Customer Activity Drives Profitability in Financial Services

By Saud Bangash, Intern, Innovation and Research, Center for Financial Services Innovation

Business managers in the financial services industry regularly face the complexities of optimizing customer acquisition costs, as they try and adopt smarter ways for signing-up loyal customers. Targeting the right consumer segments with customized services, using efficient access points, and effective sales practices for matching services to customers are some crucial considerations. Sensible customer acquisition which prioritizes customer loyalty and retention is especially key, since it enhances the likelihood of a customer using the service multiple times over a long duration, therefore increasing profitability. In this light, customer activity is a good measure for gauging a model’s sustainability.  Tracking volume growth in isolation might indicate an expanding business, but not necessarily a profitable one.  In fact, growing the service delivery footprint without prioritizing an intelligent customer acquisition strategy could soon lead to a cost overhang due to increasing sales costs and lean returns.
 
The prepaid card model provides a good practice example and illustrates this point well. While a provider of a prepaid card service would prefer to sell as many cards as possible, the net gain in profits would only show-up if the customer finds value in using the card, and makes repeated transactions for paying bills, money transfers, purchases etc. This is crucial since prepaid cards, like most financial services, operate on low margin and high volume models. A prepaid card customer must generate sufficient interchange and transfer revenues to justify the customer acquisition costs, which are significant given the expenses on sales commissions, backend processing, marketing and so on. Offering the right product features for a targeted market segment and relying on effective sales and marketing strategies to sell the service to loyal customers is critical for profitability in a financial services business.
 
Let’s look at Green Dot, which has done a great job in meeting the market demand for prepaid cards and continues to improve its sales and marketing strategy for targeting different market segments. Green Dot offers its branded and co-branded cards through a nationwide reload footprint of 59,000 retail locations.  With time, we have seen more customization in Green Dot’s prepaid cards, as it tailors prepaid card features to customer needs and continues to enhance usage. Over the past few months, Green Dot and Walmart (Green Dot’s primary retail partner generating 61 percent of the company’s revenues) undertook a segmentation analysis and resultantly added customized cards in Walmart’s Moneycard suite, including a Visa Gold MoneyCard, a MasterCard Family Edition MoneyCard and a MasterCard Bill Pay MoneyCard. With tailored features for bill payments, family usage and general purchases, customer groups will find Green Dot’s prepaid cards a better fit to their specific needs and will increase their usage of prepaid card services.
 
I find it useful to think about product adaptation in the context of the Compass principles. The principles provide business managers a framework to think about customer acquisition priorities in a structured manner. They suggest incorporating specific values in a business model which help in attracting more customers and fostering customer loyalty. Among others, the values include improving knowledge about customer needs and preferences, offering variety and choice for catering to customer requirements and building healthy financial relationships with clients. Strategies inspired by these values lead to better product offerings with custom feature choices, usage convenience, full disclosure, customer protection and more, and result in better customer satisfaction, usage and retention. In my opinion, the Compass principles provide insightful guidelines for building a profitable and robust business model.