How much do Fintechs pay to acquire customers? The answer is “depends” … let’s look at the perceived factors that affect Customer Acquisition Cost (CAC) for digital banks+ .
And why that number remains so important for the long-term health of the Fintech business model.
It is well-known that Customer Acquisition Costs generally tend to trend up over time across pretty much every category. The reason is because as a category becomes more lucrative, more competition arrives to try and steal customers away from everybody else.
But rules are made to be broken.
This post explores some of the effective strategies (and supporting data) from Fintechs who have succeeded in driving a lower CAC.
How Did Cash App Get Such a Low CAC?
Look at the data for Cash App, available as part of an analysis into the Square (Block) Business Model. A $10 CAC is legendary in Fintech for a company with ~45 Million MAUs (Monthly Active Users).
It is not unheard of for early-stage Fintechs to acquire users in a similar price range, but it rarely lasts over even a mid-term period of time (18 – 24 months), let alone several years.
Naturally, comparing Fintechs to Retail Banks on CAC alone is not an apples to apples comparison, as Retail Banks are able to generate much more in revenue per customer, especially over a lifetime (LTV). But Cash App is an anomaly, one of the few in the Fintech space. There are many potential strategies to explain why, but here are a few.
Fintech Strategies to Lower CAC
Network Effects – Cash App
Where Cash App has benefited from network-driven acquisitions in the past, Block has upped spending over the past year on paid marketing to target new audiences and drive higher product adoption for Cash App, Ahuja said. Its customer acquisition cost jumped from $5 to $10
Payments Dive
If $10 is legendary in today’s term for CAC costs for Cash App, then $5 was out-of-this-world good in their earliest days (for developed markets). The reason they were able to achieve that level of Customer Acquisition efficiency is because Cash App functioned in relation to a social network rather than a bank its early days.
When looking at some Customer Analytics from one of their most recent Investor Presentations, it has become clear that the goal was to target peer networks.
Cash App sees a 31 percentage point increase in retention when a user has 4+ friends on the app
Digital Native – Substack
While the theory of network effects applied outside of social networks is nothing new, it is extremely difficult to execute in a market like Fintech. In the case of Cash App – which competes with Venmo and Zelle – there is certainly an element of product design, but that doesn’t explain the whole success.
Referral Incentives – Cash App & Wise
Given the CAC numbers we talked about above for both neobanks (challenger banks) and retail banks, referrals are a no-brainer – if they work.
Anecdotes differ in terms of how much Cash App offered to their users as a referral bonus from between $5 – $15 at various stages in the company’s growth. Paypal also did this in their early days as a way to ‘crack’ the hyper-growth curve in P2P Payments when they were focused on the eBay platform.
ELON MUSK: Yeah. Well, we started off first by offering people $20 if they opened an account. And $20 if they referred anyone. And then we dropped it to $10. And we dropped it to $5. As the network got bigger and bigger, the value of the network itself exceeded any sort of carrot that we could offer.
Referral Candy
Wise (Transferwise) is another company that blew-up through their referral program in the early days.
In the above diagram (originally posted on the Transferwise blog in the mid 2010s), we can see how Power Users drive the network growth at certain points in the node.
We know that many consumers will be more than happy to generate referrals for brands they love; but in Fintech specifically, many brands offer referrals, so it isn’t a unique strategy.
‘Anti-MegaBank‘ Brand – Cash App and Wise
Looking at all 3 of the above-mentioned examples – and countless others across the Fintech ecosystem over the long-term – there is a guerilla marketing edge to those companies who are successfully able to paint themselves as an ‘anti-megabank’ brand.
While it is difficult to measure the impact of branding on CAC – especially since spending on branding is somewhat proportional to CAC – there is no doubt that network effects and referrals are not enough to give Fintechs a sustainable edge in low CAC. Brand has to play a factor.
- Cash App has used its counterculture brand to launch successful ‘influencer marketing’ campaigns across the U.S. They are also heavily leveraged to Bitcoin, which itself is seen as representative of a rebellion against the banks. This is perhaps best illustrated by where Cash App performs best relative to Venmo
- Wise (Transferwise) ran a viral marketing campaign in 2015- #Bath4Banks – that focused on demonstrating (very publicly) that the banking industry needed to be cleaned up, and that companies like Wise were one of the answers
Grubby fees, dirty profits and murky behaviour. It’s bath time. #Bath4Banks has arrived.
Wise
ARPU vs. CAC – Customer Retention
Just because a Fintech brand can crack the code on some layer of the Customer Acquisition equation, doesn’t mean they will necessarily win the market.
The Big Banks still make Billions and Billions each quarter. Many of the Fintechs have been beaten down this year in public markets. If the Retail Banks are spending between $300 – $600 to acquire a customer, it is because they know they can net back many multiples of that in the long-term.
Using Cash App as an example to illustrate how the numbers stack together:
- Cash App’s ARPU clocks in at somewhere around $50 per active user (per year)
- ARPU is not Net Revenue, as there is a cost to service that revenue
- Nevertheless, if ARPU is $50 and CAC is $10, then there is a chance to make a handsome profit per active user over a 3 – 5 year period, especially if ARPU trends higher relative to CAC
Churn is the X-Factor (Customer Retention)
The X-Factor in the entire analysis is how long customers will stay. Even if CAC is low and ARPU is high, if a large % of customers for any given Fintech Churn (ie. leave the platform), then the whole business model falls apart.
Switching Costs for retail banks are notoriously high. In relation to Fintechs, many are secondary or tertiary compared to the ‘primary bank,’ which is what everyone is gunning to become. In the pandemic years, we saw ‘Digital Banks‘ win big, jumping 7% at the expense of the ‘Megabanks’ in 2020.
Literally everything that was digitally driven saw hyper-growth between early 2020 and late 2021, and now the trend has reversed and many of the hottest Nasdaq companies have fallen flat on their faces in the last 12 months, with many Fintechs leading the way down.
It is hard to explain why, but just because a customer joins a new Fintech doesn’t mean they will stay. ARK Investments attempted to estimate Churn for Venmo in 2020.
That said, why did its 2016, 2017 and 2018 cohorts perform so poorly? Our research suggests that
ARK Investments – Churn estimates
Venmo’s main competitor – Square’s Cash App – is behind the answer.
They believe that Cash App’s arrival explained a large amount of Churn seen in Venmo in 2016-2018. This goes to show that no matter how much early success a Fintech has, they are potentially one new competitor – or shift in trend – away from losing a large swath of users. Customer Retention is equally as important as Customer Acquisition in Fintech.
Overall, the dynamics of Fintech and Digital Banking as a whole are unique when it comes to looking at Customer Acquisition Costs. The complexity is represented in the fine balance between acquiring users, scaling, and retaining them, all while maintaining a certain edginess in the market to avoid becoming another stale banking brand.
Top 3 – Learn More
Business Model + Analytics – Square
Customer Acquisition Cost (CAC) – Data
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Case Studies Cited
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