How turning Pareto on it’s head can be a path to growth for banks and financial institutions around the world.
Most people know the Pareto principle as the “80-20 rule.” In the banking world, it encapsulates a broad standard that roughly 20% of a banks customer base delivers 80% of their profits. This rule has significant implications for financial institutions, and this post focuses on how these organizations can improve their profitability by shifting their least profitable customers to new, more cost-effective digital cash-based banking services.
The concept of analyzing the profitability of existing customers is not new for banks. It has been written about for decades and has spawned the development of many CRM/analytical tools. Some research indicates this rule may even be skewed: It appears that less than 20% of a bank’s customers often generate 80% of all profit. In a study using detailed profitability analysis tools, US based Fleet Bank found that 50% of their customers were unprofitable!
Almost every financial institution is focusing on retaining and growing their top 10-20% “gold-level” customers who generate the most profits. The harder issue is to figure out what to do about the other 80-90% of their existing customers who do not generate much profit or who—even worse—are generating a net loss for the bank.
While this analysis should include life cycle/customer lifetime value considerations, some likely lower profit customer segments for banks include:
- Account holders who only maintain a low balance checking or savings account
- Customers who are students or young adults (and the current bank offerings may not allow the business to retain this younger generation)
- A segment who still use paper checks to make payments and tend to use higher-cost channels like branches or hotlines for reassurance that their money is safe or for more customized service
At first glance, these customer segments are your bank’s least attractive in terms of profitability and growth. However, today’s new, low-cost digital and mobile technologies are enabling banks to create new digital cash-based services which may be better suited to more profitably serving these segments.
To complement existing savings and checking (or current) account service portfolio, banks can create new, low-cost, all-digital bank accounts that customers can control. At Quisk, this means associating an account with the customer’s mobile phone number and making payments, bill pay, and P2P mobile transfers accessible via any mobile phone.
Offerings like these appeal to a new, increasingly mobile generation but also are a lower-cost and lower-service option for existing customers who do not meet certain thresholds. Most importantly, all digital, or debit-based electronic bank accounts can bring unbanked customers into the financial system and allow a bank to meet inclusion goals set by a central bank.
Although any new all-digital bank account will likely be priced to generate less initial fees than a traditional savings or checking account, a bank is now able to participate in the customer’s digital cash transactions funded from this account, just like issuing cards. This includes top-up, in-store POS purchases, online eCommerce purchases, Bill Pay, many other transaction types previously completed outside the bank.
Today’s technologies enable the use of SMS as a lower cost channel for payment transaction confirmations and improved relationship building… leading to potential financial service up-sell opportunities. Over time, we believe customers will feel comfortable paying more frequently with digital cash and writing less checks—all of which will be attractive to your bank’s bottom line.
In summary, this new all-digital bank account would enable a forward-thinking bank to offer innovative and cost-effective services that target their most unprofitable customer segments–driving brand and profitability while lowering costs for all account holders.
We want to partner with you to enable your customers to use their money without needing cash or cards. Contact us for a 10 minute demo of the Quisk platform or to find out more.