Nobody owns the customer
By: Shamir Karkal
Tags: Payments, Slavery, Customer, Neobanks, Banking

“But won’t we lose ownership of the customer if we do this?”

I have lost track of the number of times I’ve heard that comment. Usually from a bank executive who has something like customer or retail in their job title. If I am feeling particularly snarky I’ll respond

“Ownership of people was outlawed by the 13th Amendment in the US, except as punishment for a crime. So unless you are punishing your customers, NOBODY owns the customer”

Back when I was a consultant at McKinsey I used to just accept that world-view at face value. Banks built branch networks to entice customers to walk in and buy a product, usually a checking account. This was an expensive proposition, and banks’ cost of customer acquisition was frequently $1000+ . But once that customer bought a product, the bank “owned” them. The bank would leverage this “ownership” to cross-sell those customers more products over time. Eventually that initial cost of customer acquisition would be offset by the revenue streams from multiple products, and over the lifetime of the customer, they would make the bank a profit.

Even back in 2008, there were cracks in this story. Folks were starting their product search by Googling for a product instead of walking into the nearest branch. Fewer and fewer customers were walking into bank branches. And despite their customer “ownership”, most banks struggled to cross-sell products. The average bank customer purchased a measly 2 products from their bank, and the vast majority of retail customers were un-profitable for banks. But increasing that 2 to 2.2 dramatically increased the banks profitability, so banks hired teams of consultants to help them figure out how to make it happen. And those customers built decks analyzing optimal waiting time in the branch (it’s about 10 minutes — just enough time for a helpful salesperson to pull you out of the queue), and comparing your strategy to best-in-class benchmarks like Wells Fargo.

And then in 2009, my good buddy Josh Reich sent me an email with this in it.

Why not simply build a bank that provides the infrastructure to perform the 4 basic functions listed above? But instead of earning money by hiding information from the consumer — adopt an open information policy. The role of the bank simply becomes a gatekeeper for your money. Products are no longer offered directly by the bank. Instead the bank provides you with the ability to perform the basic financial transactions PLUS have complete and open access to your data. This data is then shared, in a privacy compliant fashion, with 3rd party financial products that are available to the consumer in a marketplace. If I want to get a home loan, I go to the bank operated market for home loans, and the bank uses all the data it has available about me to help me best evaluate competing loan offerings. By not implementing the loans, the bank is no longer conflicted, and takes the role of financial assistant rather than duplicitor. To put the same idea another way, think of eBay. eBay provides an electronic marketplace for goods and it provides a basic infrastructure for buying and selling goods. I want a ‘bank’ that provides the infrastrcture for basic retail financial transactions and using the information it knows about my transaction history, it assists me when I need to choose from competing financial products that are offerred in the bank operated marketplace.

That email led to the founding of Simple. It kicked off my career as an entrepreneur, but it also kicked off the neobank revolution. And neobanks by and large pioneered a new digital first approach to customer acquisition and service. There are neobanks on every continent now, and dozens of them in the US.

And you know what neobanks rarely talk about? Customer “ownership”. Making the economics of a neobank work aren’t easy. You still have to acquire customers cheaply at scale, and offer them a suite of products that make them happy and are profitable. But most of them understand that customers are individuals who have needs. If you can build a business to serve those profitably, and market it well, then you have a chance. But in the digital world your competitors are only a click away, it’s very hard to hide behind obscure legalese, and making money by feeing your customers to death is a losing proposition.

Nobody owns customers. They were always free, and now they can exercise that freedom.