I have written in a previous post about the business model challenge facing all challenger banks. Today I am moving to the next big problem – customers. A successful business model describes a way of making money and be eventually profitable, and for a retail bank it also means people, customers ready to use the services offered and somehow generate a profit. So even with an excellent business model, the success of the startup is predicated on a few people using it. What is that number? It depends …
Quality vs Quantity
Many years ago, I was part of the founding team at a “group buying” online store. We found partners allowing us to resell their services, built the website, provided customer support, started advertising… and ended up with thousands of “bottom fishing” customers, the ones that other more established service providers would reject for good reasons – thieves and fraudsters, people not paying their bills on time, customer support nightmares, etc. We’ve learned the hard way that by offering “free” and/or “cheap” services you attract that kind of customer segments.
I see today many challenger banks going the same route – and attracting a similar customer segment. All the benefits of wonderful mobile user experience are lost on customers that see just the free account or free card. And the new bank needs to either build a good set of fraud prevention and detection practices from the beginning – with the corresponding impact on OpEx and profitability – or play it risky and hope that their share of fraud is smaller than their competitors.
And that’s why having a certain number of “customers” is meaningless without knowing how long they stay, what do they do, and how much does it cost to support them. While large, established incumbent banks can afford to “fire” their worst customers – and accept the negative PR – challenger banks think that they should attract them. Just act surprised when you see the consequences…
Who’s Buying What You’re Selling?
The more academic way of phrasing this issue is “product-market” fit. The geographic and market differences need to be understood in-depth. In many underbanked markets, just getting a “normal” bank, offering free or cheap accounts and cards, with a decent mobile banking app, is enough to attract millions of “good” customers. Brazil is a good example, many others in SE Asia, and Africa is just around the corner.
In other markets, heavily regulated, it is almost impossible to open a bank account if you are young or an immigrant. Somehow Estonian credit history is no good in London or Berlin. And when you are 19 you don’t have that much work or financial history either. For these markets, we can see quick adoption, with a very good product-market fit – for a while. The target market is naturally limited, and time will tell if the early fast adoption was sustainable, or the market will reach a saturation point.
Which brings us to the US market, hugely over banked – more than 5,000 financial services institutions and literally a bank branch (or more) on every corner. Free checking account? Many incumbents offer it. Best-in-class mobile banking capabilities? Many incumbents are there by now. So, challenger banks are left with either offering advice – both Moven and Simple are down this route — or target from the start a small audience, and stay there.
How to Get Customers
Even with a good product, a business needs to get its name and offerings known by potential customers. And while the previous two issues can be solved by proper business design and product management decisions, getting your name out requires money. Lots of money. We have seen challenger banks claiming significant customer growth based solely on “word of mouth” If only… My estimate is that a small bank needs more than 200k active customers to be profitable, and this means that, at an advertising conversion rate of 1%, that 20 million potential customers need to see the commercials and act. Open an account, SSN and all that, deposit money, start using the card regularly. And this does not even consider churn, and passive and minimally active customers.
Two ways to scale to these numbers – either spend all the startup’s money on Google and Facebook ads, or find partners that can deliver this kind of numbers. Can digitally direct advertising work for new financial services startups without bankrupting them? Maybe. Can the right partner help a challenger bank get the quality and quantity of customers it needs to succeed? Definitely.
Many problems, and few solutions. That’s what makes life in a financial services startup interesting.