Magazine article American Banker

Paying for Customers a Means to Growth, Not an End

Magazine article American Banker

Paying for Customers a Means to Growth, Not an End

Article excerpt

With stock prices still high and enabling mergers of unprecedented size, bank executives have a way of explaining the strategic benefits of getting bigger. They say they will stave off competition, gain scale and technology economies, and solidify a national or superregional business.

None of this is possible without a large number of customers. The conventional wisdom is that it is cheaper to buy customers than to expand one's own customer base. In a form of "irrational exuberance," huge premiums are being paid to acquire banking customers.

Recent analyses of bank mergers indicate that the median premium paid per banking customer was around $6,000.

Banks that pay this much put themselves in a difficult position. High prices pressure chief executives and their management teams to justify the investment by keeping customers longer, cross-selling, and generating higher margins.

Andersen Consulting just completed a study, published in Strategic Finance, the Economist Intelligence Unit's quarterly, that helps put these premiums into perspective.

A customer at a large multiline bank generates about $100 per year in pretax profit. Even without discounting, this puts the payback time per customer in the range of 60 years. A customer would have to stay with the acquiring bank that long before the value of the transaction could be fully realized.

What is significant and daunting about this is that traditional retention measures indicate that customers stay with their bank only six or seven years.

Under what conditions does paying huge premiums for customers make sense? …

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