It's common knowledge that it’s easier and cheaper to sell to existing customers than to attract new ones. However, according to studies that I conducted at two major banking institutions, many cross-sell efforts result in little or no improvement in customer profitability.
There are two primary reasons for this. First, most banks do not have an effective way to accurately track “new-to-the-bank” funds. Typically, sales staff receives credit for new accounts opened and the bank projects value based on typical account balances.
But this does not account for the significant money churn between existing accounts. My analysis at one large financial institution showed that, depending on the deposit product type, between 25% and 79% of funds into newly opened accounts came from deposits already in the bank. For example, it’s pretty easy to switch account types, say, from one type of savings into another type of savings or one certificate of deposit (CD) term into another CD term, or open accounts for new family members by using existing account balances. Churn is less but still significant at 25% to 30% for brokerage accounts, non-auto direct loans or home equity credit.
Another reason that cross-selling may be ineffective is that projected balances or anticipated account activity may not materialize. New checking accounts usually start with a small balance and grow over time as the relationship builds, or as new customers wind down accounts at their previous financial institution. However, sales staff may inadvertently receive incentives to generate account volume, “widgets” rather than value because of product configuration, deficiencies in tracking capability, or both. For example, free checking – a product that many institutions have now discontinued – was so easy to sell that the overwhelming majority of new accounts opened at most banks was “free.” The number of accounts grew dramatically, but balances often did not follow.
Here are five strategies for making cross-selling more profitable:
Put the right metrics in place. In our experience, bank employees want to do right by the customer and perform to management expectations. But, as management guru Edwards Deming famously said, “You can expect what you inspect.” If you expect account balances to start small and grow rapidly as customers consolidate funds from other institutions, but only measure new accounts, then your sales staff will focus on new accounts.
Changing measurement and staff incentives from account “widgets” to new households and new-to-the-bank funds can have a dramatic impact. One client, a $3 billion financial institution, reported its greatest core deposit growth in five years after establishing an automated system to track the source of new funds, which enabled them to provide metrics to branch staff and align incentives with the bank’s strategic goals.
Alternatively, if there is no immediate way to measure source of funds, then don’t wait. Work with what you have while continuously improving your methodology. The key first step is to understand the size of the problem. How many new account balances are cannibalized from other accounts and how many new accounts don’t meet usage or balance expectations?
For example, conduct quarterly measurement of financial performance by customers who opened new accounts vs. a control group of households which were not cross-sold but started with a similar product mix. Look at balance and fee changes over time at the household level.
Householding capabilities are required to fully measure the impact of cannibalization since money often shifts across members of a household. Even if householding is not available, a partial measurement can be made by evaluating the client level rather than the household level.
Create open dialogue to determine what can be changed to the benefit of both the client and the organization. Measurement alone does not change behavior. Once you have identified the size of the low value cross-selling issue, enter into conversations with sales managers and sales staff about the problem and involve them in the solution. This will help employees understand that at least some of their sales may not be in the best interest of their clients, the company or themselves.
Make these conversations a two-way street. After all, some cannibalization may be a good thing for the client. For example, clients can earn higher interest rates on CDs rather than saving accounts. It’s important to reach consensus on when it is appropriate, or inappropriate, to open new accounts by shifting balances from an existing account. Establish rules of the road as guiding principles, and then reinforce those principles over time.
Even if the desired data is not available, conversations about “good” sales versus “bad” sales can be a beneficial exercise. These dialogues can provide a framework for dealing with clients in ways that balance the needs of the client, the employee and the organization. Setting these expectations will help move the organization to a higher percentage of profitable sales.
Change incentives to align behavior with strategic goals. Once tracking systems are in place, sales incentives should be changed to favor new money generation rather than new account generation. These systems need not be complex. For example, product activation tracking is relatively simple and only requires defining minimum new product usage goals by product, sales person or sales team.
Changing incentive systems is never an easy prospect. However, a focus on more profitable accounts can lead to big dividends for the organization. Getting buy-in from the sales staff requires sharing the initial measurements and demonstrating how the new incentives can be more desirable for both the sales staff and the organization, while serving the best interests of the client.
Identify real needs by client and sell to those needs. Understanding the needs of each client, or at least targeted clients, will ultimately lead to a win/win for the bank’s customers and the organization. There are two general ways to do that and they can be used in isolation or in combination.
First, create a framework for discussing financial needs with your customers and reinforce this process so it is a regular part of every client interaction. Since many clients prefer to consolidate their relationships with one institution, the first place to start is by determining which products are held elsewhere and asking them to move their significant relationships. Many clients would be motivated to do so in order to simplify their lives. Relationship pricing can help motivate the client further. Refine your sales and service interaction so that you consistently ask about upcoming major life events such as buying a home, selling a business, retirement or marriage. Those events lead to new financial needs which can be discussed with the client. Finally, ask about their major financial concerns, such as having enough money for retirement or improving their credit rating.
Second, implement analytical approaches to identify the best and most profitable sales opportunities by client. These opportunities may then be shared with the front line via existing systems. If handled correctly, these tools will create client interaction and uncover untapped value. The concept of prospect lists, or “next best product” predictive analytics, is not new. Nevertheless we are constantly surprised at how many banks – large and small – do not use them, or do not use them effectively.
Change policies and procedures that encourage unprofitable selling. Once the degree of sub-optimal cross-selling has been sized, it pays to review policies and procedures to determine if changes are needed. Are you making it difficult for your front line staff to “do the right thing”? Do product parameters limit taking the right actions for the bank and the customer? Are documentation procedures making it hard, or simple, to take actions needed?
After the analysis is done, incentives are changed, and sales processes modified, then don’t let “we can’t change policy” get in the way.
Mr. Hartfeil is a senior consultant at Austin, Tx.- based Peak Performance Consulting Group, which specializes in community and retail banking strategies. He can be reached at firstname.lastname@example.org.