Key Message: Banks need to link their commercial and private banking/wealth management efforts. At a minimum, failing to do so reduces potential revenues. In the worst case, a bank’s inability to focus on meeting the business and personal needs of customers can result in being replaced by better organized and more aggressive competitors. Today’s newsletter outlines some of the challenges involved in addressing the personal and business needs of a client. Our next newsletter will focus on some approaches for success.
Only after starting FIC over a dozen years ago did I come to realize how intricately linked are the business and personal financial requirements of a small business. In many speeches, we have used the phrase “two pockets of the same pair of pants” to indicate how money flows between a small business and its owner. However, most banks don’t seem to understand this fundamental fact of small business life.
In addition, the numbers also suggest that many banks do not understand the size of their profit pool that is small business-related. A recent McKinsey analysis estimates that small businesses (defined as companies with up to $20 million in revenue) directly generate about $59 billion of financial services pre-tax profit. Another $50 billion results from business owner retail banking activities while an additional $63 billion results from small business employee needs. It is that $50 billion retail banking opportunity as well as the associated wealth management that banks need to pay increased attention to.
Another indication of the linkage between wealth management opportunities and the business comes from a VIP Forum report, stating that almost 50% of households with net worth of $1-10 million are headed by a business owner. Those percentages increase significantly for higher levels of net worth.
So, if the opportunity to link commercial banking and private banking/wealth management is real (it is), why do most banks either ignore or pay lip service to it?
1. Working within a siloed organization takes precedence over the customer opportunity. Depending upon the bank, Private Banking, Small Business, and Middle Market banking will report on a straight line basis to two or three different managers, each with his/her own P&L. While top management may encourage cooperation between groups, the people running those groups typically receive more of their incentive on their specific unit’s performance. While a bank’s culture should drive employees to sell as much as appropriate to a client household, compensation often is out of synch with that goal.
2. Selling to both the owner and the business greatly increases job complexity. We have found that one of the major reasons that bankers do not cross-sell is that doing so brings them into areas outside their “comfort zone.” Commercial bankers and private bankers are different: they have different backgrounds, different skill sets, perhaps different accreditations, and they look at clients differently. Expecting a commercial banker to be a private banker or vice versa is probably asking too much. As one senior banker told me, “Supermen are harder and harder to find.”
3. Bankers do not trust each other. Banks can sell both to the business and the owner by developing a team approach to the customer. For example, in the middle market or corporate areas, a commercial banker handles the borrowing and cash management needs of the client. However, bankers often avoid a team approach for one of three reasons: one, they really believe they are the best person to assist and support their clients; two, they want to maintain tight control in part to ensure job security; three, they do not trust their colleagues to do a good job for their clients.
Unfortunately, in some cases bankers may be right about the capabilities of their colleagues. If that is the case, step one requires top management to be honest with itself and upgrade the staff. Typically, however, their argument is an excuse rather than a reality.
Few people like to give up control. Doing so demands a clear positive for the client and the banker. And, in this case, dollars may not be a sufficient incentive. The risk to a referring banker (risk of loss of control or, worse, risk of loss of the client) may far exceed any monetary incentive.
Too often, top management denies this reality, but our experience (and the frank comments of our clients’ personnel) supports the view that banks need to employ a multi-pronged approach (including training, explicit culture building, incentives, job changing) in order to create a true team environment. It is hard enough for banks to effectively sell intra-organization products and services, never mind those from a division in another part of the bank.
As Stan Gregor, the new head of the wealth markets group at Wachovia wealth management, commented in a recent American Banker: “A lot of banks talk about bringing wealthy customers the best of banking, brokerage, wealth management, and financial planning and then just end up creating a bunch of independent silos.”
4. No value proposition exists. Even if the organization, compensation system, internal capabilities, and culture are in synch, the bank needs to articulate a clear value proposition to the target. We all know why this linkage is good for the bank, but why is it good for the client? Some customers are skeptical about the degree to which they wish to deepen their bank ties and tend to pigeon-hole their bankers as being good for certain needs and inappropriate for others.
Concluding Comment
Successfully linking various parts of the bank to provide a holistic approach to service client needs is difficult to accomplish. But the payoff to the bank justifies the effort. Next time we will consider some alterative approaches for making a coordinated and seamless (relatively) business/personal approach work.