The current financial market is characterized by fierce competition among banks, each of which is always seeking new customers. One of the best methods they use is by offering high commissions or rewards on referrals to get other account holders.
You have probably encountered a referral bonus of $100 for every friend you successfully refer. So why would the banks spend a lot of money on referral commissions? So, how about we deconstruct it?
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Banks Put Customer Acquisition as a Priority
Banks are sustained by a great number of customers who are loyal to them. Each new customer will translate to:
- Increased deposits in the banks system
- Future expected loans
- Cross-sell opportunities in credit cards, insurance, and investment products
It may be costly to get a customer using advertising. As an example, it requires thousands (or even millions) of dollars to run the television advertising, online campaigns, or billboards. Referral marketing, on the other hand, enables the banks to pay after receiving a verified customer, hence a cost-effective alternative.
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High Lifetime Value (LTV) of customers in Banking
Banks understand that the typical customer has years of relationship with their bank- or in some cases decades. Such a long-term relationship places great value on every new customer.
For example:
A checking customer can later open a savings account.
They may finance using either a car loan, a mortgage or a personal loan.
They would be able to invest in the bank’s mutual funds or retirement plans.
Since one customer may earn thousands of dollars during his life, it is clever to pay high referral fee once.
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Marketing That Rely on Trust is More Successful
Individuals believe more grossly in the suggestions of their friends and family members rather than conventional advertisements. By recommending a person to a bank, you are lending your reputation to the brand.
This kind of trust factor implies:
- Increased rate of conversion
- Reduced market risk
- More customer loyalty upfront
Banks will pay bigger commissions as compared to random advertisement leads because they are usually pre qualified leads.
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Reduced Churn Rates of referred customers
Churn rate is the rate at which customers exit a service. Customers who are referred to also last longer as compared to other customers. Why?
They enter with confidence because they have a friend or someone using the bank.
They are likely to have realistic expectations.
They tend toward a sense of community or belonging to the brand.
This decreased churn rate translates to the bank receiving greater value out of the customer in the long run, making the high referral commission initially outweighed.
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Referral Marketing Can Be Scaleable and Measurable
Banks adore strategies that are easily measurable and scalable. Referral programs are:
- Trackable: The number of customers who come through referrals will be trackable by the banks.
- Flexible: They can be used to regulate the amount of commissions depending on performance.
- Low-risk: The payment is required after opening a new account and following verification.
Referral programs produce more predictable outcomes than unpredictable ad campaigns at a fixed expense.
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Banking / Competitive Pressure
There is intense competition in the financial sector. Competition against traditional banks takes place because:
- Virtual banks
- The Fintech startups
- Credit unions
Banks have to come up with attractive offers that are outstanding in order to remain competitive. High referral commissions make them work more attractive, and they are able to capture attention in a competitive market.
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Good Brand Exposure
Talking about a referral program in a bank will lead to customers promoting services in the bank though indirectly. This creates:
Free word-of-mouth marketing
- Bigger brand recognition
- Organic social media buzz is the case when referral links are shared online by customers
Although not all of them will enroll instantly, they will get acquainted with the bank-cultivating loyalty in the long run.
The Gist?
Banks give high referral commissions since it is an established, cost-effective, and trust-based method of acquiring long-term customers. With the help of the influence of current customers, banks minimize marketing waste, receive more loyal account owners, and enhance their competitive advantage.
It is a win-win program for customers; you get rewarded by referring a service or product you use, and your friends or relatives get access to new banking benefits.
Ask your bank about a referral program, in case they have one. (It may well be the easiest money you ever earn.)
