Cross-Seller's Lament

By Bill Stoneman

Bank marketers have spent decades trying to boost the number of products sold per household, but progress has been slow. Is the reward worth the effort?

Edward Rawson of Ravena, New York is a cross-seller's nightmare. The 74-year-old state employee maintains his core checking and savings accounts at Key Bank, but uses a Visa card issued by North Carolina's Wachovia Bank. Responding to a direct mail solicitation, he recently took out a $7,500 personal loan from Signet Bank in Virginia. "There's no advantage to doing business with just one bank," Rawson says.

A lot of America feels the same way. Rawson's habit of cherry picking financial services illustrates the formidable challenge banks face in trying to boost the number of products sold to each customer. Likelier than not, another financial institution has gotten there first, usually by direct mail or telephone solicitation. And loyalty to the hometown bank does not count for much when customers go shopping for credit cards, mutual funds or home equity loans.

Despite a few success stories and widespread effort, national surveys suggest the banking industry is running in place when it comes to cross-selling. The number of products sold per customer has changed little over the years, and banks have not been able to recapture market share lost to tough new competitors. "The vast majority of banks talk about cross-selling, but cannot implement it," says technology consultant James Moore, president of Mentis Corp., Durham, N.C.

Though rapid improvement doesn't seem to be in the cards, bankers are redoubling efforts to improve cross-sell programs and capture potential payoffs, which could be substantial. Selling additional services to customers such as Rawson should cost less than hunting for new prospects, providing an extra kick to revenue growth and profitability. And binding customers with multiple relationships ought to discourage them from straying to competitors.

But resolve alone won't get the job done. Three vital factors must come together in an effective cross-sell campaign, experts say, and it will be up to managers to deliver on each count. The cross-selling foundations are information management, robust sales support and compelling products. These concepts are simple to articulate, but as static cross-sell ratios attest, difficult to master simultaneously.

Bankers anticipate that recent advances in information-based technology will help them learn more about customers and how to price offerings, enabling marketers to offer the right product to the right customer at the right time. But even the most accurate databases can accomplish only so much without the support of well-trained representatives who can capitalize on information in compelling sales presentations. Even then, banks must offer distinctive "value propositions," or product and service combinations that appeal to customers and nurture bank financial performance.

In short, higher levels of execution and cohesion will be required of institutions aspiring to deepen customer relationships. Managers can't afford to be lulled into a false sense of security by progress on just a few fronts.

Customer Contacts

The critical cross-selling activity takes place at ground level, where bank personnel interact with customers in myriad sales and service situations. It is here where much of the problem resides. Front-line bankers are having trouble lifting performance, while customers find it increasingly easy and appealing to assemble their own custom banking packages with "best of breed" offerings from multiple providers.

For all the talk about using data mining to hone marketing campaigns, the battle is fought at the teller window, the platform officer desk, and in the call center cubicles. Making the most of these interactions requires astute work from employees already under pressure to handle transactions efficiently.

Consultant Robert Hall estimates that customer service representatives typically make from 25 to 40 decisions a day. These actions include a variety of considerations: whether to waive a fee, suggest a product, recommend a delivery channel or even start a conversation with a customer to acquire more information.

Realistically, training bankers to leverage sophisticated customer information and size up the potential in the myriad situations is a slow process. "We act as if information plus technology equals execution," says Hall, president of Dallas-based Action Systems Inc. "But there are still a lot of VCRs flashing 12:00."

On top of this, bankers face increasingly skeptical and independent-minded consumers. Direct mail solicitations get pitched into the trash, unread. Telemarketing efforts can be thwarted by caller ID and voice mail systems.

Consumers also seem well aware of the cornucopia of choices available to them in financial services. Atlanta-based Unidex, which performs opinion research on banking issues, finds that customers increasingly compare prices on an account-by-account basis and are tending to disperse their business more widely, rather than consolidate it with one provider. More than 21% of respondents to a survey conducted by Unidex last year said they do business with four or more financial institutions. In 1993, only half as many reported their business being that fragmented.

Consumers are spreading their business around, in part, because they're comfortable with new providers and impressed with the alternatives to traditional banking products. Research by Bank Administration Institute and PSI shows that while nearly 80% of consumers use Visa- and/or MasterCard- branded credit cards, only 38% say bank sponsorship is an important aspect of card value. On another front, mutual funds have replaced savings accounts for millions of Americans, allowing branded, specialized providers such as Fidelity Investments and Vanguard to establish formidable leads in that business.

Cleveland college professor Richard Clark, for example, says bank-owned funds don't interest him, mainly because of their brief track record. Buying shares from a nonbank provider is so easy that Clark doesn't even think about checking out his bank's offerings. "I can just call the mutual fund company on the phone, get a prospectus, and send them a check in the mail," he says.

This combination of under-trained bankers, skeptical consumers and heightened competition spells frustration for bank cross-selling programs. In 1996, banks had an average of 218 product and/or service relationships per 100 customers, down 5.1% from the 230-to-100 ratio of 1993, according to figures extrapolated by FISI Madison Financial from the 1996 American Bankers Association Retail Banking Survey.

Still, such findings should be viewed more as a warning signal than a verdict. For one thing, publicly reported financial results don't reveal how well individual banks are faring in their cross-selling efforts. And some observers contend that certain survey techniques tend to overstate relationship erosion and diffusion. The ABA figures likely undercount successful cross-selling of investment services, asserts Barry Deutsch, a Ft. Lauderdale, Florida-based consultant. Deutsch, who works largely with bank-owned investment units, also says the Unidex survey may over-count the number of financial relationships consumers have by allowing them to include institutions with which they do minor amounts of business.

Tackling the Challenge

Acquisitions are one of banking's major responses to the cross-selling challenge. In buying non-traditional rivals, banks bring more of a customer's business under one roof, particularly as institutions buy brokerages, money managers and investment banks. Banks also gain name-brand products that can be offered to existing clients.

A slew of major deals have been announced this year, including Bankers Trust New York Corp./Alex Brown & Sons, NationsBank Corp./Montgomery Securities and Fleet Financial Group/Quick & Reilly Inc. Experts predict further transactions, citing banks' hefty market capitalization and eagerness to expand non-traditional business lines. Among the risk factors strategists must consider are acquisition prices and cultural integration.

Beyond that, many banks insist they are making progress in cross-selling by combining a number of techniques. For example, banks are using in-house mutual funds and brokerage units to go after the business that Fidelity and Charles Schwab & Co. have siphoned off. They're moving into the insurance arena. And they're offering incentive packages aimed at motivating front-line staff to pitch new services to existing customers.

Another approach that shows promise is bundling several features into one package, providing more value than would be found in a collection of stand-alone products. Among Norwest Corp.'s earliest and still most important cross-selling tools is a package offering a no-fee, interest-bearing checking account and discounts on loan products to customers who either maintain a combined account balance of $3,500 or remit Norwest mortgage payments electronically. Bundled accounts such as this have helped Minneapolis-based Norwest sell an average of four products per household, according to Andrew Will, director of consumer products.

While Norwest retains minimum balance requirements for its packaged accounts, Nashville-based First American Corp. is going a step further, tying customer benefits to account balances on a sliding scale. First American's Select Rewards program, introduced in October 1996, provides frequent-flyer type points for just about any business a customer does with the bank. Points may be redeemed for merchandise, travel or cash.

A savings account balance of $10,000, for example, earns 1,000 points a month, while personal loans earn 200 points a month for every $1,000 in outstanding balance. The customer gets a $25 gift certificate from Macy's for 35,000 points and a domestic round-trip from American Airlines for 380,000 points. In little less than a year, 20,000 households with nearly $1 billion in deposits have signed up for the program, a "significant" portion of that business being new to the bank, according to Brian Cooper, marketing director at First American.

In addition to innovative product offerings, bank marketers are pinning their cross-selling hopes on high-powered database technology, which enables them to move away from mass marketing to identifying needs of specific customers. U.S. banking organizations last year spent more than $1 billion on information management and data warehousing projects, according to Mentis Corp. Bankers and consultants alike say great strides in this technology make it possible to know much more than ever before about what makes each customer tick.

Data mining underlies many direct mail and telemarketing campaigns and, in time, will shape conversations bank representatives have with customers in branches or call centers. The next generation of technology will prompt branch officers or call center operators to pitch services from the moment a customer initiates a conversation. "The ultimate potential of customer information is when you drive it to customer contact," Moore says.

But effective use of data mining technology has a long way to go at most institutions. Fewer than a third of large banks can identify their credit card customers from information collected in their deposit account tracking system, according to Moore. Managers of large databases face the monumental task of cleaning up the information they possess to make sure it is accurate and relevant. Data mining is used today mainly to generate lists of customers who don't have a particular product but who possess characteristics suggesting they could be interested in that product.

Incentive Pay

Making use of all this information will require a transformation in sales cultures. For quite some time, institutions have known that they need to get employees to think more like salespeople and less like mere order takers or transaction processors. But the transition is far from complete.

Incentive pay helps at First Tennessee National Corp., where executives say the number of products sold per household has grown to 3.3 from 1.9 in 1991. Sales managers at the Memphis-based bank can earn up to 25% beyond their base pay in cash and reward incentive compensation. Tellers can boost their pay by 10% to 15%, mostly by making referrals to platform officers. A complex formula credits officers for boosting revenue per customer and retaining and signing up new target market customers, according to marketing director Paul Harless.

But such incentive programs have their limitations. A 10% bonus isn't going to make much impression on tellers making $7 or $8 an hour, says Felice Gelman, an investment manager with Keefe Partners in New York City. She says banks should think about incentives equaling as much as 40% of base pay. However, some bankers say incentives that high would create an environment in which new sales are more important than trustworthy service, ushering in a new set of problems.

With all these difficulties, a few institutions are proving that technology, sales training and product development can combine to generate substantial new sales to existing customers.

But even as the industry strives to emulate these successes, another crucial challenge remains -- making sure cross-selling is actually profitable. The problem is that the easiest cross-sales may be those in which low-balance, convenience customers are convinced to add yet another unprofitable account. These new accounts -- though they may be successful cross sales -- won't deliver profits to the bottom line. "Our numbers show that between 60% and 70% of cross-selling that takes place destroys shareholder value," says Action Systems' Hall.

All too often, campaign volume goals are achieved through price promotions and incentive pay. The true cost of opening large numbers of low-balance accounts gets lost in communication between the accounting and marketing departments. Until bankers learn to measure profitability precisely at the customer and account level and build that know-how into estimating the profit potential of each target customer, they risk cross-selling to the wrong prospects.

Such calculations don't matter much to Edward Rawson, the New York state civil servant who picks and chooses among the banking offers that fill his mailbox. But his experience illustrates how difficult it will be for banks to predict even their own customers' behavior. Ironically, even though Rawson accepted a $7,500 personal loan offer from Signet Bank, he probably didn't look like much of a credit prospect for Key Bank, where he holds checking and savings accounts. Why? Although Rawson had obtained a personal line of credit at Key, he had never bothered to use it.

Mr. Stoneman is a freelance writer based in Albany, New York.

Copyright © 2003 by Banking Strategies, published by BAI.

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