Rethinking New Customer/Member Acquisition Investments

By Devon Kinkead

Financial institutions have many investment options but, few have the impact of investments in new customer acquisition. In this article, we’re looking at new customer acquisition through the lens of a chief financial officer.

Strategic Alignment

Investments in new customer acquisition must align with the financial institution’s overall strategic goals. For instance, if a financial institution aims to enter a new market or launch a new product, acquiring new customers becomes a pivotal part of the strategy. Each financial institution has a unique set of growth goals, whether through acquisition or organic growth in specific markets with new branches, that the new accountholder strategy must support. In the case of growth through acquisition, the acquirer needs to know the size and location of new accountholder opportunities to price the deal, then turn those opportunities into reality. Organic growth demands the same analysis and campaign execution precision.

Cost vs. Benefit Analysis

It’s essential to conduct a thorough cost-benefit analysis when considering new customer acquisition strategies. The costs associated with marketing, sales, and promotional activities should be weighed against the near-term and potential lifetime value of new customers/members. This boils down to conservative return on investment assumptions as shown in Table 1 below:

ROI for Home Equity Loans or Line of Credits (Consolidation)
Assumptions
Campaign Characteristics
Total Consumer Loan Opportunity ($)	$2,390,524,986
Total Consumer Loan Opportunity (#)	13,536
Estimated Conversion Rate	0.50%
Loan Characteristics
Average Interest Rate on Loans	8.50%
Average Loan Term (Months)	120
Average Life of a Loan (Months)	60
Cost of Funds	2.05%
Charge-offs	0.30%
Average Origination Income per Loan	$200
Average Origination Cost per Loan	$200
Campaign Output
Number of Loans Funded	68
Loans Funded ($)	$11,952,625
Average Loan Size	$175,774
Revenue
Projected Interest Income	$4,162,323
Origination Income	$13,600
Total Projected Revenue	$4,175,923
Expenses
Projected Cost of Funds	($1,003,854)
Projected Charge-offs	($35,858)
Operational/FI Origination Cost	($13,600)
Micronotes Campaign Cost	($27,072)
Micronotes Direct Mail Pass-Thru Cost	($13,536)
Total Projected Expenses	($1,093,920)
Net Income	$3,082,003
Return on Investment (ROI)	282%
Key Metrics
Average Net Income per Loan	$45,324
Net Interest Income per Loan	$46,448
Campaign Cost Payback in Months	0.8
Campaign Payback Based on Funded Loans	0.9

The key to a solid analysis is to get the loan characteristics and loan size to reflect the financial institution’s average metrics. Once that’s done, the campaign cost payback in months can be computed and evaluated against other investments. In Table 1, the campaign returns its costs in under a month leaving the balance of the net interest income stream as profit.

One such alternative investment, unique to credit unions, is the comparison of investing in modern marketing technologies using terabytes of consumer credit data that can acquire new creditworthy members within a mile of a branch vs. indirect lending investments. The probability of a new member who lives within a mile of a branch converting to a multi-product member is materially higher than converting a new member that came through indirect lending to a multi-product member.

Adoption of Technology

The role of technology, especially big data, machine learning, and automation, in optimizing customer acquisition efforts cannot be overstated. Companies that leverage big data, analytics, and machine learning loops achieve higher efficiency in targeting and acquiring new accountholders, which is reflected in the return on investment.

Market Trends and Consumer Behavior

Understanding market trends and consumer behavior is crucial. Investments should be made in customer acquisition strategies that are responsive to the changing market dynamics and consumer preferences. In particular, channels should be suitable for different target demographics and cloud-native marketing technologies should be integrated before the next lending or refinancing boom, not during the boom, because too much unrecoverable revenue will be lost to better-prepared competitors. The probability of newly acquired loan customers and members opening deposit accounts with new money is also a consideration in the return computation.

Risk Management

The purpose of the ROI analysis ahead of time is to ensure that the investment risk is understood and managed. A sensitivity analysis, including a break-even analysis, is an important part of the up-front work as well as ongoing investments to ensure the accuracy and repeatability of the return model.

Sustainability and Long-term Growth

Investments in new customer acquisition should contribute to the sustainability and long-term growth of the financial institution. Acquiring new accountholders should not only boost short-term sales but also enhance the brand’s market position and contribute to long-term revenue growth.

Regulatory Compliance and Ethical Considerations

Financial Institutions must ensure that their new customer/member acquisition strategies comply with regulatory requirements and ethical standards. This includes respecting consumer privacy, adhering to current regulations, and avoiding aggressive sales tactics that could damage the financial institution’s reputation.

In conclusion, the wisdom of investments in new customer acquisition lies in a strategic, data-driven approach that aligns with the financial institution’s overall goals, leverages technology, considers market trends, manages risks effectively, and focuses on sustainability and ethical practices. As financial leaders navigate the complexities of new customer/member acquisition, they will need partners who have the data, technology, and expertise to help make informed decisions that drive both growth and profitability.