Vantage Point

Capturing the opportunity of emerging affluent consumers

By Donald H. Wood

A few years ago, a large regional bank acquired a community bank. The community bank’s division that served the bank’s “mass affluent” customers—the group of nearly 50 million upper middle-class consumers who are moderately wealthy or fast on their way to becoming so—was included in that acquisition. Not having its own department to cater to these wealthy customers (who have a significant need for various banking products and services and who often expect a high degree of special service), the regional bank decided to keep the division rather than eliminate it, a common decision after such acquisitions.

Two years later, the same regional bank completed a profitability analysis that found that the particular division was its most profitable business line, as measured by profit per division employee. A multi-year plan to expand the division—outside the bank’s branch system that could not provide these customers the personal attention and service they want—was created.

In another area of the country, a community bank improved its so-called Private Bank division by creating new products and by training its employees on dedicated customer service. The division did not serve the same people of greater affluence normally targeted by the largest banks, but rather generally less-affluent but still upper middle-class consumers.

Two years ago, the community bank conducted a profitability analysis that also found that the Private Bank had the highest profit per employee of any of its business lines. In fact, the department was 58 percent more profitable than its commercial lending business line (and its branch system actually showed a loss).

Who typically are members of this mass affluent segment? They …

  • are stable career professionals,
  • are high-income earners (those making more than $100,000 annually),
  • are between the ages 35 and 55 with a family,
  • use bank profitable services,
  • are beginning to build their net worth, but may not have significant assets yet, and
  • represent the fastest-growing demographic in the United States.

What do these customers want from their financial institution? They want …

  • personal attention (“they are important people” and want to be treated as such),
  • quick access to their banker (face-to-face meetings are not priorities for them),
  • to use all technology available to conduct transactions,
  • good deals (they are willing to bring their full relationship in return), financial advice, and
  • a team approach (access to a banker, mortgage banker, investment advisor, commercial banker) but one point of contact (their personal banker).

Why are these consumers so valuable to a financial institution? These consumers …

  • use multiple banking services (some as many as 11 different services),
  • are very loyal if the service is good,
  • can be managed by a single banker who can also handle multiple relationships (sometimes as many as 250), unlike the small number of commercial banking relationships that one banker can adequately serve,
  • use cost-efficient profitable products and services (like debit cards, credit cards, mortgages, online banking),
  • migrate into high net worth customers with large investable assets,
  • are a valuable source of referrals (assuming the service they receive is above expectations), and
  • overall generate for banks on average a profit of $174,000 per employee in a wealth management division.

Why are there so many community banks that do not serve these consumers? Too many banks …

  • don’t realize that this segment of consumers exists and that it is so potentially profitable,
  • focus on business customers and do not have the personal products needed to serve these consumers,
  • are trapped in the mindset: “We’ve always done it this way,”
  • fail to base their decision making on data, and
  • believe too much change is too difficult.

There is both good news and bad news associated with community banks successfully creating similar divisions to serve these mass-affluent consumers. The bad news is that most of the resistance and barriers to establishing a successful mass-affluent division are internal; the good news is that most of the resistance to establishing a successful department is internal and can be overcome.

What other barriers might deter a community bank’s successful mass-affluent program? They are when a community bank …

  • does not offer the products needed to acquire these customer’s entire relationships, such as mortgages, credit cards, and investment and brokerage services, or
  • thinks that “competitors already serve this segment.” The reality is that the largest banks do not do a very good job of serving these consumers, and most community banks don’t serve them at all.

How can community banks successfully establish mass-affluent banking divisions? They should take steps to …

  • choose the appropriate banker on staff to serve these consumers. Those serving these clients should be knowledgeable, experienced bankers; have the ability to solve issues throughout the organization; understand what research indicates that these clients want from their financial institution; and have a calm, personable demeanor.
  • ensure other business lines cooperate and refer appropriate clients. The large regional bank’s independent analysis showed that a transfer of a mass-affluent client from the branch system to the mass affluent channel resulted in a 60 percent increase in deposit balances, a fourfold increase in profitability, and a reduction in attrition rates from 5 percent to less than 1 percent within 12 months of that transfer.
  • properly communicate why successfully serving these consumers is important to the entire organization. The most crucial aspect of implementing a mass-affluent service strategy is cooperation among senior management. Everyone in the company must understand why it’s important to focus on serving these consumers and how important it is for all employees to support the program with appropriate referrals.
  • This large, underserved and potentially highly profitable segment of affluent and soon-to-be affluent consumers offers a huge opportunity for community banks looking to develop another stable revenue source, acquire highly profitable clients and improve market share.