Leading with merchant services can help a bank acquire new customers, according to a recent Accenture study commissioned by Fiserv. On average, these accounts are more profitable: Compared to other business accounts, merchant account holders generate 2.6 times more revenue. In this video, Michael Rogers of Fiserv explains how these accounts help banks grow and offers considerations for how bank leaders can enrich this valuable product.
Leading With Payments
Strengthening Your Offering
To access Fiserv’s study, “From Revenue to Retention: Growing Your Deposits With Merchant Services,” click HERE.
Critical to this strategy, however, is to have a granular and holistic understanding of customer acquisition cost, or CAC. Customer acquisition cost is a broad topic and is usually composed of multiple channels. Digital account opening is a tool used to acquire customers, and therefore should be included in your financial institution’s CAC. It may even be able to reduce your current CAC.
Financial institutions define CAC differently, and there is no limit to its granularity. We advise financial institutions to separate user acquisition cost into two buckets: digital CAC and physical CAC. This piece will focus on digital CAC.
With respect to digital CAC, there are a number of inputs that can include:
The digital account opening platform;
social media advertising spend;
print ad spend (mailers, billboards);
general ad spend (commercials, radio);
retargeting ad spend (i.e. Adroll); and
Optionally, a financial institution can also include the salaries and bonuses of employees directly responsible for growth, any overhead related to employees directly responsible for growth and even physical CAC, if this is less than 20% of overall CAC spend.
How Does Digital Account Opening Reduce CAC? Digital account opening platforms are actually intended to lower your customer acquisition costs. Initially, this might sound counterintuitive: how would installing a digital account platform, which is an additional cost, reduce CAC over the long run?
The answer is scale.
For example, let’s say your financial institution spends $1 million on marketing and gains 10,000 new customers. This results in a CAC of $100 per customer. Compare that to spending $1.2 million on marketing that includes digital account opening. Providing the ability for customers to easily open accounts through online, mobile and tablet channels results in 15,000 customers, dropping your CAC to $80. In this example, implementing a fast and easy way for customers to open accounts reduced CAC by 20% and increased the return on existing marketing spend.
Once you have a successful marketing machine that includes strong digital account opening, you will want to scale quickly. Marketing spend decisions should be driven by quantitative metrics. You should be able to confidently expect that if it increases marketing spend by $X, you will see a Y increase in new accounts and a Z increase in new deposits.
The only additional costs your financial institution incurs for account opening are per application costs — which tend to be nominal inputs to the overall CAC calculation.
What is a Good CAC for a Financial Institution? CAC has so many variables and broad-definitions that it is nearly impossible to tell financial institutions what is “good” and what is “bad.” Across CAC industry benchmarks, financial services has one of the highest costs to acquire new customers:
Technology (Software): $395
Real Estate: $213
Technology (Hardware): $182
Marketing Agency: $141
Consumer Goods: $22
Customer acquisition cost and digital account opening go hand-in-hand. Financial institutions should focus on the output of any marketing spend, as opposed to the input cost. Different marketing strategies will have varied levels of scalability. It’s important to invest in strategies that can scale exponentially and cost-effectively. By focusing on these principles, your financial institution will quickly realize a path towards industry-leading growth and profit metrics, putting your financial institution ahead of the competition.
As the calendar nears the midpoint of 2020 and banks continue adjusting to a new normal, it’s more important than ever to keep pace with planned initiatives.
To get a better understanding of what financial institutions are focusing on, MX surveyed more than 400 financial institution clients for their top initiatives this year and beyond. We believe these priorities will gain even more importance across the industry.
1. Enabling Emerging Technologies, Continued Innovation Nearly 20% of clients see digital and mobile as their top initiatives for the coming years. Digital and mobile initiatives can help banks limit the traffic into physical locations, as well as reduce volume to your call centers. Your employees can focus on more complex cases or on better alternatives for customers.
Data-led digital experiences allow you to promote attractive interest rates, keep customers informed about upcoming payments and empower them to budget and track expenses in simple and intuitive ways.
2. Improving Analytics, Insights Knowing how to leverage data to make smarter business decisions is a key focus for financial institutions; 22% of our clients say this is the top initiative for them this year. There are endless ways to leverage data to serve customers better and become a more strategic organization.
Data insights can indicate customers in industries that are at risk of job loss or layoffs or the concentration of customers who are already in financial crisis or will be if their income stops, using key income, spending and savings ratios. Foreseeing who might be at risk financially can help you be proactive in offering solutions to minimize the long-term impact for both your customers and your institution.
3. Increasing Customer Engagement Improving and increasing customer engagement is a top priority for 14% of our clients. Financial institutions are well positioned to become advocates for their customers by helping them with the right tools and technologies.
Transaction analytics is one foundational tool for understanding customer behavior and patterns. The insights derived from transactions and customer data can show customers how they can reduce unnecessary spending through personal financial management and expert guidance.
But it’s crucial to offer a great user experience in all your customer-facing tools and technologies. Consumers have become savvier in the way they use and interact with digital channels and apps and expect that experience from your organization. Intuitive, simple, and functional applications could be the difference between your customers choosing your financial institution or switching to a different provider.
4. Leveraging Open Banking, API Partnerships Open banking and application programming interfaces, or APIs, are fast becoming a new norm in financial services. The future of banking may very well depend on it. Our findings show that 15% of clients are considering these types of solutions as their main initiative this year. Third-party relationships can help financial institutions go to market faster with innovative technologies, can strengthen the customer experience and compete more effectively with big banks and challengers.
Financial institutions can leverage third parties for their agile approach and rapid innovation, allowing them to allocate resources more strategically, expand lines of business, and reduce errors in production. These new innovations will help your financial institution compete more effectively and gives customers better, smarter and more advanced tools to manage their financial lives.
But not all partnerships are created equally. The Office of the Comptroller of the Currency recently released changes surrounding third-party relationships, security and use of customers’ data, requiring financial institutions to provide third-party traffic reports of companies that scrape data. Right now, the vast majority of institutions only have scrape-based connections as the means for customers to give access to their data — another reason why financial institutions should be selective and strategic with third-party providers.
5. Strategically Growing Customer Acquisition, Accounts As banking continues to transform, so will the need to adapt including the way we grow. Nearly 30% of our clients see this as a primary goal for 2020 and beyond. Growth is a foundational part of success for every organization. And financial institutions generally have relied on the same model for growth: customer acquisitions, increasing accounts and deposits and loan origination. However, the methods to accomplish these growth strategies are changing, and they’re changing fast.
Right now, we’re being faced with one of the hardest times in recent history. The pandemic has fundamentally changed how we do business, halting our day-to-day lives. As we continue to navigate this new environment, financial institutions should lean on strategic partnerships to help fill gaps to facilitate greater focus on their customers.
The battle is on among all banks to acquire new customers and their low-cost deposits. The key to winning the battle for low-cost deposits is owning the primary banking relationship and, in particular, the consumer checking account relationship.
The checking account is the central way consumers identify “their bank.” It is the only banking product that consumers use daily to navigate the intersection of their life and their money.
If this navigation is smooth, your bank is in the best position to collect even more deposits, loans and fee income.
Banks that understand this best have been successful at capturing primary banking relationships, which in recent years have been the four biggest U.S. banks. They are the ones investing the most to continue this trend and defend their success.
If you’re a community bank or even a regional one, a recent AT Kearney survey detailed the ways you are being attacked.
The four biggest banks (Bank of America Corp., JPMorgan Chase & Co., Citigroup and Wells Fargo & Co.) have 40 percent of the U.S. consumers’ primary banking relationships. Superregional banks have 19 percent. The remaining 41 percent is split between other institution types, with credit unions at 14 percent, community banks at 12 percent, regional banks at 8 percent and relatively new direct banks like Marcus and Ally already at 5 percent.
The four biggest banks are collectively budgeting more than $30 billion in technology investments, about one-third of which is on digital banking around the checking account.
Digital channels drive 35 percent of primary banking relationship moves, while branches only drive 26 percent. The Big Four banks are capturing 41 percent of consumers that do switch their primary relationship. Superregional banks are capturing 28 percent. This leaves 31 percent for everyone else, and the new digital-only banks have 11 percent of that remainder.
Big Banks Rule The reality is the biggest banks have the upper hand. The resources they are investing in digital platforms to maintain and increase market share can’t be replicated by community or regional banks.
But let’s not confuse the upper hand with the winning hand. Community and regional banks can fight back, because there is a chink in the armor of big banks.
While the digital experience provided by the four biggest banks may be superior, a review of the actual product benefits their consumer checking accounts provide isn’t that impressive. They are as ordinary as the checking accounts at most other banks.
Their checking lineups, terms and conditions are complicated with significant product overlap. They mask this weakness with an allure in the marketing and digital delivery of these ordinary benefits.
When smaller banks discuss growing consumer retail accounts, they talk more about acquisition pricing and marketing strategy, and not enough about first improving and simplifying products and lineups. Many banks start by spending on the promotion of unappealing, undifferentiated checking products at the lowest price in a confusing lineup. This isn’t a winning battle plan.
Smaller banks should first make their lineup simple for consumers to understand. The best practice here is a good, better, best methodology, which we have previously discussed in my article, Use Good/Better/Best for Checking Success.
While doing this, why not offer checking products as good, modern and different as you can afford?
Nontraditional Benefits Work Recent research by Cornerstone Advisors, titled “Reinventing Checking Accounts,” shows how positively consumers respond to switching to checking accounts that include nontraditional benefits like cell phone insurance, roadside assistance and pharmacy/vision discounts alongside traditional benefits.
These nontraditional benefits are central to consumers’ lives away from the bank but can be captured in their checking account.
There’s no debating the importance of acquiring new checking relationships in gathering low-cost deposits. While the biggest banks dominate currently, are investing heavily in technology and paying handsome incentives to attract even more new customers, smaller banks can attack where these big banks are vulnerable.
Don’t fight them toe-to-toe with a complex lineup of look-a-like checking products. That’s a losing battle. Instead, focus on the appeal of a simple lineup and products that competing banks don’t offer. That’s a battle worth fighting, and one that can be won.
Bank stocks have taken a dive in late 2018, and bank boards play a key role in the strategic decisions driving shareholder value. Scott Sommer and Steve Williams of Cornerstone Advisors explain the issues impacting shareholder value in 2019, including technology.
Customer acquisition is top of mind for most banks and their boards.
This usually translates into new, slick marketing campaigns. These campaigns mean enlisting your advertising agency to cut through the clutter, which is increasingly difficult to do. Or you could look to mine more near-term customers right from your own website and the online account opening process.
More and more banks are onboarding new customers by enrolling them through their website. This process is rife with opportunity. According to The Financial Brand, 40 percent of online bank account applications were abandoned due to a long or complicated enrollment process.
Think about that. Only six out of 10 prospects who arrive at your site—with the intention of creating a bank account—complete the journey. That’s tragic. It makes more sense to fix that leaky funnel than to spend big on another advertising campaign in the hopes of driving significantly more website or branch traffic.
We know that there are a few places in the online account creation process where banks fall down. Let’s dissect some of these pitfalls.
Identity verification. Thanks to Know Your Customer and anti-money-laundering regulations, banks and credit unions need to impose more rigor to ensure the person creating the account is genuinely that person. Thanks to a steady barrage of data breaches and advanced malware, traditional methods of authentication, such as knowledge-based authentication and two-factor authentication, are no longer in vogue. Increasingly, banks are turning to online identity-verification solutions that require a government-issued ID and a selfie to more reliably verify digital prospects. These solutions can be pretty fast and are capable of completing the online verification process within a minute.
Simple messaging. Banks that provide simple, clear instructions, written in plain English, experience much higher conversion rates. This includes providing a clear rationale for why you’re asking online customers for their ID documents and selfie, and what you intend to do with that information.
Fewer screens. Obviously, the more hurdles you put in front of your customers, the less likely they will make it all the way through the account-opening process. So, if you can reduce the number of screens to identify a new customer from seven to four, that will have a material impact on conversion rates.
Go omnichannel. When it comes to establishing identity online, you want to open up the experience to as many channels as possible. Many identity verification solutions only offer a mobile experience, not allowing potential customers to use their webcams on their laptops or desktop computers. By disabling this channel, you’re eliminating a large swath of potential customers who either don’t have a smartphone or would prefer to complete the process from their laptop. Being omnichannel also means supporting API-based mobile web and native mobile implementations. For companies looking to cast the widest possible customer acquisition net, including some older generations who may not be comfortable with newer technology, it just makes sense for your identity-verification solution to offer the broadest number of channels to your prospective customers.
No more maybes. Another cause of online abandonment are the longer wait caused by manual reviews. Several online identity-verification solution providers return a “caution” decision when they can’t easily confirm that the customer is who they claim to be.
Every “caution” or “maybe” requires manual review by a team of analysts. There are real costs to manual review. Jumio offers an online calculator to illustrate these expenses. These are real costs to your business, and they create real frustration for your customers.
So, if customer acquisition is job No. 1 for 2019, maybe it’s time to fix your sales funnel and plug the leaks with an efficient onboarding experience—one that optimizes and simplifies the identity-verification experience.
You can do the math. Spend big on advertising with iffy results. Or, create a great online experience that is designed for conversion. You’ll end up with happier customers—and a lot more of them.
In the micro-moment economy—in which customers seek instant, Amazon-like interactions—banks need to quickly gain (and keep) customer trust. Addressing the challenge will require cultural change on the part of traditional financial institutions, along with the implementation of new technology. Eric Hathaway of Zoot Enterprises shares his insights on how banks can strategically approach improving the customer experience.
For many community banks, continuously communicating with their customer base can be challenging given limited resources and rising compliance requirements. In this video, Michael Tipton of emfluence discusses how using an automated messaging platform for new accounts can help banks cultivate and grow customer relationships.
The bank down the street just did away with free checking and one of their upset customers closed the account and opened a free account at your financial institution. Good news, right?
Let’s look at this a little more closely. What balance did that customer bring? Did that person open any other relationship products? How many times does that person swipe a debit card per month?
Maintaining a customer’s checking account costs your financial institution money. The American Bankers Association estimates the annual cost to a bank to maintain a checking account is between $250 and $400 per year. For community financial institutions with less than $5 billion in assets, the average according to other researchers is closer to $250 to $300.
So what costs are included in these figures? The research shows printing, staff, legal and compliance, processing, fraud prevention, and other overhead costs are the main factors in the cost to maintain a checking account. Some argue overhead shouldn’t be included in the calculation since financial institutions will have branches, tellers, and ATMs no matter what their product mix may be—these are simply a cost of doing business. But think about the typical branch overhead for a moment. A great deal of these costs support those customers dealing with transactions and activities related to a checking account. Do you really think ATMs were invented for the loan customer?
So let’s objectively look at what the average consumer checking account looks like. According to StrategyCorps’ proprietary data on nearly 100 financial institutions and over 2 million demand deposit accounts during the last 12 months, we’ve found the averagechecking account balance is $5,600 with the following annual revenue contributions:
Net interest income $252
Service fees of $8.33
Miscellaneous fees $7.12
Overdraft fees $92.75
Debit interchange revenue of $53.43
These averages total $413.63. That would seem to suggest the average checking account pays for itself, right? No. Averages don’t tell the real story. Of all the financial institutions analyzed by StrategyCorps, we found almost 40 percent to be unprofitable – not covering what it costs to maintain them.
What do unprofitable customers look like? They tend to have very low debit swipes, about six times per month. They have practically no other relationship other than checking. Only 17 percent have more than one demand deposit account, only 23 percent have a savings account, only 1 percent have both a savings and a loan product, and 3 percent have a loan. The average balance is $812. Total annual revenue contribution for all unprofitable accounts is $92. Overall, unprofitable customers comprise only 2.7 percent of all checking-related revenue and 1.4 percent of total relationship dollars.
Contrast this with profitable customers. Their average balance is $8,000, the average monthly debit swipes are 15, 54 percent have more than one DDA, 60 percent have a savings account, 30 percent have a loan and 20 percent have both. The average revenue contribution is $1,650.
Within this group is a sub-group we call the super-profitables. This group contributes over $6,200 each annually, makes up only about 10 percent of a bank’s checking account base, but not surprisingly, contributes 54 percent of the checking-related revenue and 67 percent of total relationship dollars. Super-profitable customers carry an average checking balance of $23,800, savings of $57,000, and loans of $68,000. More than 72 percent have multiple demand deposit accounts, 81 percent have savings, 59 percent have loans, and 46 percent have both.
Now let’s get back to that customer you’ve just landed from the financial institution down the street. The good news is that you now have the opportunity to develop a relationship that you didn’t have before. However, making that relationship meaningful to your bottom line means this customer needs to have large average total relationship balances, be a power user of the bank’s debit card, be an occasional or chronic fee generator, or be a combination of these. If the financial relationship is shallower than this, it’s costing you money.
So celebrate getting that new customer. Then realize the financial realities of the profitability of a consumer checking account and get to work doing the right things to make sure that that account is profitable to your financial institution, namely selling other products that they want to buy from you and, in some cases, gladly paying your financial institution a fee for doing so.