With consumer lending contracting, banks need to focus on bundling products and trying to deepen every customer relationship, according to consultant Bill Handel.
“What becomes essential for every financial services company is the focus on share-of-wallet,” said Handel, vice president of research and product development at Raddon Financial Group, a consulting firm based in Lombard, Ill. "Deposit growth is available, but loan growth is not.”
Handel spoke October 19 during a session at BAI Retail Delivery 2010 in Las Vegas entitled “Why the Time is Right for Relationship Pricing and Product Bundling.” He was joined by Daniel Tuccillo, a senior vice president at Pittsburgh-based PNC Financial Services Group Inc.
Handel presented Raddon research indicating that, on average, 60% of all the relationships at a bank represent only one product. “That is a number that really needs to be reduced,” Handel said. “Banks just can’t continue to support that type of thing.”
The average financial institution these days holds anywhere from 28% to 32% of a customer’s wallet, defined as products including checking, savings, certificates of deposit and money market funds, according to Handel. The definition includes consumer loans and equity lines of credit but excludes first mortgages, he added.
“Banks need to think more creatively about how to improve the share of wallet,” Handel said. “Your mantra should be, ‘If I’m at 30%, how do I get to 33% or 35%?’ If you’re at 35%, it should be, ‘How do I get to 38% or 40%?’”
Handel described the checking account as the key product for growing wallet share because it generally makes the issuing bank the customer’s primary financial institution and serves as a gateway to other products. For example, of those customers who possess a checking account and direct deposit services, 72% identify that bank as their primary financial institution, he said.
Handel cited PNC as one of many major banks now putting top emphasis on growing wallet share in its retail banking unit. He said PNC’s strategy, in part, relies on tiered pricing, where free checking begins as a plain vanilla offering. At the next level, dubbed “Performance Checking,” customers are required to hold an average monthly balance of $2,500 or pay $15 a month but receive additional benefits, such as tiered interest, higher rates on select CDs, free traveler’s checks and free stop-payment orders.
Banks also need to use other delivery channels to build wallet share, Handel said. That could mean, for example, targeting Gen Y customers with an incentive to use electronic statements, which instantly raise the profitability of accounts or offering incentives to encourage use of a signature debit card, which also can contribute significantly to an account’s profitability.
“You’ll have the coupling of debit card activity with the account as a way of paying for the relationship,” Handel said. “You are going to have all those types of channel pieces as part of the packaging. It is going to be a different type of environment.”
One caveat for relationship pricing and bundling strategies is that banks need to make sure there is a good cultural fit within their organizations, Handel added. Banks that have built a reputation based on free checking might need to take a gradual approach. “It has to fit with the brand,” Handel said.
Banks also need a technology platform that can accommodate complex tasks related to tiered relationships, with the ability to handle multiple products and conditions. “You have to be agile with the technology,” Handel said. “If you are out promoting something – but you don’t have the technology to deliver – it can all fall apart.”
Mr. Keenan is a freelance writer based in Brooklyn, N.Y.