Acquiring customers is one of the main business challenges fintechs face and one of their biggest cost drivers. Another key expense category is customer servicing costs – the recurring annual expense firms incur attending to their users. Both factors have an important bearing on business model sustainability.
Based on our study of 20 listed emerging market fintechs, the median customer acquisition cost (CAC) is US$50, while the annual servicing cost is cUS$55 per user, albeit with wide variations by product and geography. Both expenses categories are lowest for fintechs in the digital banking and payments sectors and those operating in India and LatAm.
In this report, we examine emerging market fintechs’ customer acquisition and servicing costs. We recently also looked at average revenue per user (ARPU), and future reports will discuss other aspects, such as margins, cashflows and profitability.
Digital banking and payments fintechs have the lowest customer acquisition costs
The CAC for our emerging markets fintech sample stands at a median US$50 per user (2021). For simplicity and consistency, we have included only marketing and selling expenses in the CAC calculation.
By product, digital banking and payments companies have the lowest CAC. This, in our view, is due to the larger target market compared with sectors like investech and insurtech, and therefore these firms can attract a larger customer base at a relatively low level of marketing spend.
In contrast, lending and investech have the highest CAC. For lenders, not all customers that show willingness to use a product can be served due to creditworthiness problems, which increases the cost per successfully acquired customer. For investechs, the target market in many emerging markets is both small and cautious, thereby requiring higher marketing/educational spending to reach and attract new customers.
India and LatAm fintechs spend the least to acquire customers
India is the cheapest market to acquire fintech customers, with its CAC standing at just US$17. We think this is mainly because of the large and underserved nature of the market, which is ready to adopt digital products. In contrast, China has the highest CAC in our sample, by a fair margin.
Although China is also a large market, of course, the industry is much more mature, meaning that customer acquisition is geared more to attracting customers from other providers, rather than acquiring individuals who are new to financial products. In addition, for remaining new-to-finance customers, there are likely to be issues that other fintechs have been unable to surmount (eg a reticence to try new products, channels or firms).
Where customer acquisition costs are growing fastest
Overall, CACs for our sample fintechs grew by c60% in 2021 as booming VC funding enables fintechs to spend more. By product, payments companies are witnessing the fastest growth in CACs, although they still have some of the lowest acquisition costs in the fintech space. We think the rapid CAC growth in the payments sector is because these lowest hanging fruit (early adopters and so on) have already been captured. Since scale and market dominance is particularly important in this sector, firms are willing to plough money into attracting additional customers, even at higher per capita costs. By market, Latin America fintechs are witnessing the largest increase in CACs, while India saw a decline in 2021.
Investechs and Chinese fintechs spend most on servicing existing customers
In addition to customer acquisition, the cost of servicing existing customers is also an important determinant of fintech business model economics. When calculating servicing costs, we include both direct costs (interest expenses, credit risk costs, etc.) and indirect costs (such as administrative expenses). The median cost of servicing per user stands at US$56 for our sampled EM fintechs.
Investech customers are the most expensive to serve; compliance-related costs can be high and firms may need to pay various third parties based on client activity (eg trade execution). In contrast, digital banking platforms have the lowest cost of servicing; deposit interest rates are typically low, while payments-related expenses are also not usually substantial.
By market, China fintechs incur the highest cost for servicing their customers while Indian fintechs incur the lowest cost. As a more developed fintech market, Chinese customers’ service level expectations are likely to be higher. Differing per capita income levels also likely play a role in terms of the cost profile of each market.
Companies with the lowest customer costs
Egypt’s Fawry, Bangladesh’s bKash, India’s Paytm and Brazilian digital banks Nubank and Banco Inter had some of the lowest CACs last year. In contrast, Chinese fintechs including Lufax, Zhong An and Futu Holdings have some of the highest CACs in our sample. In terms of recurring servicing costs per user, Egypt’s Fawry and Bangladesh’s bKash spend the lowest, and Up Fintech and Futu Holdings the highest.
Although lower customer costs help companies build a sustainable business model, comparing this with ARPU levels is equally important to assess the margins and profitability of a company. Some high-cost firms can still generate superior margins, if these expenses help to support a high top line. We will cover this topic in a follow-up report.