[Editor’s note: This is a blog post from Alex Johnson at FICO. FICO is a Gold Sponsor at LendIt USA 2017 which will take place on March 6-7, 2017 in New York City.]
For all the differences between traditional banks and new online lenders, there is one business challenge that unites both groups: acquiring new customers.
Despite the advancements made by online lenders in many traditional financial services processes (such as account opening), the methods most online lenders use to advertise to and acquire new customers come straight out of the bank marketing playbook – third-party brokers, television ads, and even direct mail solicitations.
While online lenders experiment with offline marketing tactics, banks are aggressively ramping up their online marketing efforts, with total digital ad spend by U.S. financial institutions predicted to top $10 billion in 2019 (up from $5.3 billion in 2013). This shift is being motivated by continuing declines in branch activity and the increasingly-evident risks of branch-based sales strategies.
The result is that both groups are converging on a set of established acquisition techniques that are compatible with a post-branch environment. The problem, of course, is that this convergence will drive up all parties’ acquisition costs. While more intense competition in these marketing channels will be great for Google, Facebook, and the U.S. Postal Service, it will likely prove unsustainable for both banks and online lenders in the long run.
A new approach is needed. One that is aligned with the digital-centric preferences of today’s consumer, sustainable from a cost perspective, and able to differentiate your company from the numerous competitors jostling for your prospective customers’ attention.
Several leading banks and online lenders have started to experiment with a new approach by providing free financial health and planning tools to customers and non-customers alike. This approach enables these lenders to build a “user base” of engaged prospects who start to look to the lenders for information about their financial health and recommendations for improving it. This puts these lenders in the privileged position of knowing users’ financial situations and being able to (eventually) make relevant product and service recommendations that will help users meet their financial goals.
Here are a couple of interesting (though nascent) examples from both online lending and traditional banking:
- Prosper Daily. Prosper Marketplace made headlines in September of 2015 with its acquisition of BillGuard, a personal finance app provider, for $30 million. The company’s mobile app (now branded as Prosper Daily) allows consumers to monitor their credit and debit card transactions for unauthorized charges or other signs of fraud or identity theft. The app, which had approximately 1.3 million registered users at the time of acquisition, gave Prosper a large base of engaged consumers to cross-sell its core loan products to. This acquisition opportunity is apparently promising enough for the company to continue fully supporting Prosper Daily, despite significant cut-backs in other areas due to declining loan volumes in recent quarters.
- Discover Credit Scorecard. Building on its success offering FICO® Scores to current customers through the FICO Score Open Access program for free, Discover recently became the first credit card issuer to offer FICO® Scores to non-customers at no charge as well. The Discover Credit Scorecard enables Discover customers and non-customers alike to access their FICO® Scores and understand the key factors that are impacting their FICO® Score, for free, through an online portal. The extension of free credit scores to non-customers is becoming more common among leading credit card issuers because, despite the costs, it gives these lenders a valuable new avenue for engaging prospects around their financial health and goals.
If you use either of these services, it becomes apparent that Prosper and Discover are more focused on providing valuable financial management assistance to users than they are on marketing or cross-selling. This patience speaks well of both companies. Developing a critical mass of highly engaged users takes time and can be easily undercut by early attempts at monetization. This is particularly true in financial services, where users are looking for services that they can trust to prioritize their personal financial health and success over the short-term profits of the companies providing those services. Establishing that trust is critical because it opens the door to carefully crafted, highly targeted product and service recommendations down the road.
In a way, these new financial health tools are trying to establish a modern replacement for what bank branches used to provide – a trusted environment for financial services and advice.
Banks and online lenders looking to replicate this approach (and eventually monetize it) will need a couple of key ingredients:
- A standalone personal financial management (PFM) tool, app, or service. There are a lot of PFM activities that you can help consumers with – monitoring credit scores, identifying fraudulent transactions, paying bills, establishing budgets, automatically sweeping money into savings accounts, etc. The key is to focus on a specific area rather than trying to be all things to all people. First-generation PFM tools failed to gain meaningful user adoption because their capabilities were too broad and overwhelming to use.
- Sophisticated data management and analytic capabilities. In order to iteratively improve your PFM offering and mine insights that will drive targeted acquisition campaigns, you need to understand how consumers are using your tool, app, or service and what that usage tells you about their broader financial needs. The ability to accurately predict the type and timing of future product needs is obviously critical.
- Real-time decisioning and offer management capabilities. When the time comes to monetize your PFM offering, you will need to be able to act on the analytic insights that you have been gathering on your users. Can you pre-approve users for specific products in real-time in order to respond to time-sensitive marketing triggers? Can you optimize the parameters of those product offers to maximize customer interest, satisfaction and profitability? Can you present the offers in a compelling and non-intrusive way?
When the question is how to develop a new, differentiated approach to customer acquisition, the truth is that there is no easy answer. However, at a time when banks and online lenders are increasingly competing for the same customers in the same marketing channels, we know that this question is of paramount importance.
While it is too early to know definitively what the future of customer acquisition will look like, the financial health initiatives at Prosper Marketplace and Discover give us an intriguing hint.