The financial services industry has been increasing the pressure on digital channels to produce revenue, diversify revenue streams, and provide returns on investment. Because digital banking is becoming more expensive, the challenge is to not just save money but also actually create new revenue. For forward-thinking financial institutions, the opportunities are there to turn their digital channels into profit centers.
As Dylan Lerner, Senior Analyst in Digital Banking at Javelin Strategy & Research, explains in a new report, From Fees to Value: How Digital Banking Can Monetize What Matters, there is no one-size-fits-all monetization strategy. Financial institutions need to leverage multiple mechanisms if they want to meet their customers’ needs and achieve sustainable income streams that can last for years to come.
Not Just Saving Money but Also Making It
Banking executives hear every day that they need to find ways to make money while also keeping up with customer satisfaction. Many banks are focused on using digital offerings to save money. They look at scenarios where a customer is able to self-service their account without contacting the call center and claim that saved the institution five dollars.
That’s saving money, not making money. Javelin is focused on ways for digital banking operations to actually incur revenue, which means looking past collecting fees for services rendered.
“We are evolving beyond the narrow mindset that monetization is just about charging fees,” Lerner said. “There is a lot more opportunity to monetize a customer relationship than just fees.”
Lerner advises that banks should try to charge fees for what is valuable, not what is easy. Institutions need to find what delivers the most value to a customer and monetize those offerings.
“When you take that perspective about value and focus on value over fees, you find ways to create value without fees,” he said. “If I work more with this customer, maybe I can win their mortgage or get them to use their credit card more. These things don’t cost the customer anything but still create value for them and have a benefit for the bank.”
Reading the Customers
Many digital banking executives find themselves filling the role of product manager for digital offerings rather than checking accounts or some credit products that banks have traditionally sold. This might be new territory for many on the digital product side who might have started as insights managers or designers and were never pressured to make money. Now they are in a whole new environment.
Up to now, digital channels have largely been about servicing. By the time people log into a digital offering, they are already customers. They don’t expect to be sold products there or to be charged for using the platform.
As digital banking platforms get more expensive, banks face more pressure to increase their return on investment and make money. The finance side of the house wants the digital team to help recoup some of the costs or justify their spending. The digital team may want to build great experiences that meet customer needs and do things quickly and efficiently, but at the same time, they’re feeling pressure to make money and find ways to build relationships.
“We try to emphasize what customers really care about, which is the value they’re receiving,” Lerner said. “When you go shopping, you don’t see a giant price tag for $5 and a tiny box of cereal, right? You see the giant box of cereal and a tiny price tag, and you know what to emphasize. You know what grabs the attention.”
What Value Means
It’s also important to remember that the concept of “value-added” depends on the customer. At a car dealership, one customer might be getting the basic Toyota Yaris while another is buying a top-of-the-line Land Cruiser. These consumers are going to find value in different things: One is going to care about gas mileage, while the other is going to care about size and power.
The same logic applies to digital banking services. Someone might be willing to pay $15 for an expedited bill payment because it gives them peace of mind that their payment arrived on time. Someone else might pay a 1% fee on a check deposit to have access to the funds sooner.
Building Long-Term Relationships
Another primary source of revenue is data selling. As the adage goes, if you’re not being charged a fee for something, it’s probably because you’re the product.
“When we sign up for almost any app and don’t pay for it, there’s the implicit understanding that I’m going to be advertised to and my data is going to be sold to advertisers to target me,” Lerner said. ”When I log into online and mobile banking, I see banner ads for other products. You’re not charging me a fee, but you are trying to sell me on a product and maybe convince me to open something. Perhaps the bank gets some sort of monetization on there when I use my debit card. I’m not paying for interchange, but the bank receives it, so they might push me to use the product that way.”
The most important way to incur revenue is through relationship deepening, the long-term strategy of selling products over time. The broader perspective requires a customer-centric attitude, not selling them on fees and nickel-and-diming them but being there for them over the long term.
“The best example I can give is a free youth account through a parent when they’re 16,” Lerner said. “Then maybe when the child gets older, they get a credit card and now you’re getting interchange off that person. Then they get their first auto loan through you, and maybe their mortgage. It’s positioning yourself to win the next product as opposed to sell the next product.”
Fees Can Poison a Relationship
The voice of customers is loud and clear: Fees don’t add value, but they can make or break a relationship. That’s the fine line that all financial services providers have to walk. The whole point of working with financial services company is to bolster your finances. If the bank is taking money away from customers, that’s not really helping with their finances.
“It’s not that fees in themselves are a problem, it’s too many fees or fees that are too high,” Lerner said. “It’s about finding the sweet spot of charging as much as you can, which as a business we naturally do, while also meeting the needs of the customer at a price that is reasonable enough that they’re not going to feel cheated and leave.
“We see good data about why people choose to leave banks, and they often have a million reasons. But in real life, it’s often one thing that sent them overboard, one bad experience or one fee they felt they shouldn’t have been charged. It shows you just how delicate the banking relationship can be.”
