Most people know the Pareto principle as the “80-20 rule.” It says that, for example, 20% of your sales force delivers 80% of your sales, or 20% of your customer base delivers 80% of your profits. This rule has significant implications for banks, and this
post focuses on how banks can improve their profitability by shifting their least profitable customers to new, more cost-effective digital cash-based services.
The concept of analyzing the profitability of your existing customers is not new for banks. It has been written about for decades and has spawned the development of Customer Relationship Management (CRM)/analytical tools. Some research indicates this rule
may even be skewed for banks: it appears that even less than 20% of a bank’s customers may generate 80% of their profits. Using profitability analysis tools, Fleet Bank found that, in fact, 50% of their customers were unprofitable!
Some summaries of the Pareto principle and its applicability to bank profitability analyses are listed below:
Almost all banks have been focused 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 their bank.
While this analysis should include life cycle/customer lifetime value considerations, some likely lower profit customer segments for banks include:
- The segment who only maintain a low balance checking or savings account
- The segment who are students or young adults (and your current bank offerings may not be a perfect fit for this younger generation)
- The segment who still use many paper checks to make payments and tend to use higher-cost channels (i.e., branches) for 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.
Opportunity for banks to create new digital cash services
To complement existing savings and checking (or current) account service portfolio, banks should investigate creating a new, low-cost, all-digital bank account, which uses digital cash. This new bank account would be associated with the customer’s mobile
phone number and be accessible via their mobile phone.
This new offering could appeal to the younger generation (who are never without their phones) and be a lower-cost/-service option which your bank could provide to existing customers who do
not meet certain thresholds. In addition, this new type of bank account could appeal to the unbanked segment in order to assist with meeting financial inclusion goals set by your country’s central bank.
Although this new all-digital bank account may be priced to generate less initial fees than a traditional savings or checking account, your bank could participate in the customer’s digital cash transactions which are funded from this account. These could
include in-store POS purchases, online eCommerce purchases, Bill Pay, P2P and many other transaction types.
What is needed: Banks recognizing and taking action to leverage opportunities created by new technologies
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,
these 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 your bank to offer innovative and
cost-effective services—based on digital cash, which may appeal to your currently unprofitable customer segments… to help them become more profitable. Let us know what you think.