Monetization: What Digital Bankers Should Know.

credit: Mary MM

Having worked both in the telecommunications and banking sectors, I have noted that telecom companies think very differently when it comes to monetization than banks. Adopting some of the monetization principles practised in the telecom space would greatly benefit digital banks and digital-first products trying to get off the ground.


I would like to give my take on this topic hoping that more digital banking practitioners will develop and roll out products that go beyond the innovation lab.

I assume you have built a digital-first banking product with several value propositions that are attractive to your potential customer base and are looking to take this to market.

What is Monetization?

Monetization is how a business earns its revenues. It involves developing and executing strategies and tactics that cause the trajectory of revenues and profits to inflect upwards in a company.

The Levers A Monetization Strategy Provides.

If you are looking to launch a digital banking product in the market, a monetization strategy will help you:

  1. Pay the cost of transactions and consequently generate positive gross margins.
  2. Allow you to afford customer acquisition.
  3. Help you grow profitably by reducing the payback period.
  4. Grow competitively by outbidding your competition in the chosen sales channels while acquiring more customers.
  5. Help you grow faster by offsetting churn.

Let us go through each of these and see how a practitioner in this space can implement a monetization strategy to give them a chance at success.

1. Pay Cost Of The Transaction

A strong monetization strategy aims to increase gross margins and provide the business capital for growth.

I cannot emphasize enough how important this is in creating a sustainable and profitable digital banking business. Gross margins can improve either by increasing revenue per unit or lowering the cost of goods sold.

Revenue Design

As you design your digital banking business model, you need to be conscious of the two revenue types.

  1. One time revenue — In banking terminology, one-time revenue would most probably fall under the category of non funded income. For example, a payment product feature in your digital banking product will allow you to charge the customer a fee every time a customer executes a transaction.
  2. Recurring revenue — Recurring revenue, on the other hand, occurs at best monthly. Recurring revenue is highly sought after since it provides a predictable stream of cash flow to the business. In a digital banking context, I would classify interest income in this bucket. A product feature like a term loan that generates monthly interest income falls under recurring revenue category.

Recurring revenue is a fundamental measure of the strength of your digital business monetization strategy.

Cost Of Goods Sold

CoGs are the costs incurred in the sale of a single unit of the product or service. For example, suppose you have a payment feature with a use case of sending money to a Mobile Money network. In that case, the charges incurred in fulfilling this transaction to the mobile money network would fall under this category. The same would apply to any other cost that is incidental to the sale of a service. These costs are borne to make the transaction possible.
On the other hand, the license fees you pay to host your digital banking services in a public or private cloud, for example, are not part of CoGs as they have to be borne regardless of whether a customer transacts or not. These would fall under your operating expenses category.

Gross Profit

Gross profit is revenue from sales less CoGs. Gross margin is gross profit expressed as a percentage of revenue. Gross margin is a good measure of how efficient a business delivers products and services to customers.


If your gross margins are healthy, you will, in turn, fuel growth as you can afford to pay for more customer acquisition.

A strong monetization strategy optimizes Gross Profit which in turn fuels growth.

2. Afford Customer Acquisition

As a part of your digital strategy, you will find that cost-effective customer acquisition is one of the most essential pieces you need to have a successful business.

Paid acquisition is one of the most effective ways to acquire new customers; however, this comes with making the cost of customer acquisition viable.

Brick And Mortar Anyone?

Digital bankers see themselves as un-shackled to the “old school” sales channels that are physical branches.

With technology, one can design and take advantage of digital-first acquisition channels that don’t require a physical touchpoint. Your customers spend most of their time online as such developing sales channels for digital acquisitions is critical.

One of the critical bottlenecks in having a full digitally acquisition model in the past was verifying KYC to the Central Bank standards as stipulated in the banking regulations. However, with advances in image recognition technology, one can now implement an SDK in their Apps that will compare a customer image and image stored in the Integrated Population Registry System run by Kenya’s Government.

Selection Of Customer Acquisition Channels

In monetization strategy, a channel refers to the means of acquiring a customer.

You will note that most Banks look at channels as “windows or doors” into a customers bank account. A mobile banking App/ Internet banking App in the traditional sense is designed to give a customer access to an already existing bank account. The monetization approach turns this on its head completely.

Importance of Channel Strategy

A channel gives access to desired buyers. Each channel has specific levers and mastering their dynamics is key to dominating the channel, thereby extracting maximum growth possible from that channel. Some of the questions a digital banker should ask when choosing a digital channel are;

  1. Cost — What is the cost of acquiring a single paid customer through the channel?
  2. Volume — How many customers can be acquired through this channel?
  3. Cycle Time — How long does it take a prospect from exposure to an advert on the channel to convert into paying customer?
  4. Saturation — What is the saturation point? At what point do you need to pay a higher acquisition cost to acquire the next customer?
Channel Strategy

Acquiring Customers Profitably

Once you have selected your channels of choice, you need to identify the cost drivers for these channels. There are three types of costs one needs to be aware of as you execute your channel strategy.

  1. Cost per Acquisition — This is the cost of acquiring a lead.

2. Customer Acquisition Cost — This is the cost of acquiring a paying customer.

It is crucial to track Cost per Acquisition and Customer Acquisition Costs separately because failure to convert leads and non-paying users into paying customers can inhibit the business’s growth.

3. Operating Expenses — Operating expenses include customer acquisition costs and the cost of supporting paid customers. It is important to note that customer acquisition costs also include the cost of supporting leads, (non paying customers) that eventually become paid customers.

Cost of supporting leads or non-paying customers can come about due to the design of an onboarding journey. For example, if you need to execute full KYC on a customer before they transact, they will remain as non paying customers until they fulfil this requirement. Another example is on the credit side. If a customer does not qualify for a credit limit, they will remain non-paying customer until they qualify for the credit limit allowing them to drawdown on a loan. These types of customers will need to be supported by the business despite thier non revenue generating status.

3. Grow profitably

Operating Profit and Operating Margin

Operating Profit — This is the profit remaining after subtracting operating expenses from gross profit. Operating margin is operating profit expressed as a percentage of top-line revenue.

This is a useful measure of a company’s efficiency in delivering products and services to customers. This is an extremely important metric as it allows the business to reduce the payback period of CAC.

Two Companies Comparison

Consider two digital banks Companies with the same CAC profile but with a different revenue profile. Obviously, the company with higher revenues (Company A) will generate higher profit margins, which means they break-even faster and therefore have more funds available to plough back into customer acquisition.

Breakeven Demo

Payback Period

For your digital banking business to grow profitably, you need to reduce the payback period.

The payback period is the amount of time it takes for profits to pay back the cost of acquiring customers.

The cost of acquiring a customer is an investment in the future. You need to break-even and then generate positive cash flows going forward. If you overspend on customer acquisition, you will then be forced to borrow from future cashflows to fund this acquisition. After a few cycles, this significantly starts to compound the losses and makes it harder for your business to profit.

A digital banker needs to consider the Cost of Non-Performing Loans and its devastating impact on the business. If you don’t design your digital lending models appropriately to control credit risk by selecting the right customers to lend to, your losses will grow exponentially.

4. Grow competitively by outbidding your competition while acquiring more customers.

To compete for customers, you will need to determine the Lifetime Value and its ratio to Customer Acquisition Costs.

Lifetime value or LTV is the cumulative profits generated by a customer over their lifetime, net expenses such as CoGS and CAC. The ratio of LTV to CAC informs the ease with which a company can acquire customers while remaining profitable.

If the ratio is 1:1, it is impossible to be profitable. This means you have barely broken even.

If the ratio is slightly better than 1:1, it is hard to be profitable, especially as you grow.

The sweet spot ratio is 3:1. This allows you to grow sustainably.

If you generate higher LTV: CAC ratio against your competitors, you will have key leverage needed to dominate customer acquisition channels.

Domination of Customer Acquisition Channels

Companies can dominate customer acquisition channels by Increasing the market-wide CAC of paid marketing channels by raising their own bids. For example, Safaricom can get any morning show on the radio on a day notice run their promotions. They can also outbid competitors for keywords on search engines and social media advertising. This is due to the high LTV: CAC ratio they have.

Safaricom can get any morning show on the radio to run their promotions on a day notice. They can also outbid competitors for keywords on search engine and social media advertising. This is due to the high LTV: CAC ratio they have.

5. Grow faster by offsetting churn.

Customer churn

Customer churn is the rate at which paying customers stop paying for your service. If the service is a loan product, this will have devastating effects on your business as you will lose both interest income and capital. On the transacting side, you will be left with operating expenses with no revenue.

Churn is inevitable for every product, but beyond a certain threshold, it can kill the business. As such monetization strategies have to be put in place to offset churn.

There are several concepts one needs to be aware of when dealing with churn.

1. Active User Churn

Active user churn is based on some critical in-product action. It is defined as the rate at which an active customer stops performing a critical activity in the product.

The best practice for digital banking is to link this activity to revenue. A more appropriate definition of active user churn for a digital banker would be the rate at which a user stops performing revenue-generating action.

2. Dollar Churn (Contraction Revenue)

This is the revenue lost due to existing paying customers reducing their spend, for example, they may not use one aspect of your product like payments or skip loan payments.

3. Expansion Revenue

Expansion revenue is the revenue gained due to existing paying customers increasing their spend. For example, a digital banking customer may fully use your payment channels, draw down on an overdraft, and drawdown on a term loan.

4. Net Dollar Retention

To measure the impact of churn on your digital business, you need to track Net Dollar Retention (NDR). Net Dollar Retention is the percentage of revenue retained from existing customers after accounting for customer churn, contraction revenue and expansion revenue.

An NDR of 1.0 or 100% implies that all revenue lost to churn and contraction is made up for by expansion revenue from existing customers. At that point, all revenue from new customers is channelled to the growth of the business.

An NDR greater than 1.0 accelerates the growth rate of the business. An NDR less than 1.0 slows down the growth rate leading to a tapering growth curve.



I am still on the journey of becoming an expert in monetization strategies, especially in making them work for digital banks and NEO banks. I will benefit immensely from your feedback, especially in creating monetization strategies that work in this space.

The opinions presented here are strictly my own and do not represent those of my employer.



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digital money design.

digital money design.

Fintech, Banking, Financial Services, Decentralised Finance, Technology.....