By Charlie Kelly and Brian Hink, Remedy Consulting
Bankers provide digital tools to their customers, but many community bank CEO’s and even most “Digital Experts” from large financial technology organizations struggle to answer two questions related to their digital users:
“What incremental revenue does an engaged digital user bring me?”
“What does an engaged digital user cost me?”
If you want to determine an ROI for each active digital user you recruit, it may help to have a better understanding of the two sides of the equation — how to quantify the revenue and the cost of each digital user.
Throughout this piece, we will try to get bankers thinking about the questions to ask when deciding what a digital user is worth to your bottom line.
A recent McKinsey study suggests that the number of “channels” a customer uses from your financial institution to access their money has a direct correlation to both the number of products they purchase, and the revenue per customer. The number of products purchased increased from five on average for the less engaged customer up to nine products for the most engaged customer. The revenue per customer the study used was $100 per customer for a single channel (less engaged) customer, and $210 per customer for a client who used three or more channels. So, $110 in incremental value for an engaged customer vs. non-engaged customer.
We have seen other studies that suggest the incremental value of the digital customer is somewhere between $75–$200 per customer. Oddly, we have yet to find an expert to show us how they calculate the value of the engaged digital customer. The reason that they may not want to commit to the secret sauce behind their estimates is because there are so many variables in this equation. The two most obvious might be:
- Using the concept that more channels equal more products purchased, which additional products can you anticipate that the engaged digital client will purchase?
- Can the average community bank CEO estimate the value of the additional products?
Let’s look at some revenue drivers a bank could use to calculate the value of a digital user. For the purposes of this argument, let’s ignore loans and use just the value of a deposit account for an active digital user. When we build a model for a client, we start with three revenue and one expense reduction driver:
Interest Revenue on primary account: When building ROI models for our clients, we start with $9,000 as an average balance, with 25 bps as a conservative estimate of the spread between investments/loans and what a client might pay on account balances. This comes out to $1.88/month.
Fee revenue on a primary account: Use $6 per month per account as an average, which varies significantly depending upon a bank’s fee policy.
Debit card interchange revenue: Average transactions used per user = 15 per month, $.30 per transaction after blending PIN and Signature interchange revenue. $4.50/month.
Savings for eStatement users: An active Digital user will offset some account expense that a paper user would not, so we plug our model with $1.90/month savings in postage, labor, statement composition, etc.
A bank might be better to use their own customer transaction and revenue estimates rather than mine, since the “expert” opinions on the monthly value of each vary significantly. And these are meant to be gross numbers, they do not net out expenses such as the incentives you are paying your team to bring in new business.
But, if we use these numbers we come to an estimated $13 per user per month for the deposit relationship. If you multiply that number times four incremental products for an engaged user, you are at $52 per month in gross revenue. Most loan products generate more income than a deposit account, so you can see where an incremental value of $75–$200 might be coming from.
Not a perfect science by any means, but perhaps a framework you can use to plug in your own assumptions while validating how much a digital strategy means when growing your bank.
Now let us look at the direct cost side of the equation. Your vendor invoices will give you the direct vendor costs-per-user you currently pay but consider using incremental costs only. By which I mean that every user these days will require a core account, ecommerce, and a mobile application. Those are must-haves that you pay for regardless, so you might ignore when thinking about digital power users. Now look at tools like direct deposit, estatements, bill payment and mobile capture. The use of these tools is what separates a truly active digital primary account user from a laggard. You can consider them incremental as they drive more cost with each power user and are likely not used by someone who just parks a laggard account with your bank.
Divide these by the price you pay each month for these incremental tools by the number of active primary checking account holders, and you will come up with a cost-per-primary-account holder per month. For simplicity’s sake, you could use checking accounts with an active direct deposit as your divisor.
If your direct, incremental cost-per-user is $4 per active user, and your potential monthly income from selling those products exceeds that number, then you have a decent way to figure out your return on investment, at least in helping you decide whether to purchase and install additional technology that may draw users to your bank.
After running this analysis quite a few times, perhaps the best advice I can provide is to build yourself a model with both the revenue and expense assumptions that your team is comfortable with and use that as a baseline to make decisions. This type of a model can help you decide in what tools to invest in, and once you dig out all the numbers you need for the analysis, it can also help you develop a baseline for your internal digital guru to use to decide how you want to grow the user base going forward. It can become a great strategy planning tool. Do everything you can to negotiate your technology expense, and it will improve your ratios.
The evidence strongly suggests that large banks are well ahead of their community bank counterparts when it comes to active digital users. Since larger banks have more customer data to analyze that suggests that they see a strong ROI in investing in digital tools. We have seen the same assumptions at Remedy Consulting when analyzing data across multiple community banks.
Charlie Kelly is a Partner at Remedy Consulting and host of BankTalk Podcast. Brian Hink is a Senior Director at Remedy Consulting and manages the vendor negotiation and bank strategy practices. Remedy Consulting helps financial institutions (FI) thrive through best-in-class fintech consulting services specializing in System Selections, Core Contract Negotiations, Outsourcing/In-House Advisory, Bank Mergers & Acquisitions, and FI Strategic Planning.
Charlie Kelly will be presenting a breakout session “Digital Transformation — Where to Spend Your Time and Money” at the WBA Management Conference, September 13–14, 2021 in Green Bay.