Customer Acquisition Cost (CAC) is the largest single discretionary investment by consumer-focussed Financial Services businesses and the no.1 cause of death in FinTech startups. It's therefore important to seek to understand it better.
CAC is subject to precedence — everyone has paid it and it’s assumed as an integral and unavoidable part of the market. The question is never if, but how high?
In this article, we simply ask the question if this assumption is correct? could there be another reason that financial services companies have to buy customers, could it be a self-inflicted?
Defining CAC. As with many KPI’s definitions vary, making cross-company comparisons often meaningless. It's usually defined as all the marketing costs associated with acquiring a customer. A mix of fixed costs in marketing to create a sales “funnel” with paid-for clicks driving site traffic, consumer incentives like referral fees or bounties and channel incentives — paying others to drive their traffic to your site or solution.
Sometimes, especially if a Customer Lifetime Value calculation is to be made, it includes the costs associated with opening and running the account. Every account costs money to open and maintain. There are the costs of sending out things like debit cards which range from $10–15 and upwards (Apple Card, for example, is likely to be over $30 given its a metal card and complex packaging).
The funnel is, as it implies, very wasteful with a lot of potential customers entering the funnel and very few coming out. Even when you have successfully convinced someone to open an account a very high proportion of them remain unused — inactive. This means all of that cost was for nothing.
To become profitable the company has to not just pay for the costs of acquiring the active customer but also the costs of all the inactive ones. For example, the average cost of acquiring a credit card customer is $200. But over 50% of all cards in force are inactive (defined as 1 transaction in the previous 12 months — a low bar indeed). This means that the actual cost of acquiring an active customer is $400 because half of those acquired are inactive and have no chance of paying back the cost of acquisition.
“Marketing and advertising costs have become the tax you pay for not being able to create a better idea than your competitors.” (Mike Maddock in Free the Idea Monkey)
If marketing is indeed a tax on poor design, the Big Banks are surely paying more than their fair share.
The top 6 of the Big Banks in the US spend over $10bn a year on advertising, a staggering sum. JP Morgan Chase alone spends over $2bn almost exclusively in the US. That’s more than Apple spends globally!.
In financial services, there are really two elements to any value proposition — value for money (do I feel it helps me make more money than it costs) and customer experience (easy to use etc.).
In terms of value for money, the Big Banks are demonstrably woeful. With the notable exception of Capital One's Savings Account. There is really no reason anyone in the US should have money in any account paying less than 1.6% and yet over $12 trillion are sitting in Checking and Savings accounts with the majority earning less than 0.1%.
Usability is a more complex and subjective measurement — digital scores vary wildly but many people still appreciate having a local branch or branded ATM even if their actual use of it is minimal.
What is observable though is that both economically and structurally there is limited differentiation between the Big Banks. They all carry the same products, price them near identically and market them generically.
So on any rational measure, the Big Banks are doing a terrible job on value for money and a variable job on usability and maintain near parity on all levels of product features and functionality.
Could such limited genuine and authentic differentiation be the reason why so much money has to be spent to get consumers to move banks? Why else really would you bother?
The other side of this would be — if a bank did differentiate on value for money and product design could this change the need for excessive CAC?
Tesla never needed to advertise the Cyber Truck — it’s radically different that this alone was enough to drive organic awareness generation. Its design has clearly hit a nerve with a substantial proportion of the population. Tesla’s CAC is going to be a fraction of any financial services company, possibly ever. Maybe that’s part of the reason it is worth more than the rest of them despite selling a fraction of the volume. It’s doing things differently.
That’s not to say just because something is new or different its automatically good.
So what do consumers really want? and if banks could offer a differentiated product proposition to meet these needs — would users move on their own accord? could you be a new bank and not incur — waste, money on excessive CAC?
No great surprises — consumers want it good and cheap. Good broadly defined as low effort (easy) and good returns.
High returns. To increase returns banks need to either reduce costs or reduce their profits. This is the hardest for incumbent banks to deliver against. It’s not in their economic interests to do so and their shareholders would revolt if they proactively handed back hundreds of billions of dollars in profit that would otherwise go to them. Reducing costs is equally hard — they employ hundreds of thousands of people, have expensive buildings to maintain and decades-old legacy technology to maintain. None of these can be turned off quickly, cheaply or easily.
Low effort. The last decade has seen the rapid rise of personal financial management tools (PFM) like Mint and many others. Whilst these provide access to information and alerts and guidance to optimise they don’t actually do it for you. The irony is that they actually increase the work on the user and can create a negative sentiment — reminding you of your failures to act rather than positive re-enforcement. The other problem here is that these tools are least likely to be used by the people who need them the most. The problem is one of motivation, not education or awareness. The optimal low effort is essentially no effort for the majority of people.
No effort requires automation and automation requires integration. Whilst big banks have all the products and more than anyone might require they all sit in highly complex technical, organisational and above all political organisations. Typically the heads of departments of banks don’t work well together — like all big corporate organisations they are in competition with each other and their bonuses are generally focussed on their department's performance not cross-company collaboration. Getting an integrated solution out of these companies is pretty much impossible.
So if it’s to all practical purposes impossible for Big Banks to offer genuine differentiation in terms of effort and value for money. What are they left with?
Innovation theatre and marketing spend — Dancing robots and coffee shops.
It’s clear then that any institution that is going to offer more than dancing robots and coffee shops is not going to be a traditional bank.
For a greenfield company, unencumbered with the need to maintain high profits and high costs, there is a clear opportunity to deliver on both differentiated product — especially ease of use and value for money.
These two dimensions are to a large extent co-dependent. The more differentiated your product (Tesla Cybertruck) and the better it meets consumers needs the lower you need to spend in attracting consumers. The lower your CAC the more you can afford to give back to consumers and still be profitably sustainable.
A no CAC bank is a radical suggestion and counter to almost everything we know about marketing financial services.
But then isn’t the whole point of startups to challenge the status quo and invent new things not just replicate the old in digital form?