Niche Banking vs Niche Experiences

As noted in a previous blog post, Rediscovering Roots: The Biggest Opportunity for Credit Unions, niche marketing is a further refinement of a market segmentation approach where a subgroup of consumers is targeted with tailored information and products. In the financial services realm, the term “niche banking” has risen in popularity. This typically refers to companies that have a specialized focus on a particular group of customers. In these cases, the organization’s entire business model and marketing is geared primarily to serve their chosen subgroup.

It is for this reason that many credit unions are reluctant to adopt a niche marketing strategy. They believe such a transition would demand a total revamp of their branding, digital strategy, and technology stack. That might be the case if a traditional niche banking strategy were pursued. However, an alternative strategy can be executed using minimal additional resources with the existing membership base: building niche experiences.

Niches are identified by analyzing internal credit union data along dimensions like demographics, location, occupation, current products, etc. The resulting niches are then presented with content and product offerings tailored to their interests.

While conventional niche banking goes “all in” on a particular subgroup, a niche experiences strategy aims to create the same effect within clusters of existing credit union members without sacrificing the credit union’s strategy with the rest of the membership.

However, even though both concepts target specific customer segments, they differ fundamentally in their implementation and risk level. Let’s compare the two differing strategies:

Niche Banking

Niche banking targets a specific segment of customers perceived to be underserved by conventional financial institutions. Such companies make it their mission to understand their target group's unique needs, aspirations, and specialized needs. Based on this deep knowledge, they offer specialized products and services to the target group.

Niche bankers believe that since traditional financial institutions have underserved their target groups, there is a huge potential demand for specialized products and dedicated customer service. The desired outcome would be strong sales growth by accessing this untapped potential. A parallel benefit is increased customer satisfaction and, therefore, deeper loyalty to the brand.

Niche bank examples:

Niche banking emerged as a way to differentiate in a crowded marketplace. With the advent of the online banking era, the barriers to entry were lower for financial start-ups, but traditional banks quickly adopted technological innovations. As a result, entrepreneurs searched for new differentiation opportunities. For certain consumer subgroups, niche banking delivered distinctive advantages.

The benefits of niche banking for customers are products and services that better fit their needs and the feeling that their bank “gets them.” For the financial institution, the benefits are potentially:

• Greater revenue
• Deeper product penetration per customer
• Greater brand loyalty that leads to better retention

One drawback for customers is that a niche bank may not offer a wide breadth of products and services. As a result, they may need to meet their broader banking needs via multiple institutions.

For financial institutions, being a niche bank means locking the organization into a narrow market. If the niche choice was faulty or trends make the niche less attractive over time, changing course is an expensive prospect because branding, internal processes, and the technology stack were tailored to the niche.

Niche Experiences

Like niche banking, a niche experiences strategy is also based on customer segmentation and an intense focus on a specific group. However, rather than committing to a single sub-segment, the niche experiences approach identifies multiple subgroups within the credit union’s existing membership base. Working with these subgroups follows a similar process as single niche banking. Once identified, each receives tailored digital content and product offerings.

The nature of the digital content is a pivotal factor. By focusing on tailored experiences for each subgroup, often leveraging technology for personalization, members feel a deeper connection because they feel the credit union is talking to them on a closer, more intimate level. This creates trust and, therefore, loyalty. Also, opportunities can be created for online communities of like-minded members to form, making interactions with the credit union the source of truly unique, memorable experiences.

Of course, increasing revenue is a desired outcome of a niche strategy, so personalized product recommendations march in step with tailored informational lifestyle content. And these don't need to be new product types. The credit union should focus on its existing product strengths and create variations that match up with the needs and desires of each niche.

Credit unions considering this strategy will be encouraged to know that providing niche experiences bears significantly less risk than the niche banking approach.

• For one thing, the niche experiences strategy does not require branding changes. A credit union can maintain its current branding and, optionally, add new messaging to support the niche experiences strategy.
• Second, executing a niche experiences approach requires no overhaul of the technology stack. A niche bank typically customizes technical assets in support of its target niche. While this makes its IT systems laser-focused on the chosen subgroup, it also renders them inflexible.
• Drastic changes to a credit union’s IT infrastructure aren’t needed to provide niche experiences. In most cases, established communication and product processes can be easily adjusted, if needed, to accommodate the new strategy. For example, the existing website would add a section that contains content targeted at the chosen niches.
• Finally, any niche strategy endures the risk of picking the wrong subgroup. Even though research identifies a group with high potential, actual results might not meet projections. Another risk is “niche drift.” Over time, the growth potential of a subgroup evolves to be less attractive. If a subgroup changes appreciably, a niche bank would be at risk due to its sole dependency position. A credit union employing a niche experiences approach would be much less vulnerable since its niches can be added, modified, or dropped with much less effort.

As noted above, niche banking and niche experience strategies both begin with the concept of customer segmentation. It is important to note that regardless of strategy, the goal is to build a focused community around each niche, which requires continuous content delivery. For credit unions, implementing a niche experiences strategy poses less cost and risk while potentially delivering improved revenue growth and deepened member loyalty, as shown in the comparison chart below.