s strategy was born of necessity—in the early 1980s, Asian regulators limited the number of branches that foreign banks could open—it has been highly successful: in 2001, Citibank Asia made net profits of more than $700 million from its consumer-banking, asset-management, and private-banking operations, comparable to the profits of Citibanking North America.

Asian banks will probably begin their movement out of the one-size-fits-all approach by taking the focused route, since it offers the easiest transition. Will they then be able to go on evolving? Some banks might be tempted by what DBS has accomplished with the two-banks, one-system strategy or by Citibank’s success with its umbrella brand. They should resist, however, until they have the marketing skills needed to master the focused approach.

Local banks in Asia’s emerging markets should stop treating customers as though they all wanted the same thing; trying to serve everyone equally well usually means serving everyone poorly. Apart from being expensive and inefficient, the approach is pushing increasingly disloyal customers into the willing arms of increasingly avid competitors. Asian banks need to segment their markets, to choose the segment or segments they can serve best, and to adopt an appropriate business system. In the end, their survival will depend on this.