Why Digital Differentiation Matters For Acquiring New Customers

Olivia Lui, product marketing innovation expert at Curinos, digs into our recent research on how and why customers choose their primary banking relationship, and what that means for institutions as the digital banking channel grows in importance.

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Transcript

(F)INSIGHTS PODCAST TRANSCRIPT:

Rutger van Faassen: Today my guest is Olivia Lui, who is director of marketing and product in our omnichannel sales and experience practice here at Curinos. Olivia, welcome back to the podcast. Before we dive into talking about the U.S. shopper survey, can you remind the listeners what your role at Curinos entails?

Olivia Lui, Curinos: Thanks, Rutger, for having me again. My role is really running the marketing product innovation practice at Curinos. What that means is I really work with a lot of marketing teams and product teams across the banking financial services space to really try to understand how to best leverage and change our strategy to drive acquisition as well as retention.

Great to have you here. Curinos conducts a U.S. shopper survey. Can you tell us a little bit more about that?

Yeah, so this study has been a longitudinal study that's existed since 2012. When we think about the U.S. consumer churning population, really, truly the percentage of people who are looking for a new primary institution on an annual basis, we're looking at about 6 to 7% of the population, and so that's about 18 million people total. This particular study focuses on that population really trying to understand who did they end up choosing as a new primary institution, why did they end up choosing that primary institution and who did they really consider as part of their consideration set?

That begs the question, why is it important to understand where customers have their primary checking account?

The primary checking account has been this holy grail for a very long time in the industry where, although we'll talk about this in a little bit in terms of primacy, but the primary checking account tends to be a signal that this particular customer leverages this institution for all of their primary needs. What we tend to see is that once you capture that primary checking account, you are much more likely as a bank to also capture their lending needs, their other deposit needs, also be able to actually provide a better level of service so that they're actually satisfied with you over time. It becomes a very important part of the equation when we think about the value of a customer and lifetime value of a customer.

It obviously gives us insight into how the consumer is going to make choices based on how primary you are for them. We also talk about digital acquisition a lot, and so why is digital acquisition such an important theme and how does it compare to historical data? What do you think it can tell us where is this going in the future?

From a digital perspective, what is interesting is that it has certainly increased in terms of digital account opening. When we think about which channel consumers really prefer to open a new checking account in or a new banking account in, that's much more likely going to be a digital channel as in on their phone, online, on their desktop or on their laptop. What's interesting there, though, is that although digital acquisition has increased over time, which is on average about 30% of accounts open today within the marketplace, what we tend to see, though, is slightly different behaviors and not only behaviors, but also quality, meaning balances within accounts that are open digitally versus open via branch or originated via branch. But this theme starts playing out, becoming much more important over time as we think about, again, lifetime value of a customer.

Given the migration towards digital that you mentioned, what does that mean for bank branches and what role do neobanks and direct banks play in the migration towards digital?

When we think about the migration to digital, let's talk about the concept of perceived convenience. I emphasize the word perceived. The perception of whether or not your institution is convenient enough for my banking needs. It has shifted away from branches such as branch attributes, like lots of ATMs around me or making sure that there's a branch near my work or near my home. Instead, what's happened is useful online and mobile banking features have really increased over time and it's taken that place. Given that, what we see, then, that migration toward digital account opening, but also toward digital-first types of players has occurred. This also means, then, the role of bank branches are no longer the biggest driver behind bank choice. When we compare what the driver or the bank branch as a driver to bank choice was back in 2015 versus where we are today, the bank branch used to be over 50% of the driver. Today it's talking about 30% to maybe 35%, and so marketing and branding digital have really come up the curve on that front. It tells us that although bank branches are not a big driver in terms of why you would choose a bank, what it tells us, though, is that the role that bank branches play is likely going to start evolving to a much more billboard-value type of role. What does that mean? Do you have the right branch location in the right place where it garners a good number of impressions and good number of eyeballs and/or do you have them in the right locations where it actually gives off a sense of really good convenience, as opposed to having really dense networks as a lot of banks did pre-pandemic. 

You mentioned digital-first organizations. What exactly does that mean?

When we think about the share of folks who are shopping every year, of those 18 million folks in the most recent year, about 30% of those folks went to neobanks. Institutions that function as a digital bank but don't truly own their balance sheets, so they're partnering with another bank to actually provide banking services. Those are digital-first folks. They don't have branch network. They might have the ATM partnerships from a cash need perspective, but otherwise it's very much a digital-only type of experience

They'll choose to go first through a digital channel and only if they need another channel, they'll go to that next channel. What is driving the increase in the costs of customer acquisition?

When we think about the cost a bit, let's think about it from a competitiveness perspective and then the quality that's also coming through the door when we think about acquisition. The competitive perspective is that the amount of marketing spend has increased significantly, given the rising rate environment. We are seeing a 1.3X to 2.2X increase in the amount of marketing investment that exists in the marketplace today, compared to the previous high rate cycle back in 2019. Not only is that attributed to the cost of media, but at the end of the day, it just tells us that more institutions are trying to leverage marketing as a way to drive acquisition. That has actually created an increase in cost per acquisition by about 70% pre-pandemic to where we are today. That's where then the bigger question is if you're paying 70% more per acquisition for each customer coming through the door, can you make up for it on the other end when you think about revenue and you think about “How long does this customer stay with you?” If 30 to 40% of accounts are opened digitally and there's an 8X to 12X difference in quality relative to branch originated accounts, that's where we start seeing, really, a breakdown of what that return may be over time. This starts getting toward an important metric, like customer lifetime value and how much are we paying upfront and then versus really how much can we keep and actually build and grow with that particular customer?

Let's talk about that in a short second, but to maybe wrap this point up, I was thinking if things go digital, it's cheaper, but you're basically saying because of the competitive environment, there's a lot of marketing costs and the people that come through the digital channel actually don't convert as much as the people through the branch channels. Higher marketing costs, maybe slightly lower operational costs, but lower conversion leads to higher overall customer acquisition costs. Is that right?

Yeah, that's about right. I would expand probably that conversion, the definition of conversion, from bank choice all the way through whether or not you actually activate, because you might open the account, and you just might not activate at the end of the day.

Which is that perfect bridge to what you were talking about, this customer lifetime value. How does this value differ for the different acquisition channels and how does primacy play a role in the CLV, or customer lifetime value?

When we think about CLV, bringing the equation back up where the marketing cost has increased, the quality you maybe bring through is actually maybe less than what it had been prior because you have more digital accounts opened or more digital account origination. What we're seeing from a lifetime value perspective is that pre-pandemic, we saw an 18-month payback period to make up for how much was paid initially for that particular customer. We're seeing that payback period actually get pushed out to about four years. For digital-only channel, if we just look at digital, that gets out to over five years and in some cases six to seven years. That begs a big question, then. If that is the case, how do we keep this customer on our book to ensure that A, are we providing the right experience? B, are we delivering the right value to actually drive value back from that particular customer? That's where the differences may lie when we think about how that true customer experience would need to look like between a branch versus a digital originated customer. One of the things I'll say that we continue to see in the marketplace is a lot of institutions will take their in-person experiences and translate that directly to what a digital experience might look like. In reality, if you're online shopping versus you going into a retail store shopping, vastly different mindsets, and your shopping behaviors are completely different, too. It is actually bringing to life a bit more in terms of what that experience really needs to look like between the two different channels.

Then, the last part of that was around how does primacy play into that? If my primary bank or my non-primary bank, how does that impact customer lifetime value? I would say intuitively, if it's my primary bank, I'm probably going to do more with them and engage more and therefore potentially create more value, versus if I have a secondary account not with my primary bank, I might just have it for my backup account or for the one thing that I do there. Is that how it works with primacy and CLV?

Yeah, absolutely. One thing I would love to push the industry forward to debunk a bit actually is just the traditional definition of primacy. I think a lot of institutions have always said direct deposit plus 10-plus debit card transactions a month, and so that must be the role of primacy or that has to be a sign of primacy. That is, actually. Those are good triggers for what a primary customer would look like for a particular segment. This is where, as folks start becoming really less branch-centric and start interacting with us on a more digital basis, either over the phone, over the internet, over the mobile app, we have to understand what their definition of primary is. One example of this is that a traditional bank customer versus a direct bank customer actually have different views on what a primary institution means for them. For a traditional bank customer, that direct deposit, still extremely important. They view that the institution with my direct deposit relationship is my primary institution, and I will go to them when I have initial banking needs in the future. The direct bank customer, we start seeing the delineation where they start looking at the bank where I have my credit card or the bank where I pay off my credit card bill, which tends to be, actually, for this group at the same institution. That's actually their primacy definition. If that's the case, are we driving the right level of primary relationship to actually help drive customer lifetime value over time? This primacy play starts becoming much more of a segment and should become a segment driven type of question where we should, as institutions, figure out what is the definition of primacy for this customer and how do we drive better value for them so in return we also have better value from them.

How important is branding in new customer acquisition and are the biggest brands still widening their lead over the rest of the pack?

Branding is extremely important and so here... Yeah, that's a great question. Let me define branding a little bit. Branding in the more traditional case, a lot of folks will perceive it as, it's the motto, it's the logo, it's the slogan line that we go to market with. At the end of the day, branding does include that, but more importantly, it includes your ability to differentiate. Do you have the right proof points in the marketplace, et cetera, to drive distinctiveness? What we have found is that a comparison between the least distinctive versus the most distinctive players in the marketplace has a 60% difference in their effectiveness of marketing, meaning the highest and most differentiated players, who have invested and consistently invested in their brand, have been able to get 60% more out of every marketing dollar than their counterparts who have not done the same. It does become a really important lever of investment, but also a very important long-term investment because you might not see that come to fruition immediately.

Now, when you step back, what's the main takeaway from what you're seeing in the market and when you just look at the survey overall? What's the biggest surprise of what you're seeing in the market?

Several takeaways that remain consistent in terms of the world is heading toward a digital-led industry within the banking space. This does not mean, again, that there isn't a role for branches, for people interaction. There are. It's just that experience may evolve over time. We're seeing much more importance in digital experiences as a whole, and that becoming also a preferred channel of acquisition. Now, the second point to that, though, is that what we did see is that I should say perception of digital capabilities also has become less of a driver over time, behind why you would choose a certain bank. This tells us that the industry as a whole has reached a parity. We are at a point where most institutions have reached table-stakes capabilities and that consumers feel comfortable with those table-stakes capabilities without having to really focus on does this bank have this feature? Does this bank have this digital feature? Consumers don't have to worry about or choose a bank just for their digital capabilities. The last point I'll make, it really continues to be something that's consistent from the study is that the ability to make yourself differentiated continues to be a key theme, and it's increasingly become that. The folks who have been able to actually do that effectively, we have continued to track that they are not only better with their marketing dollars, marketing effectiveness, but they're also much better at grabbing the quality customers over time. The qualities exist. This is where figuring out, then, what is the bank's value proposition, who are you really after, who are you designing for, become much more important questions as we enter increasingly digital-led worlds.

That makes a whole lot of sense. Now, finally, we're asking each guest, what is a term or acronym or lingo that you think we should redefine?

I love this question of yours. One term I would love to redefine, maybe redefine a little further is actually the term marketing as a whole within the space. Maybe I'll specify even further, acquisition marketing. Marketing teams as a whole have always treated acquisition marketing as “I need to get volume to the door and all of my dollars will be getting people to the door to open the account.” Given where we are today, especially with the shift toward digital account opening, we have to expand that to not only from really getting people to the door, but all the way to activation. That needs to be acquisition marketing's job moving forward, and so that's really the term I would want to redefine moving forward is that.

Really, thank you Olivia for being here. I know you're traveling, which accounts for some of the background music. Thank you very much for making the time to be with us today.

Of course. Thanks for having me.