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The Changing Economics Of Mass-Market Banking

Old-fashioned consumer banking is facing some very modern challenges.

A steep decline in overdraft fees, combined with higher rates of fraud and competition from new entrants, means that it is getting more expensive for financial institutions to provide basic banking services to the mass market.

As a result, Curinos estimates that the revenue associated with providing a mass-market bank account will fall by 40% between 2021 and 2024. This is putting tremendous pressure on the traditional economics of consumer banking.

And it gets worse. Not only are overall revenues declining, but the types that are coming from the mass market are shifting as well. The collapse of overdraft fees means that revenue from mass-market interchange and loans are coming to the forefront. Just as neobanks now rely on debit card utilization and/or lending, traditional banks will also increasingly depend on these revenue sources to make the mass market viable. The implication is that traditional banks will need new products and marketing skills to capitalize upon these alternate sources of revenues.

These dynamics mean financial institutions need to rethink the way they acquire, monetize and retain mass-market customers. That includes adopting an acquisition plan that focuses on personalized treatments and optimizes customer lifetime value (CLV), taking advantage of digital capabilities to find the right customers and finally (re)doubling down on relationship banking.

Current Performance

So how are banks doing in targeting, acquiring, onboarding and expanding mass-market relationships? The short answer: not so well.

First, the cost to acquire customers has increased significantly. Investment in marketing and incentives, one of the most important drivers of bank choice, has surpassed pre-pandemic levels; costs per acquisition (CPA) are now 40-60% higher than they were in 2019. Pile on rising fraud rates and the expense of growing the digital channel and the CPA is even higher.

Second, although acquisition through digital channels has picked up significantly due to changing consumer preferences, there is a significant gap in quality. Digitally acquired accounts tend to see a 40-50% attrition rate and experience a deposit gap that is 7 to 12 times less than branch-originated accounts. (See Figure 1.)

Lower revenue, higher acquisition costs and lower quality of acquired accounts add up to seemingly untenable economics in consumer banking. Based on today’s market conditions, Curinos estimates that the payback period for a typical newly acquired mass-market retail customer is at least five years. And that grows to at least eight years for digitally acquired customers. And new-to-bank consumers with less than $1,000 in starting balance aren’t profitable at all. (See Figure 2.)

The industry has to do better.

Figure 1: Branch-To-Digital Deposits Ratio

Customer Retention by Channel (2021 Vintage)

Source: Curinos Digital Benchmarking

Deposit Relationship Balance Distribution (1 mo on Book)

Source: Curinos Digital Benchmarking

Three Opportunities

Curinos has identified three strategies to help financial institutions overcome the challenges of serving the mass market.

  • Acquire customers with a focus on customer lifetime value. Not all mass-market customers are uneconomic. But within the “mass,” there are subsegments that are more attractive on a long-term basis than others for any given institution. The ability to identify prospective customers who contribute higher value to a bank and to deliver impressions directly through the right media channels to reach them is critical to driving acquisition. This requires a marketing approach that is grounded in customer lifetime value, making the return much easier to measure and manage.

    Ultimately, we believe the intersection between marketing and product innovation is going to become more critical to finding and attracting the mass-market customers. Tiered offers have become very popular over the last few years. Examples include giving a consumer $100-300 for bringing over a checking account and setting up direct deposit or performing a certain number of transactions. Those are followed by a more material offer of $300-$500 for bringing over significant balances. These types of offers align the cost of acquisition with the value that the account will bring to the bank. Getting the offer into the right hands and then creating the right incentive to bring the value to the bank becomes critical moving forward. This intersection of product, offers and marketing will become increasingly important in an environment where quality and personalization outweigh quantity.

  • Use digital personalization to target and onboard the right customers. Banks too often serve customers who come to them (i.e. walk into branches) — an old approach appropriate to the traditional branch-dominated business models. Digital marketing and distinct products allow banks to target their most attractive customers. Once acquired, the need is to maximize value through personalized onboarding and deepening journeys. According to Curinos’ Amplero platform, these strategies can help improve new customer retention by 10% year over year and drive higher cross-sell rates. For customers with more than $5,000 in opening balances, this translates to more than $1,000 incremental CLV in the relationship.
  • Focus on primacy and getting all of a customer’s business. Bankers have always known that relationship is important. Given the difficult economics of the mass market, it has never been more important to own the total customer relationship. With the new mass-market economics, it is essential to not only retain the customer but also to deepen the relationship. Deposits, payments and lending go hand in hand and will lead to a more profitable outcome for the provider. That is especially the case when interest rates are rising and customers may be tempted to chase rate elsewhere. Here again, product innovation and digital marketing will be key.

Although market conditions can change, consumer banking economics will continue to get squeezed. Those economics aren’t likely to improve any time soon, putting pressure on financial institutions to adjust their approach to acquisition, retention and relationships

Figure 2: New-to-Bank Customer Profitability By Cohort And 90-Day Starting Relationship Balance

Current NPV Per Customer

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