BAI Online | Banking Strategies | November/December 2007

Consumers overloaded on debt and banks helped contribute to their addiction. It's time to migrate from a transactional to a relationship focus to help families restore their balance sheets.

2007 will be remembered as a time when the excesses of consumer debt began to reach a reckoning point. The implosion of the sub-prime mortgage market and rising delinquencies for home equity and credit card loans signaled that a decade-long party characterized by cheap money, aggressive lenders and easy home equity extraction was coming to an end.

Americans now have the highest level of debt outstanding relative to income (14.3% in 2007's first quarter) since the Federal Reserve began tracking these figures in the 1950s. And these record highs were reached with interest rates at record lows. Now, with less liquidity and tightening standards in the credit markets, consumers can no longer borrow freely to maintain a feeling of prosperity. They could use a good banker to help them through this transition.

Unfortunately, banks have lost their way in the consumer lending arena. In their quest for greater volume, they've allowed customer interactions to become pure transactions as opposed to part of an overall financial relationship. This transactional focus can be easily viewed in bank branches, where knowledge of loan products and credit is minimal and borrowers have been redirected more toward call centers and indirect and Internet channels. Some financial institutions already receive more than 40% of their mortgage applications through the Web. Front-line bankers are pressured to sell loan products, but their ability to truly counsel borrowers on loan products is suspect.

Going forward, many banks would gain traction in the market by using consumer lending more as an anchor for broader retail relationships. Because banks are trusted more than other financial providers, they are uniquely positioned to help consumers better manage their credit addiction. The key will be to position the bank's front-line staff as true advocates for the consumer. Such bankers could, for example, advise customers to borrow the appropriate amount of debt for their household's overall financial plan rather than go for the maximum.

To leverage this opportunity, banks will need to shed the hard-sell sales cultures that have been in vogue for many years and instead build an "expertise-based" sales culture. Key elements include:

Strengthening the front-line staff’sknowledge of consumer and mortgage loan products and test/certify for this knowledge.
Providing simple front-line tools for loan product selection, debt consolidation and rate comparisons to improve the customer's loan experience.
Improving cross-channel capabilities for consumer lending and streamline processes so that the branch, call center and Internet channels can work together for borrowers.
Identifying and targeting specific loan cross-sell opportunities via “triggers” in customer transactions (for example, offering an automated home equity line when the customer takes out a mortgage loan).
Integrating the bank’s consumer lending business with its retail investment business. For example, how many of the bank’s licensed reps are actually selling debt consolidation loans as part of a financial plan today?

Making these changes will be difficult since short-term earnings pressures encourage managers to push the hard-sell approach. Over the longer term, however, customers will give their loyalty to the trusted advisor. As Danish psychology professor Morten Smistrup said, "The role of the banker is essentially buying and selling trust."

Mr. Williams is a principal with Cornerstone Advisors, Inc., a Scottsdale, Ariz.-based consulting firm providing best practices, strategy and technology planning services to the banking industry.