Why customer acquisition is so difficult for financial startups

When it comes to getting new customers, startups in financial technology are in a lose-lose situation. It’s no surprise: The reigning banks have been around for decades so they have a large existing set of customers and streams of data on them from over the years. Their problem is they're plagued with old infrastructure that slows them down and cuts into their ability to manage data well. Startups don't have that problem, but they also don't have the customer base -- or the ability to scale. Customer acquisition is expensive. For a large bank it could cost between $1,500 and $2,000 to acquire a retail banking customer, according to Ciaran Rogers, director of marketing at StratiFi, an early stage startup that helps advisors manage portfolio risk. In credit cards the cost could be in the hundreds, not thousands -- according to David True, a partner at PayGility Advisors. An expensive customer could be as high as about $800, which would include the cost of teasers and bonus loyalty points. At startups it could be between $5 to about $300 for one customer. Fintechs want to spend less money on that -- Wealthfront, for example, decreases its marketing budget year after year. Partnerships with bigger brands have been one way to bring that cost down. For example, Canada's fifth largest bank, CIBC, is reportedly in talks with robo-adviser Wealthsimple over a referral deal in which the bank would send some of its customers to the digital investment startup. “As large organizations, they can use that data to optimize,” Rogers said. “You have so many inputs. You spend $20, $30, $100 million and you're able to use the power of statistics to help you. When you're a startup you just don't have those same data sets to pull from.” Traditional wisdom says companies have largely been falling behind when it comes to their data strategy. However, with more and more data-focused startups in the market and large companies moving their information storage to a cloud-based system  -- JPMorgan and Capital One have already started that migration -- larger banks have been working hard to get their acts together, organizing their data and becoming competitive with fintech startups. And they already have an easier time acquiring new customers. PFM app MoneyLion’s chief marketing officer Tim Hong said his company built its core infrastructure itself and built the company with the premise that with good machine learning and artificial intelligence technologies, it could get a better read on the data it collects to ultimately provide better products to service the customer. More than 30 percent of its customers come because of word-of-mouth. “It’s important to define the when as well as the two in terms of acquisition,” Hong said. “A lot of folks I talk to at traditional banks really have pain points around their legacy systems. Even though they do have customers and they do have troves of data, oftentimes those are locked up or siloed and therefore they’re really unable to form that holistic picture of their customers’ needs.” Startups themselves say their cost of customer acquisition isn't high at all. At MoneyLion, the cost of customer acquisition is about $5 or less, said chief marketing officer Tim Hong. MoneyLion launched in 2013 and now touts about 1.5 million customers. Earlier this year, Luvleen Sidhu, president and chief strategy officer of the all-digital BankMobile, said it spends about $10 to acquire an account. That's great, but the number of accounts these companies manage is overshadowed by the existing customer base at the big banks. At robo-adviser Wealthfront, 90 percent of the new assets that come in are acquired organically, according to a spokesperson for the company; for the remaining 10 percent that come in through a paid channel, the company would never spend more than a couple hundred dollars on acquisition, she said. “We very consciously keep our unit economics low so we can keep costs to the client down and build a large business that will be very profitable at scale,” she said. “This is the beauty of being fully software-based, it doesn't cost software anything to scale.” Wealthfront, which launched six years ago, reported 194,243 accounts as of last month. By comparison, Bank of America’s digital users grew 5.2 percent to 34.5 million on a year-over-year basis in the third quarter of this year. Mobile banking users grew 10.8 percent to 23.6 million. JPMorgan reported a six percent increase in digital users to 46.3 million and a 12 percent increase in mobile users to 29.2 million in the same period. Big banks can optimize the placement of ads, target behavior, size of ad unit and the message. Since startups don’t have all those resources, they have to get creative. In the age of infinite content, every financial brand has a content marketing strategy: Ellevest has a perfectly curated Instagram feed; Acorns is trying to become a publisher; Wealthsimple uses an online magazine; Bond Street has a blog as well as an online magazine. “Creative becomes the thing that helps them get ahead, that’s where startups have to be; they have to have a more creative, more differentiated message,” Rogers said. “To optimize creativity is a heck of a lot harder than optimizing whether you're gonna use a 200x350 or skyscraper banner size, which is really how the big banks are able to achieve efficient acquisition.” That’s partly why creating content for customers is no longer much of a “differentiator” for fintech firms as it once, briefly, was. Furthermore, fintech that entered the financial scene in the wake of the financial crisis pitching new, “disruptive” ideas, are trying to communicate new, different messages from what bank customers had gotten used to, adding another layer of potential for pitfall, Rogers said. Consumer facing fintech startups also stumble because their value propositions, however necessary or popular among everyday people, just aren't scalable. “You could be an amazing fly fisherman but if you're fishing in a pond with only four or five fish you're gonna catch those fish pretty quickly and that’s not scalable,” Rogers said.