What banks (and customers) should learn from the cancelation of Santander’s Extra20 account

Recently, Santander sent me a letter informing me that my Extra20 account was being ported to a new, less exciting product called “Simply Right Checking.” I had been waiting on this letter since the day I signed up for the account (more on that in a second). More importantly, there are important lessons that banks and customers should learn from this ill-fated product.

An Overview of the Product

Santander announced Extra20 in late 2013 as part of an aggressive advertising and branch expansion campaign. The product was extremely generous, offering up to $20 per month in bonuses for sticky services: $10/month for setting up direct deposit, and another $10/month for two qualifying bill pays.

The original marketing materials for the Extra20 account

This offer was incredibly rich. For making a total of $18,000 in direct deposits, and 24 bill payments, Santander were giving customers $240/year. This is on top of the $250–400 in costs that banks incur in servicing costs every year. So what was Santander getting for their $500-$600 investment in a customer?

The average bank earned just $268 from checking accounts in 2011; since then interest rates (i.e. interest income) have continued to dwindle, debit card fees (earned when you swipe your card) have been cut in half, while other income (e.g. fees) has only increased slightly. So Santander may have been losing upwards of $300 per year on each account. Why would they do this?

My (Educated) Speculation

There are three main reasons why Santander was prepared to lose so much on each account:

1. They expected to profit in a future rate environment: If the interest margin on bank accounts were to get back to “historical levels”, acquiring thousands of customers at a loss may eventually pay off. However, given the bleak outlook for rates back in 2013, it seems unlikely that Santander believed this to be true.
2. They assumed aggressive cross-sell rates: Checking accounts are often viewed as loss-leaders with the assumption that banks will be able to cross-sell higher margin products (savings accounts, investment products and, in particular, loans) to their customers. However, this logic does not seem to reflect the reality that consumers are unbundling their financial relationships. More than one-third of consumers purchased financial products away from their primary banks in the last year. So unless Santander has some truly amazing lending products, or is willing to further reduce their margins, this also seems unlikely.
3. They never expected the product to last: The last reason is also the most troubling for customers. Namely, Santander always expected to cancel the product after a short period of time. With historical rates of switching ~10%, it’s not unreasonable to pay to acquire customers and expect customer inertia to carry you into profitability. Whether this is ethical is a completely separate matter.

Lessons for Banks

I argued recently that banks have two choices: embrace being a commoditized service provider, or focus exclusively on the front-end customer relationship. If banks embrace this view, then the front-end relationship owners will focus almost exclusively on customer retention than acquisition.

Why? Because switching costs will decrease as front-ends become interchangeable and back-ends begin to consolidate. Whoever provides the “killer app” in banking (whether that be mobile experience, or fee policies, or something else entirely) will automatically steal customers. And their ability to innovate will be what determines how long those customers stay.

Ultimately, offers like Santander’s will be viewed as a bad idea. Paying to acquire customers may work, but you’ll need to keep paying them to keep them. You’re effectively training customers to look for generous payouts as part of the core experience. And once the payments stop, customers will move on to the next best option.

Lessons for Customers

Customers will need to be increasingly suspicious of offers like Santander’s Extra20 offer. Let’s look again at the offer itself.

The offer boldly promises up to $1,200 in bonuses over 5 years. I doubt Santander even intended to keep the product alive for 5 years. Even if they did, consumers should wake up to the reality that offers in banking will diminish in value over time, as bank margins continue to be squeezed. In other words, if it sounds too good to be true, it absolutely, positively is.

Conclusion

I don’t mean to be too critical of Santander; their aggressive strategies may pay off. But don’t expect to see many of these offers and strategies in the future. These will soon be viewed as relics in a world where the economics of banking have completely changed.