What Banking is Not 2: Cross Sell of Third Party Products

Banking is Not Cross Selling





Banking System

Over the years the gap between what banking ‘is’ and what banking ‘should be’ has widened. If you are a purist, you would consider banking as a money intermediation business involving taking of deposits and providing loans. As a corollary, you possibly expect the banks to facilitate money transfers, provide fair lending rates and sound advisory on matters of money.Banks are expected to act as a custodian of public trust and any economic structure relies much on its banking institutions.

However, Banking has ‘evolved’ much beyond the classical definition. Today, banks sell Insurance, IPOs, Mutual Funds, Gold Coins and if you understand the way Retail loans are marketed, they possibly also sell or significantly influence the sales of Cars, Bikes and TVs. Ever met an overzealous finance canvasser at an electronics store? Some banks even have market-places selling mobile phones and everything else. In short, banking is no longer a simple deposit-loan-remittance business. It’sturned into an intermediation play- Intermediation of almost anything where money changes hands!

The temptress: Leveraging channels?

      Tactically, there is a compelling case for banks to sell third-party products (TPP) – existing branch network can be leveraged, with minimal incremental cost, high fee income (sometimes upwards of 30%), no liability or risk and no long-term service commitment. Why shouldn’t a bank ask its Relationship Manager (or even Teller) to cross-sell?

Nor is leveraging distribution channels unique to Banks. It is common for companies to leverage their channels as effectively as possible. For example,ITC, a USD 9Billion (INR 60000 crs) Indian company, has in the last decadediversified into new product categories like Foods and Toiletries, leveraging the strength of its Cigarette distributionchannel. Although cigarettes still contribute 80% to its revenue, it has been able to acquire market share and build new brands in each of these categories.It is also common to see bundled offerings in electronics, with either freebies or discounted offerings say a discounted headphone with laptop purchase or a Samsung storeselling mobile phone accessories of smaller brands. So,aren’t banks justified in following this ‘best practice’?

There are two moot points. Firstly, the diversification with own products or related components/accessories isn’t the same as selling competing or non-complementary third-party products. Secondly,how goods are ‘sold’ isn’t the same as how services are ‘provided’. In goods, the distribution channels are often outsourced and do exactly what they are expected to do – distribute, as optimally as possible. In banking services,it’s a bit more complex, wherepoint of saleis also point of service and relationship management. Customer engagements need to be direct and can’t escape what they tell and sell.

Banking isn’t tuned to sell TPP

           Bankingis possibly the only sector where the flow of transaction works in reverse. While the sale of a phone leads to an inflow for the electronic store, in contrast, selling a loan productculminates into a pay-out by the Bank. Even the inflows received by banks through ‘sale’ of liability products, like Saving accounts,are for ‘custody’ and do not lead to completion of sales cycle/transaction.

There is more to this. In goods, profits accrue as soon as the payment is made for the purchase. Once a good is sold and payment made, the transaction is practically over. In banking, however, once the ‘sales’ is done, of either the liability or asset product, the relationship begins and profits accrue over a period of time. Profits correlate more to level of service, with less weight on how the product was distributed.

In short, a new sale in banking leads to increasing intensity of relationship, while for goodsthe relationship diminishes over time.

The banking structures are thereforeattuned (or should be) to sell and serve over long periods, with focus to create delightful experience at eachmoment of truth. Every time a customer has a transactional or service requirement or issue, he/she reaches out to bank for resolution. If handled with care and consistency, this arrangement creates trust, sometimes blind trust, on banks.

TPP sales is an odd fruit in this basket. It upends the fundamental banking principle of ‘sell, serve and grow’ to ‘shoot and run’.

Wrong fruit: Don’t eat the apple

           Imagine a situation where a customer relationship built over a long period of time is pursued for buying a third-party product. In the event this customer has a service requirement or faces a challenge in TPP, all that the banker can do is say ‘we are just the agents’. Banks have no control or ability to service. This leads to a mismatch in what is expected and what is being offered,causing loss of trust.

Banking history is replete with examples of mis-selling. Pensioners being sold equity linked schemes and gullible customers being made to invest in riskier asset classes they don’t have a clue about. These customers seek and expect right advice on money matters. While it seems innocuous at the time of sale, when markets crash and the value of investment is depleted, there are no answers a bank can provide. FDs and Sweep-out saver accounts are simply not same as MFs or Insurance.

Banks in India have drawn flak for selling overpriced bullion to naïve customers. Since banks try to maximise the margins with increased intermediation, the prices generally tend to be higher.

While the glitter of large commissions is blinding, it would be good for Banks to realise that they are not only leveraging the channels for selling TPP but possibly exploiting their own brand and diluting the strong attribute of ‘trust’. All this to their own peril.

The moral of the story is what Adam and Eve learned the hard way. Don’t give in to the lure of serpent (large commissions, easy money, leveraging branches and staff) and be thrown out of Eden (customer trust, retention and service orientation). Instead focus on strengthening the relationship by delivering products where the bank has absolute control on the entire customer experience.

The other costs

              Apart from loss of trust, the heightened cross-sell focus also causes collateral damage.

Push to achieve higher profitability creates employee stress as they grapple with selling and learningthe nuances of non-core products while remaining oblivious to the changing product, policy or regulatory framework pertaining to core offerings. Till recently, qualifying the exam for selling Mutual Funds was a key requirement to be in the role of a branch Relationship Manager in many banks. It is obvious that this creates a tendency to measure customer relationships through the tainted glasses of ‘how much is the TPP potential’. This in turn implies priority service for customers with high cross-sell at the cost of ‘normal’ customers.The core product focus and service orientation arecompletely lost, sometimes even going to the extreme of ‘take insurance to get service’ attitude.

Not to forget the Asset-Liability mismatchan aggressive TPP strategy may cause on the bank balance sheets. As more and more account balances move to other asset classes being cross-sold, the CASA and FD balances reduce. Putting axe on your own foot?

In short, the tactical benefit of branch leverage and additional revenue comes at the cost of strategic strengths that the banksshould build.For a bank looking at long term, these Bancassurance, MF and other tie ups should, at best, are at smaller add-ons and not a strategic diversification or value add. For the myopic, over-reliance on these may be the case of missing the woods for the trees. Or may be missing even the trees, for the fleeting golden swan in the


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