Customer value is a composition of various factors or value drivers widely discussed in businesses, which are interrelated and affect each other.
In this article, we will focus on 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. In addition to mentioning these, certain examples are highlighted of how these value drivers can be boosted by the bank.
In the below figure value drivers are shown together with how they can be broken down.

Figure 1: Value drivers for the use case of digital invoice data

We have broken down customer value into 3 main factors:

  1. Length of customer relationship
  2. Number of services used by the customer
  3. Return on investment on the 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, over the customer lifetime can the bank realize all its service revenue.

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 per the current practices, 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, additionally 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, customer loyalty increases if the bank’s brand is seen throughout the whole customer journey. Obviously, each bank will form its strategy on how it wants to participate in various ecosystems, but for use cases closely related to banking and financial administration this can be an argument to launch a service/platform under the bank’s own brand.

Highlight – Digital only customer experience with the integration of e-invoicing and banking

All the three mentioned value drivers can be boosted with a seamless digital customer experience. By integrating e-invoicing and the online bank both payments and financing processing can be made seamless.

Payments:
  • Each invoice or bill must be paid. The ease of 
    • invoice processing, 
    • payment initiation, 
    • and automatic transaction matching

are important customer pain points for SMEs in their daily finances. Any point where automation and digitalization happen gives a superior experience for the customer.

As pointed out in our other article the accessibility of digital invoice data enables

    • automatic invoice data input for payments,
    • 1-click payment generated based on invoice data,
    • and automatic transaction matching. 
Financing:

If the bank has access to digital invoice data, the financing request 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 and transaction history is available for the bank, it can provide a superior customer experience compared to a third-party application, where the customer is new.

Number of services:

Both customer revenues and customer loyalty can be increased with more services used. These additional services can be other banking services sold on top of the already used service or can be built around a problem a customer faces, providing an end-to-end customer journey to that specific problem. 

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.

Ecosystems offering/Value-added services:

Many banks design their services not only to provide financial services but incorporate other partners into the customer journey or joining other ecosystems providing financial services. Providing e-invoicing and digital invoice management embedded into the online bank is an offering that is a value-added service for customers and can be the start of an ecosystem building based on invoice data

In an e-invoicing and payment ecosystem interoperability plays a huge role so that data can be exchanged automatically between trading parties. In such an ecosystem each enterprise is a participant, while accountants, accounting, and ERP software providers. 

An e-invoicing and payments ecosystem is naturally linked to the bank’s business, therefore it makes sense to do it under the bank’s brand.

ROI on services:

The return on services can be derived from 

  1. service revenues, 
  2. service costs and
  3. investments. 
Service revenues:

One way of maximizing service revenue is to provide value-added services to customers for which they are willing to pay additional fees. 

E-invoicing 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 generally arrive in the use case of providing digital invoice management, because the purchase to pay process invoice logically precedes the payment transaction, and e-invoice data is a structured data along with payment data, which can be used by the bank in several ways.

In the 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.

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.

 Service investments:

As a new digital product, e-invoicing requires investments, but investment costs and implementation risks can be decreased by using white-label offerings provided by technology providers. With such solutions, the time-to-market can be decreased significantly, and investment costs can be better controlled.

Why embedding e-invoicing into the online bank is a good digital offering for banks?

The integration of e-invoicing and the online bank is not only a beyond banking service, but it also transforms both the complete SME financial administration processes and online banking by bundling digital invoice management and banking. Because financial administration and banking belong together from the aspect of the SME customer, defining an integrated customer journey provides a convenient customer experience, where the 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 in real time for modeling, 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: many times 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 enhancing 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.
  • analyzing invoice data can reveal new segmentation criteria and can serve as an input for product pricing for other banking products, as well as next best offer modeling.
How to build up a business case for digital invoice management?

When preparing the financial plan of the digital invoice management of the solution, besides the planned service revenues, the abovementioned factors should also be reflected and incorporated. As there is no existing track record 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.

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 enterprise client[1] 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, the actual benefits can be much more far-reaching, taking into account all value generation possibilities – but that can be part of the upside risk of the financial planning. 

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[1] Based on the average corporate loan amount of EUR 234k, 2.24% average interest income, and 0.5% less risk cost, assumptions: https://www.euro-area-statistics.org/bank-interest-rates-loans?cr=eur&lg=en&page=1&visited=1

https://www.euro-area-statistics.org/banks-balance-sheet-loans?cr=eur&lg=en&page=0&charts=M..N.A.A20T.A.1.U2.2240.Z01.E+M..N.A.A20.A.1.U2.2250.Z01.E+M..N.A.A21.A.1.U2.2250.Z01.E&template=1, Eurostat business demographic statistics, Partner HUB estimation