By Evgenii Zharnakov
The usual structure of financial logic in banks is built around products. Managing teams for credit cards, mortgages, brokerage accounts, deposits, etc. optimize their own P&L, as well as local profitability. When doing so the decisions are made at the level of individual products. And the bank’s overall profitability is calculated upon then. But if growth points are scattered across the different products, it becomes difficult for the bank to improve the whole performance.
The approach built around Client Lifetime Value (CLTV) shifts the focus from product to user. It pushes the management toward understanding how clients interact with multiple bank products over time. CLTV requires a specific financial logic to measure revenue, and a new approach to decision-making.
Applying this logic starts with a simple observation: clients don’t use banking products sequentially and in isolation from each other. They use them based on actual needs. A client might start with a basic card, move to payroll, open a savings account, then eventually consider a mortgage with the same bank. Each step advances the relationship.
This client evolution is invisible through a product P&L lens. CLTV captures the full journey.
From Product P&Ls to Client Value
There are reasons to think about products as isolated businesses. Managing teams for cards, deposits, brokerage, and insurance work on increasing profits in their departments. Decisions inside departments can create problems for the whole bank. For example, the deposits team might refuse to lower fees, even if this reduction would lead to growth of new clients in a neighboring division.
When the bank rewards departments for stand-alone profitability, these problems might not be visible at all. For instance, a rational decision would be to raise brokerage fees, and thereby increase the department’s profit. But since product teams don’t track long-term client profitability, the medium-term decrease in profit from these clients in neighboring departments remains unnoticed.
The approach using CLTV changes the question from “how profitable is the product?” to “how profitable is the client over the next several years?” And exploring this question helps banks discover many potentially profitable decisions.
CLTV as a Financial Metric
The CLTV structure consists of two elements:
(1) Gross Margin from current products: Gross Margin = Interest Income + Commission Income − Commission Expenses − Transfer Funding − Cost of Risk
This metric shows momentary profitability, but doesn’t show future client profitability. If you orient on Gross Margin, banks risk misallocating pricing, support, and acquisition spends, since their impact on profit is not obvious.
(2) Expected value of future products: CLTV = ΣCurrent Gross Margin + Σ(Future Product Margin × Probability of Purchase)
After introducing allocation of expenses, connecting client behavior with service usage, Gross Margin becomes a more complete indicator of profitability:
Net GM = Gross Margin − Allocated Operating Costs
CLTV is a good financial instrument for forecasting profitability with significantly higher transparency than product P&Ls allow. In banks where I worked or helped set up CLTV, the transparency of strategic planning increased significantly. Division managers were able to see which business segments were worth developing, which channels were ineffective, and which products served as entry points for future profits.
Attracting vs. Earning Products
For CLTV it’s necessary to distinguish two types of products within banking portfolios, which are usually not visible with a product-centric approach.
Attracting Products
These products bring little profit or might even operate at a loss. They’re important because of establishing relationships with the client and forming subsequent decisions about using other products. For example:
- debit accounts
- payments and transfers
- brokerage
From a product perspective these types of businesses seem unprofitable. But CLTV analysis shows they play a foundational role in generating profit in medium and long-term perspectives. The client journey doesn’t start with large products, like Mortgages for example, but starts with simple products with a low entry barrier.
Earning Products
These products generate the majority of profit and usually characterize permanent clients:
- mortgages
- credit cards
- consumer loans
- insurance
CLTV shows that attracting products creates conditions for clients transitioning into earning products. Those products that on the surface seem unprofitable might turn out to be constant sources of clients for earning products.
How Product-Centric Thinking Misprices Services
The most common result of a product-oriented approach is mispricing. When there’s a need to increase product profitability, teams might choose a simple solution and raise prices or fees and tighten conditions. Such a decision might look rational, but simultaneously harm on a systemic level, if this product brings clients into expensive products.
CLTV shows what impact pricing decisions have on the long-term perspective. High fees improve short-term P&L but reduce client engagement, decrease cross-product activity, and in extreme cases lead to the loss of high-income clients. And in the reverse direction, low and near-zero fees for attracting products can significantly increase the probability of future adoption of earning products.
My experience shows that once banks see the full client journey, pricing policy gets reconsidered very quickly and plans to raise fees get cancelled.
Retention Economics: Spending More to Earn More
Using the CLTV approach requires a different retention policy. Instead of using a general and generic retention policy, the bank sees which client groups bring the highest long-term profit and can use the retention budget effectively and deliberately on this group.
In my experience, such clients with high CLTV want more flexible pricing, direct access to support, and individual conditions in some services. Agreeing to such requirements can be considered a targeted investment to protect the bank’s future profits, to preserve an important source of income.
Organizational Shifts Required
Implementing CLTV requires cross-departmental alignment. Finance, risk, treasury, analytics, product and client teams must work within a common profitability model.
CLTV makes sense with a common point of view. Otherwise, each department will optimize only its own metrics, diluting the bank’s overall economics. CLTV offers a common language needed for making pricing decisions, supporting investments, developing client acquisition channels, and priorities in product development.
The transition to client-oriented metrics also changes the approach of senior management. The bank will start supporting the development of client and acquisition departments, instead of for example strengthening the brokerage department.
Conclusion: The Client as the Profit Center
Banks continuing to use product P&Ls as the main source of analysis limit their growth potential. In comparison with banks that adopt a client-centric approach and gain a structural advantage.
When a bank starts measuring client value, many decisions — from pricing, support, acquisition, product evaluation — become more transparent and strategically more uniform. Constant optimization of client value outperforms optimizing product margins.
About the Author
Evgenii Zharnakov is a Finance and analytics leader focused on applying AI to management reporting, risk, and decision-making in capital-intensive industries.
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