Following a brief hiatus, we are excited to share additional insights on client lifecycle management. Our blog post (1) in November 2019 introduced some ideas around the potential benefits of applying customer lifetime value (“CLV”) lens to client lifecycle management, and how it can bring enhanced benefits for both corporate and investment banks (“CIBs”) and their clients. This month, we seek to demystify the factors CIBs should consider in applying CLV to their clients.
We enter the third decade of the 21st century with mixed feelings of optimism and uncertainty. The UK has left the European Union following Boris Johnson’s recent UK General Election Conservative-majority win and the world prepares for the upcoming US Presidential Election later this year (2), while US-China trade relation quarrels continue (3).
In the midst of these geopolitical and economic pressures, 2020 will continue to bring a raft of challenges for CIBs to acquire and retain clients. Banks will need to consider modernising their technology systems, implementing artificial intelligence (“AI”), employing digitally enabled processes, and innovating on products and services to create a sustainable competitive advantage in the marketplace. Furthermore, CIBs will need to renew focus on Environmental, Social and Corporate Governance (“ESG”) (4), green finance, and bring enhanced client experience to ensure that they continue to attract clients and remain relevant within a dynamic global market. CIBs will need to consider how best they deliver CLV to their clients, which if done well, can enhance overall profitability.
CLV is the total net worth of a client relationship over the whole lifetime span of the relationship. It is intrinsically linked with profitability and sustainable growth of the business. The calculation of this value is important not only at the start but also throughout a client relationship and consists of several factors. Typically but not exhaustively, these factors include;
- total revenue, both fee and interest margin revenues from the portfolio of products and services held by a particular client;
- discounts and incentives offered to the client;
- acquisition and servicing costs of that client;
- probability of consumption of a product or service;
- rate of churn;
- discount rate of return; and
- rate of inflation (5)
When applying these variables, a CIB will need to consider the significance of each factor in the calculation being relative to the journey stage their client is at: from a start up in the early years to becoming a household name.
For CIBs, the frequency of transactional activity may pose an additional challenge to calculating CLV. In contrast to traditional retail banking customer interactions, CIBs typically have lower volume but have higher value transactions. Cyclical activities (e.g. KYC re-assessments) undertaken by CIBs, are natural touchpoints and present an opportunity to identify and capture expected account activity, and re-assess the discount rate, probability of client churn and incentives to be offered to the client.
Historically, CLV has been widely adopted in retail banking and direct consumer driven businesses, but less so within CIBs. New entrants, for example FinTechs, crowd-sourcing platforms, and PE firms allow capital to be deployed outside traditional regulated markets, are changing the competitive landscape and increasing the risk of potential client churn. Many Tier 1 investment banks are recognising this and looking at ways to innovate their businesses. In a recent CNBC interview with JP Morgan’s Co-President, Daniel Pinto highlighted this, as he shared his outlook for 2020 and beyond, particularly on the dominance of Big Tech (Google, Uber and Facebook) companies: “…it’s only a matter of time before they participate in financial services in a bigger way. We have to assume that they will be real competitors” (6).
CEOs, political world leaders, economists, journalists and celebrities alike gathered at the annual World Economic Forum last month to discuss global issues, with this year’s theme centred on ‘Stakeholders for a Cohesive and Sustainable World’ (7). Unquestionably, the state of the global economy and global banking industry continued to be a key discussion topic. The demographic landscape of clients is changing, along with their needs and wants, and it is crucial CIBs consider the current and future state of their client relationships to bring sustainable futures for clients and the CIB industry. Our next blog post will feature our insights on industries at the forefront of using CLV in their business model.
Following this article, there will be a series of publications that will address various topics in relation to client lifecycle management of corporate and investment banks with a focus on customer lifecycle value in capital markets.
1 Deloitte, ‘Uncovering the benefits of client lifecycle value for investment banks during challenging times’, November 2019, https://blogs.deloitte.co.uk/financialservices/2019/11/uncovering-the-benefits-of-client-lifetime-value-for-investment-banks-during-challenging-times.html
2 Financial Times, ‘ What will 2020 hold for companies?’, December 2019, https://www.ft.com/content/65784240-1ff8-11ea-92da-f0c92e957a96
3 Guardian, ‘US and China sign Phase One trade deal, but experts are sceptical’, January 2020, https://www.theguardian.com/business/live/2020/jan/15/us-china-trade-deal-trump-tariffs-global-risks-uk-inflation-business-live
4 City A.M., “Investor demand for environment-friendly firms is becoming 'phenomenon' says top Barclays banker”, October 2018, https://www.cityam.com/investor-demand-environment-friendly-firms-becoming/
5 Deloitte, ‘Finally: Customer Analytics for Banks”, 2011, https://www2.deloitte.com/content/dam/Deloitte/us/Documents/process-and-operations/us-cons-customer-analytics-102711.pdf
6 CNBC, ‘JP Morgan’s co-president talks about his 2020 outlook, the Big Tech threat and socially conscious investing’, December 2019, https://www.cnbc.com/2019/12/27/jp-morgan-co-president-talks-his-2020-outlook-big-tech-threat-and-esg.html
7 World Economic Forum, ‘ Davos 2020: World Economic Forum announces the theme’, October 2019, https://www.weforum.org/agenda/2019/10/davos-2020-wef-world-economic-forum-theme/