The increased popularity of digital banking has led many banks to contemplate the value of their new, digitally acquired customers. Community banks and credit unions may be concerned that digital customers — though typically easier to acquire — may be less valuable when compared to customers onboarded through physical branches.
However, research demonstrates that when lifetime value (LTV) is taken into account, digital customers can prove to be high-value investments. LTV is a measurement of how valuable a customer is to your company across the length of the relationship. For banks and retailers, it is a useful metric in circumstances where immediate profit margins are thin and it may take a while to break even on acquisition costs.
Considering digital customers from an LTV perspective helps solidify the distinct advantages of growing your digital brand. Further, banks that embrace this concept can work to effectively increase the LTV of their customers.
LTV helps banks determine how much time and resources to invest in acquiring a customer. Since it costs less to keep existing customers than it does to acquire new ones, increasing the value of your existing customers through cross-sells can be an efficient, ongoing way to drive growth.
LTV also helps uncover untapped opportunities for growth in different demographics. For instance, certain age groups may appear less profitable at the start, but provide a higher LTV over time. Typically, older customers have higher deposits and are the primary consumers of bank products — but they also have a shorter life cycle with the bank.
Younger customers, on the other hand, have a longer life cycle with the bank and more opportunities to invest in bank products as they go through different life stages. While their initial deposits tend to be lower than those of older customers, focusing on the LTV of younger customers can help banks rethink their acquisition strategy and how they capture value over time.
The personal finance company SoFi provides a compelling case study. SoFi started by lending to high-potential college students whose educational backgrounds indicated that they would be more likely to pay off any loans — even though many of them did not have a strong credit history yet. The company found a way to bet on the students’ future earning potential and their ability to become profitable (in other words, their LTV) — and it worked.
Beyond targeting underserved or niche demographics, maximizing customer LTV is about maintaining long-term relationships with customers. A tried and true way to improve LTV is to invest in customer experience. In fact, “highly satisfied” customers are two and a half times more likely to open accounts or consume new products with their existing banks than those who are merely “satisfied.”
Further, data from J.D. Power & Associates shows that offering relevant advice and guidance has a 17 percent positive impact on consumers’ willingness to use additional banking services. The advice offered could be as simple as helping customers identify their needs before introducing a new product or carefully walking through the product’s features and benefits.
As is the case in the retail industry, customers who engage with a bank through multiple channels tend to bring higher LTV. According to the same study from J.D. Power & Associates, customers who rank highest for customer satisfaction use a mix of physical and digital banking services.
Millennials, for instance, are the main users of digital services — but three quarters of Millennials and the emerging affluent also say they’ve visited a bank in the last three months. The importance of multichannel engagement tends to be an advantage for mid-sized financial institutions, as they outperform larger banks on branch-related satisfaction factors including courtesy, knowledge, and a range of services.
Becoming a digital bank or launching a digital brand is a crucial part of a long-term customer strategy. Throughout their (hopefully lengthy) relationship with a bank, customers will require — and be willing to pay for — different financial products and services. Digital engagement can help to increase brand loyalty, improve financial outcomes for customers, and boost future sales of new products and services.
As customers deepen their relationship with a bank, they create endless opportunities to cross-sell into other bank products. Customers who use digital tools are more likely to have interactions with their bank involving eliminating or paying down debt, budgeting and spending, managing their investments, and preparing for retirement.
Improving lifetime customer value begins with the basics — a superior online account-opening experience. Today, customers expect opening an account to be a seamless process. They don’t want to deal with long wait times or multiple requests for the same information. MANTL’s real-time processing and simple, user-friendly interface can be the start to a lengthy, rewarding banking relationship.
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