KPIs to measure ROI of a digital bank
An Avaya survey in India a couple of years ago found that 51% of Indians use online banking whereas another report by the Office for National Statistics says 69% of UK population bank online. Digital banking that knocked on the customers doors in the 1990s with the advent of the internet has the potential of reducing cost, save the environment (with paperless mode), offer convenience and raise profitability for the banks.
Has that happened? Are digital banks able to generate a positive return on investment (ROI) while keeping the customers engaged? Let’s dig in to find out.
Key performance indicators (KPIs) to measure the success of a digital bank
Once a bank has finalised a digital strategy, and the most suitable bidder amongst the solution providers is onboard, what are the KPIs that could help the bank to measure the ROI?
Digital traction metrics
Digital traction metrics is a way to audit your digital strategy and whether it is helping in attaining a positive ROI. It applies to any digital platform that offers digital services and products.
For the banking industry, the metrics would indicate number of users (existing or new) who signed up for internet and/or mobile banking. What was the growth rate in a month and channels via which customer was acquired? How much time was spent on each transaction? How many trasactions got dropped in between? What was the number of active users? What was the conversion rate and which channel helped majorly in converting?
A quick reference of the key metrics below would be helpful:
Cost to acquire a typical customer (CAC)
The expenses put in by sales and marketing teams divided by the number of new customers added on to the repository would define CAC, and as part of this, you could also include infrastructure cost, production cost, wages etc to get a more accurate figure.
Lifetime value of a typical customer (LTV)
LTV, also known as customer lifetime value (CLV) or lifetime customer value (LCV) is a forecasting method to estimate the projected revenue from a customer over the lifetime of their relationship with your business. Knowing the number helps banks in determining how much one should invest in customer acquisition and retention.
As a matter of fact, banks hold their customer for a longer period when compared to other verticals. So picking a simple example if a customer purchases:
|the worth of products/services from your bank over the lifetime of your relationship||$1,000|
|the total cost of sales and service to the customer||$600|
|LTV||$400 ($1,000 – $600)|
Based on the data above, if banks are investing more than $400 on product purchase, sales and marketing it would generate a negative ROI for the bank.
Other KPIs set by industry leaders
While the above KPIs mention the metrics of any digital platform, experts from the industry, such as Deloitte and DBS Bank, for example, present different criteria.
In its Digital Banking Benchmark Report, Deloitte evaluated ten retail banks in Luxembourg on eight dimensions representing 235 criteria. The milestone covers the daily banking services that a bank could/should offer on its web platform or mobile application.
For DBS Bank, which wanted to transform a bank in India to scale with few branches, a solution of a mobile-only bank seems feasible, but how to execute and generate an ROI? DBS explains:
“You have to balance it. And the way we balance it is through group scorecards, which really drive everything we do and clearly indicate to people the amount of time we expect them to spend on certain areas. The top part of the scorecard is all financial metrics, customer metrics, shareholder value-add, and revenue generation. The middle part is where the core of the digital transformation comes in, and we ascribe 20% of the value of the scorecard to this, which is then used to drive compensation for the company. Below that we have the strategic initiatives we need to get done, and that’s another 40%. So big transformations like automated lending into India or how to transform future-ready employees, go in that box.”
Strategies to be adopted by banks to attain a positive ROI
A digital banking product cannot only save cost for you but could make a place for new revenue models.
- DIY Service
With digital banking, research suggests that you can save up to $5 on a branch visit, $2.50 for a customer call to a call centre. With online banking, the customer is using their device and broadband connection. All you need is keep the website up and running.
- Low-cost funds transfer
Issuing a demand draft in India means an additional amount to be paid by the customer. If it is an inter-bank transfer customers not only need to pay extra charges, but spend a lot of time on conducting the transaction. With a digital banking solution the customer can make money transfers seamlessly at no additional cost. Digital banking also helps to make global transfers faster.
- Environment friendly
Lessen your paperwork by releasing e-statements, offers on email and electronic know your customer (e-KYC) submission. Support digital transformation, be environment-friendly and save on paper costs.
- Support and maintenance
Deploying chatbots or voice assistants as customer support can help banks in slashing the cost of employing full-time customer support. And now with the serverless mode, you can reduce the infrastructure cost by only paying when in use and not for idle time.
- Customised products
While booking an air ticket from my net banking, a pop-up appears to include travel insurance at just XYZ price. Or when you use your card at a fuel station, you get a message of a cashback or X% discount on next purchase. These personalised product offerings can help to keep the customer engaged and also drive revenues.
Digital banking with the use of open application programming interfaces (API) could also be integrated with social media, financial portfolios, and other web applications, that could help in understanding your customer and offering just what they is looking for at a reasonable cost.
Digitising lending and mortgage experience
Loans could be a good source of income for banks, but it is also a risky proportion if the borrower credibility is not validated, and that is a time-consuming process. With the use of artificial intelligence (AI) banks could verify the borrower credibility, assess the risk and make an informed decision in a shorter period. Digital transformation for debts could be a game-changer for banks in generating revenue.
Banks who are adapting to digital are ahead than their counterparts and fintech enterprises. But measuring the “digital maturity” of “digital adoption” is crucial. As per research done by Capgemini and MIT Sloan, businesses who recognise the value of digital transformation are on average 26% more profitable than their competitors and have valuations that are 12% higher.
Digital influence can be tracked, measured, and would indicate on what the ROI is – positive or negative.
By Vishal Gupta, founder and CEO of Teknospire and Hylo
Vishal Gupta is founder and CEO of Teknospire, a start-up helping banks and financial companies in their digitisation endeavours, and Hylo, a hyperlocal initiative to build a self-sustainable neighbourhood.