When was the last time you received physical mail from your bank urging you to sign up for a new credit card? Probably not too long ago.
In 2018, Wells Fargo spent almost $1.6 billion on advertising and promotion, postage, stationery and supplies, or roughly $600  per new checking account. Retail banks pay between $350 and $1500 to acquire new customers, or $925 on average, as prior ARK research has illustrated. In stark contrast, Square, the company behind one of the most popular Digital Wallets in the U.S., the Cash App, acquired new users for fewer than $20 in 2018.
ARK believes that cost declines are a primary force behind technologically-enabled disruption. The same holds true in consumer banking: customer acquisition costs are a critical variable in determining the profitability of checking accounts.
Low customer acquisition costs should enable Digital Wallet companies to capture more lifetime value per account than retail banks garner today, increasing the present value of all future profits generated from each customer. Additionally, Digital Wallets should be able to offer checking-account like banking products to customers with low account balances and shorter lifecycles whom traditional banks cannot accept without incurring losses.
US adults maintain their checking accounts on average for 16 years with a balance of $10,545. According to ARK research, a retail bank that pays $925 to acquire a checking account customer can expect to earn back that $925 plus $559 in additional lifetime value, as shown on the left chart below. Offering a checking account based on the same terms, a Digital Wallet company would enjoy almost triple the customer lifetime value, or $1,464 net of customer acquisition fees. As also shown, a checking account becomes unprofitable as customer acquisition costs approach $1500, the high end of retail bank customer acquisition costs.
The positive impact of low customer acquisition costs (CAC) on customer life time value (CLV) becomes clear with shorter term customer relationships. Two forces apparently are shortening the average life of a bank customer: competition and loyalty, or lack thereof. Competition is fierce with many actors – from Fintech startups like Wealthfront and SoFi to more established companies like Goldman Sachs – offering competitive deposit products today. Retail banks have lost their monopoly on deposits and must fight for every incremental dollar. Moreover, the next generation of bank customers may not be as loyal as their parents to slow-moving banking institutions because they have grown up on smartphones and expect financial matters to be solved on-the-go and instantly.
At $925 in average CACs, a checking account customer at a traditional bank typically turns profitable after eight years, as shown in the chart below. A Digital Wallet company, however, can serve customers profitably from year one. At year eight, the value of a Digital Wallet customer can approach $900.
A customer’s account balance also has a significant impact on profitability. At initial account balances below $6,600, deposit accounts at traditional banks typically are unprofitable even with a 16-year life, as shown below. Important to note, this CLV analysis applies only to deposits, and does not consider the cross-selling of more profitable products such as credit cards and other loans. Nevertheless, Digital Wallets can serve customers profitably with initial account balances of only $145, without cross-selling.
The ability to offer low-balance deposits profitably grants Digital Wallets access to a massive market: the 20 million people in the US who still are unbanked. To put this number into perspective, Citibank has 20 million customer accounts in the US today. With Citibank as a guide, Digital Wallets could generate tens of billion dollars in market cap by offering basic checking account services profitably to the unbanked.
The average annual income of an unbanked household is $18,203, suggesting that the household’s account balance is unlikely to be above $1000 and that retail banks will not court them. They would be profitable, however, for Digital Wallet providers. As shown in the chart above, the CLV of a customer starting an account with $1,000 would be $120 over a 16-year relationship. In contrast, a traditional bank would net a negative $784.
Digital Wallets could bank the unbanked, whereas it appears that traditional retail banks cannot.
At least one Digital Wallet company already has targeted the unbanked opportunity. Reports started to surface in 2018 that Square’s Cash App was especially popular among low-income consumers in cities like Atlanta where unbanked rates are high. Jack Dorsey, Square’s CEO, has said that “people are using [the Cash App] as their primary banking account, and in some case it’s their only bank account.” Our research supports this observation. Comparing the FDIC’s unbanked rates and Google Search Trends for Square’s Cash App, the geographic overlap is striking, as shown below. The Cash App dominates in the southern states where the rates of the unbanked are highest.
The overlap between the Cash App and the unbanked probably has its roots in a feature called Direct Deposits which Square introduced in 2018. Direct Deposits lets Cash App users generate routing and account numbers, like those for normal checking accounts, that they can pass on to their employers to facilitate the deposit of their paychecks directly into Cash App. Users then can spend their paychecks from their Cash App balances with Cash App’s own debit cards anywhere Visa is accepted. They also can connect their debit cards to Apple Pay, all without traditional bank accounts.
Enabled by low customer acquisition costs, Digital Wallets should be able to serve the unbanked. With 15 million monthly active users Square’s (SQ) Cash App already is leading the way in serving the financially underserved, while PayPal’s (PYPL) Venmo counts over 40 million annual active users and Apple (AAPL) is expanding its Digital Wallet, the Apple Wallet.