The legislation governing bank in Canada changed in 2001 to allow more competition in the sector, ushering in a host of smaller players and prompting the country’s major financial institutions to become more savvy about their customer's personal interests.
Being a gold-card client of my bank should be a source of pride to me. On top of a basic chequing account with a low monthly fee of $4, the Royal Bank of Canada (RBC) gives me free access to more services than I get from CIBC, my other financial institution. I’ve also been offered – and taken – a credit card with a limit I’ve never come close to maxing out. Indeed, if I make the right sequence of transactions, gold-card status at RBC allows me to reduce my bank fees below the best service package offered by either RBC or CIBC. Too cool. But what really chills the conversation about banks in our house is that my wife still carries RBC’s standard-issue card. This, despite the fact that she’s a long-standing client, while I only started banking with RBC when we opened a joint account two years ago. Yes, she gets the glittering offers for extra credit that I have taken advantage of; yes, she has as much need as I do for the extra services I enjoy free of charge. But she gets dinged for services such as bank drafts in foreign currencies and other products, and I don’t. The preferential treatment I receive at our shared financial institution is the result of some of the sophisticated technology upgrades that Canadian banks have poured $37.6 billion into over the past decade. These technologies have allowed them to pinpoint clients whose business is worth more to them, offering them preferred rates. Meanwhile those clients on the lower rungs of the financial ladder must continue to climb one step at a time. The legislation governing bank ownership changed in 2001 to allow more competition in the sector, ushering in a host of smaller players and prompting the country’s major financial institutions to become more savvy about their customers. Speaking to the trade magazine eBusiness Journal that year, Tom Wolf, then senior VP of e-business for RBC, explained that financial institutions were paying closer attention to their clientele, focusing services to deliver the best return to the bank as competition became more intense. “If people aren’t profitable to us right now, that doesn’t mean we’ll just abandon them. It’s about focusing our services,” he said at the time. The means to the end Wolf described is known in marketing circles as customer segmentation, a group of strategies aimed at predicting which services clients are most likely to use. These include scoring systems that rank customers according to risk, while at the same time flagging their eligibility for certain products and services. Similar systems are in place elsewhere. England’s Guardian newspaper reported last year that Lloyds TSB and HSBC Holdings PLC, the U.K. parent of Vancouver-based HSBC Bank Canada, both rank their customers, not only for their marketing gurus, but for the front-line staff cashing cheques and updating bank books. The U.K. division of HSBC, for example, assigns customers a “behavioural score,” according to the Guardian article, as well as a star system, which rates customers from one to five. The rankings aren’t shared with customers, but HSBC’s annual report isn’t shy about the difference they’ve made to both its corporate and personal banking divisions. HSBC’s most recent annual report trumpets segmentation’s role, citing it as “underpinning” a 20-per-cent increase in pre-tax profits for its corporate banking division in the U.K. last year. It also credits segmentation as one of three factors that helped total worldwide revenues grow 13.4 per cent to US$65.4 billion last year. The same annual report notes that, in the U.S., segmentation is also helping HSBC weather fallout from the downturn in the U.S. housing market and rising defaults on mortgages. Segmentation has become an equally important tool for B.C.’s financial institutions. While analysis of market segments has existed for years in other sectors, financial institutions have become leaders in the practice. When Lisa Ritchie, who heads the Bank of Nova Scotia’s customer knowledge and insights division (a cozy-enough sounding euphemism for the bank’s market-research division, given the intimacy of the information it gathers), joined the bank in the mid-1980s from the retail sector, financial institutions’ use of segmentation was in its infancy. She says competition in the financial-services sector has changed that, with banks facing a range of competitors eager for the cash to be gleaned from loans, term deposits and other products. Those competitors are remaking the marketplace, Ritchie says, and in turn customers are revising their expectations of what financial institutions should deliver. Bankers tend to couch the trend toward segmentation in terms of its benefit to clients. For example, Ritchie talks about meeting customers’ needs: “Once customer perceptions change, you have to make sure that you understand those perceptions and preferences and needs very tightly and deeply.” Maura Drew-Lytle, senior manager of media relations with the Canadian Bankers Association, adds: “To provide the service that people need, you really need to know who your customers are and what they’re looking for.” While claiming ignorance of segmentation practices, Drew-Lytle says competition for delivery of financial services, which contributed just under $4 billion to the B.C. GDP in 2006, has prompted Canadian banks to make massive investments in technology ($4.4 billion last year by the big six banks alone). Sophisticated software programs sift information about customer behaviour as well as the data we voluntarily supply when opening accounts or buying products. Those seemingly endless questions we answer when trying to make a simple RRSP purchase are all part of the banks’ desire to know our needs even before we’re aware of them ourselves. The result is a depth of knowledge beyond what we might expect, and much of it is available at the fingertips of front-line staff as soon as we attempt a transaction. “We instantly know who you are, know what you’ve done and what your relationship is with the bank,” says Dave Revell, senior VP of corporate technology development with BMO Financial Group in Toronto. “If you call in on the telephone one night and you’re talking to Jane, and you’re in the branch the next day talking to Bill, they will know automatically, after you swipe the card, ‘Oh, you were talking to the telephone centre last night and you had a request for this, and here’s the status of it.’” The technology flexes its muscles even more if the call was about opening a new account. “When we get that information about opening your account, we will also take that and pre-authorize some other [services],” Revell explains. “We can come out and say, ‘Well, by the way, you have also been pre-approved for a credit card and a line of credit, and – perhaps, if you’ve indicated this is something you can be interested in – a loan for RRSP time.’” It’s not just banks. Credit unions, the grassroots organizations that claim more than 22 per cent of deposits in B.C., regularly advertise themselves as the kinder, gentler financial institutions that are just about anything a bank isn’t. But they too use segmentation to get a better understanding of their clientele. For example, staff working the front line for the largest credit union in Canada, Vancity Savings Credit Union, can tap into a complete picture of clients’ relationships with the institution. The principles of segmentation help them understand the information they see before them and anticipate the needs clients might have. “Our front-line staff can see all the different products and services this person has; they can see their age, they can see their credit history, they can see at a very high level the extent of the relationship,” explains Avis Sokol, Vancity’s director of relationship marketing. Clients may not be given a score, but staff are given training on how to use the wealth of information before them, including insight into lifestyle choices based on where the client lives. “[Staff] use all of that information in discussions with our members to understand their financial situation so that they’re providing products and services… that are most relevant to them,” Sokol says. The ways banks use customer information cause concern among privacy advocates. Murray Long, an Ottawa-based privacy advocate, notes that banks have attracted their share of complaints regarding privacy practices, reflected in findings published on the website of the federal privacy commissioner (privcom.gc.ca). Long singles out a 2001 complaint that challenged banks’ right to withhold customers’ bank-assigned credit scores from them as setting the tone for subsequent discussions about banks’ use of customer information. The bank in question – its identity was never disclosed – succeeded in arguing that information generated in-house was proprietary and competitive information and therefore excluded from disclosure provisions in the Personal Information Protection and Electronic Documents Act, which was enacted in 2000. (Unlike a score from a ratings agency such as Equifax, a bank credit score is an in-house analysis that helps financial institutions determine a client’s risk and eligibility for loans.) “I can find no significant harm to the complainant’s privacy rights or those of Canadians at large that would arise from continued inability to obtain access to internal credit scores,” then-commissioner George Radwanski remarks in findings, issued in February 2002. He adds: “I am unable to see how the internal credit score itself can be of any real, bona fide benefit to the individual who requests it, provided that the bank does instead provide an explanation of how the individual’s credit standing is perceived, and/or why credit has been denied or limited. This is particularly true in the complainant’s case, since she was in fact successful in obtaining the credit she sought.” The decision effectively gave free rein to financial institutions that sought to develop increasingly detailed profiles of their customers free from the scrutiny of those same customers, or anyone else for that matter. “I suspect that all banks and credit unions have taken heed of this commissioner decision and are probably reluctant to or would refuse to reveal the internal credit scores they assign to customers,” Long says. Indeed, when HSBC Bank Canada was contacted for this article, HSBC spokesperson Ernest Yee would say only that the segmentation system the bank uses in Canada is not a numerical system, as in the U.K. He declined to comment on the specific differences. “HSBC Bank Canada has a proprietary method for managing customer accounts. It is not simply a numerical score,” Yee said. “Unfortunately, we will not be able [to] discuss the details for competitive reasons.” Still, segmentation is no replacement for actual relationships with customers. Scotiabank’s Ritchie emphasizes that segmentation is not an end in itself; a bank has to use the information to develop meaningful relationships with customers rather than just tailor services or achieve efficiencies in its operations. “It’s what you do with the data and understand[ing] the customer needs that really gets you where you need to be,” she says. Vancity, for example, prides itself on dealing with customers on a case-by-case basis, but it is also deepening its six-year-old segmentation strategy to help front-line staff understand clients better. “We find reasons to say ‘yes’ as opposed to using a number to say ‘no,’” Sokol says. “We’re never going to be the one to say, ‘This is the thing you should always sell,’ because some really smart PhD figured that out with a bunch of numbers. It’s always finding the right pieces of information, making sure our branch staff have it and have it at the appropriate times.” Surrey-based Coast Capital Savings Credit Union is taking a radical approach. Moving away from traditional segmentation practices, Coast Capital doesn’t rate or rank its customers and is developing products it considers impartial, such as a “haggle-free” term deposits and mortgages that treat all customers equally. “From a service perspective, we don’t have anything that sits with tellers that says this guy is worth more to us than the next guy. You’re free to use any channel that you want, and, basically, all of our products are offered to everybody,” explains Lawrie Ferguson, senior VP of marketing for Coast Capital. “Why should we differentiate based on how much you have with us?” It’s a question we’re still asking in our house, every time my wife pulls out her client card.