Sep 132011

Customer Value has been a key metric in most industries when assessing the value received by the business from customer relationship.  Most businesses in most industries have understood that long-term viability and long-term profitability are completely dependent on customers generating value in excess of the costs required to support their relationships.

This concept, while certainly not new or novel, has failed to permeate into Community Banking and Credit Union sectors.  It appears that very few Community Bank and Credit Union executives understand customer value, and more specifically, the customer value for their organizations.  And perhaps, more importantly, the effect of customer value has on the long-term profitability and likelihood of their institutions continuing as ‘going-concerns’.

To help set a baseline for these discussions, and particularly given that most Banks and Credit Unions are entering into their Strategic Planning sessions for 2012, the following is a brief outline of Customer Value and the impact to the institution.

First, it is helpful to understand that most Retail Banking customers have and need only a small number of products / services from their Bank and/or Credit Union.  Most consumers only need checking account & debit card (possibly some consumers will opt for direct deposit and maybe bill pay).  Unfortunately, that means that nearly 80% of customer relationships are be highly unprofitable.

There are two customer profiles of checking account customers that generate a profit – the perpetual OD / NSF customer and an Affluent customer who keeps large balances in his/her checking account.  Banks and Credit Unions can pursue either both segments.  However, we believe that most Banks and Credit Union want customer relationships that have the potential to expand beyond OD / NSF income.  That leads us directly into the category of Affluent & High Net Worth customer segments — customers who desire deep and broad relationships with financial services providers including depository products, lending products and value added services such as investments, insurance, trusts, wealth management and others.

The above graph illustrates that most customers maintain balances of less than $3,000 in checking account leading to operating losses.  As we just discussed, most of these customers do not want or need any other product / service from their Banks or Credit Unions — thus, the checking account defines the relationship in its entirety.  Unfortunately, the checking account operating loss defines the customer value to the Bank or Credit Union in its entirety.  We find that nearly 80% of customers generate non-recoverable operating losses (the calculations exclude customer acquisition costs).

80% or more of the customer base at a typical Bank and Credit Union generates operating losses.  So much so, that the 10% – 20% of the customers that are profitable generate 140% or more of the institution’s profit, of which 40%+ is destroyed by the “masses”.

We already identified that this is so because most Retail Banking customers want and need very limited set of products thereby establishing a relationship that is unable to generate operating profits given current pricing schedules.  This situation will grow worse as Community Banks and Credit Unions pursue and “win” additional accounts based on ‘Free Checking Account’ promotions.  As we have already discussed, the vast majority of the consumers attracted to these offers will generate non-recoverable operating losses.

Customer value is generally assessed based on Customer Life Time Value calculations.  While specific value drivers will vary, the industry average for Banks and Credit Unions suggests a Customer Life Time Value of approximately $140.  This metric is helpful in framing customer profitability but also in ‘bracketing’ maximum acquisition costs.  That is, an average customer relationship that costs more than $140 (over lifetime) in acquisition costs will ultimately be unprofitable.  Therefore, logic suggests that Banks and Credit Unions ought not spend more than $140 to acquire a typical customer relationship — and that they should spend much less should they wish to show a profit for that customer relationship.

However, as the graph above suggests, average Customer Life Time Value masks the true customer profitability or lack thereof of.  As the above graph illustrates, 80% of customer base at a typical Bank and Credit Union has a Life Time Value of less than $40, while the most profitable customer segment (10% – 20% of the customer base) has a Life Time Value exceeding $2,000.

$40 vs $2,000 — a significant difference that should lead to huge strategic and tactical implications for Banks and Credit Unions.  Spend no more than $40 and preferably much less to acquire the typical customer relationship with the hope that some of these will break even or generate a small operating profit that offsets the deeply unprofitable customer relationships.  On the other hand, there is a small customer segment that generates substantial profitability thereby creating latitude for much more generous acquisition budget.

It should be obvious that Bank and Credit Union profitability is highly sensitive to the quantity and quality of the customer base.

Very small changes in the customer base can have dramatic impacts to Bank and Credit Union net income.  Every 5% increase of money-losing customer base will reduce Net Income by 37%!  Alternatively, growing the profitable customer segments by just 5% will cause Net Income to spike by nearly 40%!

As a Bank or Credit Union executive you owe it to yourself and to your stakeholders to work through this type of an assessment.  Every Bank or Credit Union executive must understand that strategic decisions have a direct impact on marketing campaigns which in turn have direct revenue and cost implications.  Have your internal teams work through this assessment, contact your favorite consultant (assuming that (s)he is knowledgeable and capable) or contact me for support.
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Serge Milman

Serge Milman is the Principal Partner of San Francisco, CA based SFO Consultants which provides Strategy, Finance and Operations Management Consulting services. He is also the Principal of Optirate – a blog dedicated to growth and profitability strategies for Banks and Credit Unions. Serge can be reached at

  2 Responses to “Bank and Credit Union Business Strategy and Customer Life Time Value”

  1. Hi Serge – I had a simple question. In your figures, are you considering the income derived from the use of debit cards (the checking account customers) by the bank customers, i.e. the portion of the interchange fee retained by the issuing bank. It seems those are recurring revenues to the bank?

    • Vineet – thank you for reading the post and I appreciate the question.

      Interchange fee is one of the largest components of the revenue stream derived from Checking Accounts — though it is not nearly enough to offset the cost, thus resulting in so many accounts being unprofitable.

      As you know, interchange fee is now under (further) assault and is likely to be reduced significantly if the merchant groups win their case. But even in today’s environment, interchange revenue totals $50 / year / account (compare this with cost to serve of $300 – $400 / year).

      Moreover, as we showed in a recent article, consumers using debit cards tend be less loyal, they have lower engagement levels and they generate lower revenues / profits for the serving Banks and Credit Unions (read more:

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