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Mass Market: How To Make Up For Flagging Economics

In 2019, the average cost per acquisition (CPA) for checking customers at branch banks was $293, which drove $185 in annual value from interchange, fees and net interest margin. Adding savings, loans and other products to the mix could boost the average annual contribution to more than $550. That made the payback on checking-only customers or members 12 to 18 months – and far shorter for those with a broader relationship. 

Since then, CPAs have risen 75% to about $500 (Figure 1), and higher-for-longer rates will likely exacerbate the cost of acquisition as margins continue to fall and deposits reprice faster than loan growth. Recent observations show 83% of acquired accounts come from customers that contribute only 4% to NIM. (About 75% of NIM comes from the 3% of customers with $450k or more in deposits.) These mass-market customers (less than $10k in balances) may provide scale, but their economics are tenuous at best. And if CFPB and Fed proposals for reforming overdraft fees, credit card late payment fees and interchange take effect, those economics are likely to deteriorate further (Figure 2). Average annual income could shrink to less than $100 for checking-only, and about $200 all in, a level that may not be offset by acquiring customers with larger balances, especially if rates fall.  

Figure 1: Average Checking Cost Per Acquisition

Deposit marketing spend has increased and account acquisition
has become more expensive with increased competition.​
Note(s): excludes sponsorship spend; Average CPA for full AIQ participants​
Source(s): Curinos Marketing Analyzer , Kantar, Comperemedia, Curinos Analysis, Curinos 2021/2022 US Shopper Survey​

Figure 2: High-Level Annual Unit Economics | Before and After Fee Reform​

Without fee income streams, and with heightened acquisition costs,
the mass market has become largely uneconomical.​
MASS MARKET
AFFLUENT

Note(s): Assumes consistent cost per mass market customer before / after reform | Assumes 80% reduction in deposit fee revenue and 65% reduction in lending fee revenue | Assumes affluent cost = 125% of mass market’s​
Source(s): Curinos Benchmarking | Disguised Client Benchmark

Can The Economics Be Remedied?

To help rectify the situation, there are three broad levers that banks can pull: get more of the wallet; increase the margin through fees and tiered-rate pricing; and reduce the cost of service.   

Expand the wallet. The mass market is not inherently unprofitable, but to make it sustainable, FIs will need to capture the full wallet of its customers. Today, most of the profit in mass market is in credit, but because of conservative scoring, branch banks of all sizes lag fintechs in retaining liquidity lending (small-dollar, credit card, unsecured lines), even despite having captive deposits and the payment history of transaction accounts. Fintechs have maintained profitability through effective risk management using aggregators and other alternative data sources (that aren’t necessary if they hold the primary checking account). Potential interchange legislation, however, may make it possible for regional and community banks to recapture their share of credit card spend from their primary customers through relationship underwriting. Reduced interchange on credit cards will make rewards less attractive, so regional banks will be able to better compete on the relationship or by better knowing their customers, such as managing risk more accurately with cashflow data. In addition, building credit and transaction propositions that replace overdraft for the mass market represents a more attractive opportunity than competing on price with national players. 

Drive margin. In response to Chime and other direct providers, branch banks have broadly expanded the services they provide for free while expanding their digital offerings. But maybe they’ve overdone it. Curinos believes there’s room for them to make fewer things purely free and scale the benefits customers receive, such as ATM and wire fees, based on the relationship. A shift toward the mass affluent – prospects with balances from $10k to $50k – could also help: the addition of one-half to one account per month per branch could raise total retail deposits by as much as 5%. Raising maintenance fees, on the other hand, is more nettlesome because most of the impact would fall on the mass affluent already on the books – those with larger balances – thereby reducing the perceived value of the brand among important prospective customers. Research shows that 60% of potential customers are averse to maintenance fees, even more than to overdraft fees.  

Reduce the cost of service. Many organizations worldwide have tried to move the mass market to direct channels by either pricing specific branch services or through maintenance fees, with call centers and direct bankers still needed to support the unwashed. The strategy generally works in the near term, but longer term, deposits begin to run off. So providers need to strike the right balance. It’s also important to note that fraud is far worse through online account opening than in branches, even though the situation is improving. Ironically (and likely intentionally), most direct banks and neobanks rely on the know-your-customer (KYC) data of branch banks to mitigate their fraud risk and speed. That’s because they’re using services like Plaid and Yodlee to verify customer data on transactions and accounts that have been derived from branch banks.  

Pivot To Mass Affluent?

We’d hardly expect a bank or credit union to change its overall mix of customers overnight, but we do believe that even slight changes in product and marketing can shift the deposit mix to mass affluent and above by 3-5%. While that increase in customers may seem nominal, it could increase the volume of deposits disproportionately and offset some of the cost of serving the mass market. By focusing product and marketing on the customers that are break-even or better, banks will be better able to fund the financial well-being and support of the mass market. 

The first order of business is to shift the acquisition strategy from broad to focused, to yield a greater quality of acquired customers even if fewer of them emerge. As with credit cards, precise targeting based on customer value is needed to avoid adverse selection – in this case, too many potentially unprofitable customers as measured not by credit risk but by lifetime value. That entails having the right combination of relationship balances and transactional engagement across deposits, loans and wealth. 

To improve both efficiency and effectiveness, banks will not only need to estimate the potential value of a customer but also identify the ones in motion – those with a high propensity to choose an FI’s brand based on its functional and emotional attributes (Figure 3). This is already happening among national banks, which have the experience of millions of customers and large analytic teams. To level the playing field, regional and community banks will likely need to rely on service providers that have both enough performative data and the requisite expertise. 

Figure 3: Targeting Insights to Optimize Audience and Marketing​

Banks will need to identify customers in motion – those with a high propensity
to choose a brand based on its functional and emotional attributes.​

What Will It Take To Succeed?

The cost of acquisition and reductions in mass market contribution are already making acquisition difficult, and CFPB fee actions and the debates over interchange are likely to make it worse. To counter, successful FIs will need to: 

  1. Capture the wallet of the mass market by combining acquisition with credit, leveraging the deep relationship data that primary banks already have as a differentiator. And exploit the impending regulation on credit interchange that may change the economics of reward cards and the dominance of national players. 
  2. Drive margin by matching the size or depth of the relationship to the benefits provided in fee rebates, and support proactive engagement to further migrate customers to self-service channels where appropriate.    
  3. Focus acquisition efforts on value not volume of conversions. FIs that don’t proactively identify prospects that can bring balances and engagement will suffer adverse selection in their deposit and transaction portfolios. 

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