Actionable Insights From APT's Financial Services Practice

Banks Think Bigger than Free Toasters

September 17th, 2014 | Posted by JDouglass in Financial Services

As competition closes in on all sides for retail banks (e.g., growth of online-only providers, new mobile players, brand consolidation, and more), organizations are doing all they can to bring in deposits. Adding to the pressure, rates are expected to rise fairly soon, which makes it essential for banks to acquire new accounts now. Just like community banks of generations past, financial institutions today are enticing customers with incentives and “freebies” to spur new account generation. However, this isn’t your mother’s free toaster! Today’s marketers are offering cold, hard cash to customers who meet certain requirements. This raises the essential question for bank executives: is this all worthwhile in the end? Are we needlessly spending hundreds of dollars per customer to increase new account generation? How can we know the exact payoff of such offers, and what can we do to make these programs as profitable as possible?

There are a few items that banks must consider when rolling out such incentives, including:

  • Get the offer right – Banks are giving out sizeable rewards to customers—anywhere from $1,000 (Citizens Bank’s CollegeSaver account) to a simple $50 bonus (Capital One’s 360 Checking account). Without understanding what is the optimal amount to bring in enough (valuable) customers to make a profit, banks could be giving away millions of dollars per year without the capturing an adequate payback.
  • Understand which behaviors are truly predictive of high profitability – To defend against customers who are just looking to make a quick buck, banks are attaching a variety of requirements to such acquisition offers (e.g., minimum initial deposit amount, enrolling in direct deposit, certain number of debit card transactions per month). While these types of requirements theoretically increase customer “stickiness,” banks should be testing different requirements to see which ones truly increase customer LTV and decrease attrition.
  • Target specific branches/markets – Too often, banks will conduct nationwide rollouts of customer acquisition programs. Ideally, programs should be rolled out to individual branches. However, if this is too difficult, selective market-by-market implementation is nearly always feasible, and can save an organization millions. By testing an acquisition program and segmenting results to target the rollout, banks can save on unnecessary marketing/media costs and avoid potential losses from unprofitable customers.
  • Optimize outreach to current customers – If the offer is open to existing customers, identify which customers are most likely to redeem the offer, and which are most likely to be profitable after taking the offer.

As the competitive pressure continues to increase for banks to generate incremental deposits, only the players who smartly and carefully implement acquisition offers will see the benefits of such programs. Otherwise, they can be crippling costs which do more damage than good.

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