The rationale for cross sell focus in banks is not difficult to understand. It creates win-win for all stake holders- Banks get additional income, Employees get brownie points, better appraisals and Customers get access to a wider product suite at a convenient point of sale.
The research around the world seems to support this. Cross-sell is not only a cost minimiser (helps improve Cost to Income due to better channel leverage), but can also be a risk minimiser owing to no capital requirements, no servicing burden and risk-free commission in many of the external investment products
But beyond the obvious benefits, the devil is in the details. The strategic impact of ‘Own Products’ cross-sell is fairly different from the more prevalent cross-selling of ‘Third Party Products’ (TPP) like insurance and mutual funds.
Shoot and run?
Cross-selling is a well-accepted strategy across industries and a key strategic tool for diversification. But adopting this in Banks is a little tricky.
While an ITC distributor can sell No Sugar or Digestive ‘Sunfeast’ alongside Cigarettes, Banks have to be careful about of what product suite they offer. The fundamental difference is in the required level of customer engagement.
If you are selling goods, the relationship intensity is strongest during the sale transaction and diminishes over time in most cases. In banking, however, relationship intensity increases (or should increase) over a period of time. If handled with care and consistency, this engagement is what creates trust and perpetual income for banks.
Further, while distribution network is a key point-of-sale for goods, in banking, branches are primarily a point of service and relationship management. Sales is incidental although not necessarily dormant.
The banking structures are therefore attuned (or should be) to sell and serve over long periods, with focus on creating delightful experience, at each moment of truth.
TPP sales is an odd fruit in this basket. It upends this fundamental banking principle of ‘sell, serve and grow’ and moves the banks towards a culture of ‘shoot and run’.
Pound and Penny
Banking history is replete with examples of mis-selling. Pensioners being sold equity linked schemes, naïve customers being lured into buying overpriced bullion or gullible ones being convinced to invest in riskier asset classes they don’t have a clue about.
A customer expecting some sound advice on money management is more likely to end up at the wrong end of the gun of an over-pressured RM dealing with everyday insurance target.
What seems like an innocuous sales push, becomes an Achilles heel when markets crash, value of investment is depleted, and customer feel short-changed. Banks have little or no control or ability to service these products, leading to a huge mismatch between what is expected by the customer and what was offered by the bank. MFs or Insurance are simply not same as FDs and Sweep-out saver accounts.
Customer relationships nurtured painstakingly by the tellers, operations and relationship teams, may be lost to a single TPP cross-sell. A banker responding with ‘I can’t help as we are just the agents’, kills the remaining trust!
While the glitter of large commissions is blinding, it would be good for Banks to realise that TPP is not limited to leveraging channels but may also lead to brand over-leverage and dilute the core attribute of their business model -‘Trust’.
Apart from loss of trust, the aggressive cross-sell focus also causes collateral damage.
The push to achieve higher profitability creates employee stress as they grapple with aggressively selling and learning about TPP features while losing the focus on core banking products.
As AMFI certification for selling Mutual Funds becomes a life and death question for the branch Relationship Manager, he/she starts looking at customer relationships through the tainted glasses of ‘TPP potential’. The core product focus and service orientation are completely lost while encouraging a culture of ‘if you want service, take insurance’. On the other hand, there is hardly any focus in banks to keep them abreast with ever changing regulatory and competitive dynamics in their core business.
There is more. An aggressive TPP strategy may aggravate Asset-Liability mismatch in the bank balance sheets. As more and more account balances move to other asset classes, the CASA and FD balances reduce.
In short, the tactical benefit of branch leverage and additional revenue comes at the cost of strategic strengths that the banks should rather build.
Does that mean banks should not sell TPP?
Not necessarily but with due caution. Bancassurance, MF and other tie ups can be good add-ons but cannot be the core of all customer engagement.
While pursuing the customers for loans and liabilities is necessary in a competitive market, making TPP investments as a pre-condition for loan enhancements, fees and interest rates reductions, is what starts a downward spiral for the customer relationship.
Banks and supervisors should be careful about building a “How much insurance today?” culture. Over-exuberance on non-core products is a case of dancing with the stranger for too long. It may be perilous.
Amit Balooni is the Founder of FrankBanker. In his 20 years banking and consulting career, he has worked with leading banks and now advises banks globally on SME, SCF, Credit Risk and Strategy. Through his workshops, he has trained more than 2500 bankers across mid and senior levels. And continues his learning while pursuing a PhD in banking.
Disclaimer: The opinions expressed here are those of the author and does not reflect the views of FrankBanker.com