Here's a summary of a movie you haven't seen yet, it's about a kid who moves to a new city, he is the archetype new kid at school - it's halfway through the year, everyone's friendships are already in place. What's he going to do?Kid decides his strategy will be to approach other kids at school and pay them to be his friend, he comes from a rich family so the money is not a problem. In the schoolyard, the new kid is always surrounded by other kids. He looks for all intents and purposes like he is really popular.How is this movie likely to end? How valuable are relationships when they are bought? Would you be feeling good about this approach if it was your child?Financial services companies have been marketing themselves like this for decades, pushing deals, incentives and special offers to attract customers in the best traditions of the used car lot. Banks and financial services companies know that buying customers with upfront incentives works, and the vast majority of customers who do take the bait will be with them for the long term and they can milk them profitably for decades. Conventional banks have to resort to such tactics, there is very little differentiation between banks and all provide stunningly poor value for money.So desperate have some become financial services companies have at times crossed the line between marketing licence and outright deception. The truth though, however uncomfortable it makes us is that conventional banks have been ripping off consumers for decades and filling their own and their shareholder's boots over the financial bones of their customers.
There is no reason for anyone to have money in any account paying a minimum of 1.5% in the US today. The average checking account pays 0.06% and the average "savings" account pays little more at 0.09%. There is over $12 trillion held in such accounts in the US earning almost nothing for consumers and hundreds of billions of dollars of profit for the banks, every single year. This helps make retail banks are 3x more profitable than the market average.So dire are the actual products that banks sell, that the primary form of competition is marketing with the top 6 banks alone spending over $10bn per year in marketing. An extraordinary amount for what is a utility and commoditised product. Chase spends as much in the US as Apple spends Globally!This approach has not served consumers well - the costs are now so high to acquire new customers as there is really very rarely a compelling reason to move banks or acquire a new credit card so banks have to buy consumers interest. The more valuable the customer or desperate the bank the more they will pay. A significant portion of this cost is in advertising with most of the rest paying affiliate fees to other companies who send customers their way (like Nerdwallet,Creditkarma) and finally, consumer incentives. The quality of customers that have to be bought are not good - credit cards that are unused (the average adult has almost 4 credit cards in the US), bank accounts without deposits or transactions. These drive banks costs higher as the active customers that remain not only have to cover their costs of acquisition but all the costs of those that are not active as well.It costs on average around $200 to acquire a credit card customer in the US (up to and beyond $1,000 if they are affluent cards like MasterCard World Elite and Visa Infinite). 50% of cards in force in the US are inactive, active is defined as 1 transaction in the previous 12 months, so it's a pretty low bar. In reality, only around a quarter of cards issued are actually actively used and therefore making the bank money. The real cost of acquisition of an active customer is therefor $1,000 not $200 - a very steep cost that has to be covered for the bank to make a profit.The higher the bank's costs are the harder they have to work to claw that back and continue to support their profit growth every year. Consumers pay for this market inefficiency through lower interest rates, benefits and higher fees.The vicious cycle of push marketing creating poorer customer experiences is, however, not inevitable. Outside of retail banking, we have seen companies like Vanguard create real innovation in adjacent markets like retail investing. Taking what was exceptionally poor value for consumers in investing and creating an entirely new model based on value for money. The less Vanguard charged the more people were naturally pulled towards them. They both promised and delivered fantastic value for money.What if this model was transferred to retail banking. A model where customers were given great value for money and products designed to enrich them rather than the bank. This would probably look like a simple bank account with high interest. Debit and Credit cards that rewarded your loyalty and spend and investment platforms that were no or low cost and helped the customer maximise their returns and manage risk through diversity and dollar-cost averaging. A product that actually attracted customers and provided long term reliable and sustained value.Such a platform would naturally see much higher rates of consumer pull. The provider would therefore not need to spend money on marketing, affiliate fees and upfront consumer incentives. Instead, they could focus on delivering customer value. Every dollar saved would potentially go back to the consumer. The customers would also be much higher value, they came to the provider attracted by the product, not the marketing. Inactive rates would be low saving more costs and putting no pressure on having to have the most active customers carry in the inactive as well.In such an unconventional approach customer acquisition costs (CAC) would be very different and much lower than the market norm. CAC has an enormous impact on individual customer profitability and therefore the overall economics of the bank. Changing the high CAC push model to a low CAC pull one would enable a new style of banking industry to emerge. One that is predicated on providing and competing on the best customer experience and value for money and not the brute force marketing spend they deploy. Only in this model will customers be the ultimate beneficiary.
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