How can banks increase customer value with e-invoicing?
In this article we will focus on the value creation using invoice data and e-invoicing and will describe how the availability of invoice data can support the bank in creating customer value.
When building up a business case for e-invoicing as a beyond banking service, banks should consider these factors and build their strategy and business model considering all these factors.
Figure 1 summarizes all drivers of value creation related to digital invoice management offerings by banks.
We have broken down customer value into 2 main factors:
1. Length and intensity of customer relationship
2. Profitability of banking services
Length of customer relationship
The length of customer relationship is important as acquisition costs can be spread over the total customer lifetime; therefore, it is an important factor in driving customer value. On the other hand, the bank realizes its service revenues over the customer lifetime.
The customer relationship can be longer if the customer is satisfied with the service and churn can be minimized. In today’s ecosystem-based offerings the primary customer contact has increased importance, as the customer facing application can have the largest share of the product/service margin. This is because the customer facing application aggregates users and distributes products of the ecosystems’ offerings, but the ecosystem is oftentimes branded by the umbrella application. As the distribution happens by the umbrella brand, it generally charges a fee/commission to be part of the ecosystem. For the bank the customer loyalty increases if the bank’s brand is seen throughout the whole customer journey.
Profitability of banking services:
Service revenues:
One way of maximising service revenue is upselling value-added services to customers for which they are willing to pay additional fees.
Invoice management as a value-added service makes sense for the bank as banks are looking for beyond banking services with which they can provide additional value for their customers.
In the SME segment, when carrying out market research banks arrive to the use case of providing digital invoice management, because in the purchase to pay process the invoice creation logically precedes the payment transaction, and e-invoice data is a structured data, which can be used by the bank in several ways.
In case of beyond banking services the bank should not only consider the actual service revenue that can be charged for the service but should consider all other value creation factors stated here, when building up the business case.
The bank might choose not to launch an own invoicing service, but to have access to invoice data through 3rd party integrations such as invoicing providers or tax authority APIs, still, the majority of the benefits of using invoice data can be realised.
Payments:
- Each invoice or bill must be paid. The ease of
-invoice processing,
-payment initiation,
-and automatic transaction matching
are all important customer pain points for SMEs in their daily finances. Any point where automation and digitalization happens gives a superior experience for the customer.
The accessibility of digital invoice data enables
- automatic invoice data input for payments or for request-to-pay,
- 1-click payment generated based on invoice data,
- and automatic transaction matching
- advanced dashboarding
By launching an invoicing service and conveying the right messages for payments, net interest margin can be increased through higher deposits, as invoice payments arrive to the bank account and the bank becomes the primary bank for the SME.
Also, if the bank has access to supplier invoices, and funds are in the account provided by the bank, then the SME will initiate supplier payments from this bank account, which contributes to higher transaction revenues.
Automatic transaction matching and advanced dashboarding are value added features for which the bank can charge extra fees or can use these features as a marketing asset.
Financing:
If the bank has access to digital invoice data, the financing request for invoices can be processed digitally. An invoice finance request can be initiated directly from the customer invoice list, as the banking customer has all master data in place and invoice data and transaction history is available for the bank.
By providing embedded invoice finance based on invoice data, contextual and timely financing can be offered that generates extra interest revenues for the bank.
Service costs:
The SME customer segment has been underserved by banks due to the characteristics of the segment, namely: the number of customers is much lower than in the retail segment, therefore product development costs can be spread over a lower number of customers, while the margin which can be realized on an SME customer is much lower than in case of the corporate segment. However, technology advancements have made it possible to serve SME customers with retail-like digital offerings, where the service costs can be decreased because of the digital channel.
Why embedding e-invoicing/digital invoice management into the online bank is a good digital offering for banks?
The integration of digital invoice management and online banking is not only a beyond banking service, it transforms both SME financial administration processes and online banking by bundling digital invoice management and banking. Because financial administration and banking belongs together, an integrated customer journey can be defined, where SME customer pain points related to financial administration can be addressed without missing any of the important aspects. This is a use case, where the needs of SME companies can be 100% fulfilled, while providing positive externalities provided by the accessibility of invoice data.
Invoice data as an asset
Invoice data should be treated as a strategic asset which can be used as input for several models, besides the usage of data to enable digital processes.
Invoice data is available real time for modelling, there is no need to wait for year-end financial statements, which enables the bank to act in a timely manner.
Inputting invoice data into models can enhance the customer value by:
- the ability to make better cash flow forecasts, which can be used to make well-timed and targeted financing offers: in many cases financing opportunities are missed, because the bank does not propose the financing when it will be needed
- decreasing risk costs, because the risk models can incorporate the most elementary transactional data and can provide information not only about the sum of the invoice but also about the payment patterns of customer and supplier invoices, therefore risk models can predict the probability of failure much better, counterparty risk can also be better assessed. With more precise risk models the risk costs can be decreased and also customized per SME (or SME segment), which results in better pricing for the loan products. The better risk models also contribute to enhance the financing activity, because there can be enterprises, who become financeable with the new risk models, so a new segment can be opened up for financing. This is of utmost importance for the SME segment, where liquidity is an everyday question and one of the most important factors for the survival of the SME
- analysing invoice data can reveal new segmentation criteria and also can serve as an input for product pricing for other banking products, as well as next best offer modelling.
How to build up a business case for digital invoice management?
When preparing the financial plan of the digital invoice management solution, besides the planned service revenues, the abovementioned factors should also be incorporated. As there is no data available for such solutions, each bank needs to make its own estimation of the effects of each value driver based on its market environment and competitive position and strategic objectives.
However, a starting model is presented below, which can be elaborated by each bank, for each of the different segments, the bank wants to serve.
In the below model we present the benefits for both banks and SME companies and only focus on the effect of invoice data on the core banking activities.
Figure 2: Benefits of e-invoicing services for SMEs provided by banks
Revenue streams:
We assume the following revenue potential for a typical banking client over 5 years:
- Additional EUR 2100 interest income from financing per average SME client from additional financing based on data (assuming extra 30 days financing compared to average loan amount)
- EUR 15000 payment revenues from retained payment transactions (on a portfolio basis 5-10% lower churn should be considered as a benefit) to other payment providers (payment revenues making up 40% of total banking revenues); assuming 1,5% payment commissions, 100 payment transactions per year, average EUR 2000 per transaction
Costs:
- Estimated decreasing risk cost of EUR 1170 per average enterprise client
- For enterprises EUR 6327 may be realized for lower financing costs (on equity costs)
These numbers represent a ballpark figure of the magnitude for the potential benefits that can be realized beyond the actual service revenue. As mentioned above, the actual benefits can be much more far-reaching, considering all value generation possibilities – but that can be part of the upside risk of the financial planning.
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