Key Message: Effectively linking Private and Commercial Banking requires setting a unified strategic direction and then tirelessly implementing the key tactical requirements for success. The roadblocks to success are significant, but the payoff is greater: high returns, a much “stickier” client relationship, and strong barriers to competitive inroads.
In our last newsletter, we discussed why banks should consider combining their private and commercial banking efforts, and we discussed some of the reasons most fail to do so. In short, reasons for doing so include strong linkages between the personal and commercial needs of many small and mid-sized business persons, the high financial services revenues they offer, and the opportunity available to banks to leverage off their business-based client relationships to generate increased fee business.
While the opportunity is real, most banks fail in this cross-sell effort. As detailed previously, factors contributing to failure include: most banks’ siloed organizations, lack of banker knowledge and “comfort” with private banking, poor intrabank trust among employees, and the lack of a meaningful value proposition.
Given both the attractiveness of the opportunity and the difficulty in turning it into reality, what practical actions have other banks taken to link these businesses successfully?
1. Determine the value proposition. Understandably, banks want more of most customers’ business; increasingly wallet share has become a key profit driver, particularly in this slower growth environment. However, in most cases, banks fail to provide the customers with a compelling reason for bringing more business to the bank. From the customers’ perspective, it is easier than ever before to disaggregate their purchasing decisions.
In trying to attract the personal business of a commercial client, banks can leverage/combine three or four “offers”, such as a relationship emphasis, a lower cost on borrowings or higher interest rates for excess funds. They can also link the personal and business offer to increase household share. While being in the ball park regarding pricing will be critical, most banks either cannot be or will want to avoid being a price leader. There will always be another player offering a lower cost, and competing with alternative providers such as ING is simply unrealistic for most.
The most successful players in offering personal services to commercial customers emphasize the relationship provided by a banker and the bank’s ability to assist the owner and his/her company with key financial services requirements, whether investments, financing, insurance, or advisory. As with other markets, with private banking they segment their products, delivery channels, and pricing based upon the specific target group.
Some banks have pioneered by providing clients with a banker who can handle all their needs whether personal or business. (Note: many banks say they do this, but few follow through.) Obviously, that lead banker relies on a team-based approach to meet those needs and a strong technology platform to allow for transparency between people and channels as well as quick access to client data. To make this work, the bank has to attract and retain very good professionals.
2. Change management. Banks wishing to link private and commercial/small business banking also need to link together the employees of those groups. How can you do that? One client bank appointed a very successful and respected commercial banker to serve as the head of its wealth management unit. Frankly, in many cases that would be a recipe for disaster (“oil and water”). In this case, the person chosen was sensitive to the culture he was entering; he knew what he did not know (that is, private banking and wealth management) and worked with his private banking professionals to gain the required knowledge. Critically important, he also had the full support of senior management to make the required organizational and staffing changes.
The executives leading commercial and private banking need to act as a team with team-based metrics and rewards.
3. Change people. One of the reasons that commercial bankers do not cross-sell private banking is that they do not understand the product set and do not trust their colleagues in the private banking area. Banks can address the “understanding” issue by, to the extent possible, simplifying the product set, streamlining processes, and creating organizational and incentive linkages between the commercial and private bankers.
Regarding the distrust factor, unfortunately, all too often we find this concern has some legitimacy. As noted above, banks need to ensure that they attract top private banking players, not those who think working for a bank offers a less stressful existence. In our experience, the banks that have generated the greatest success in private banking have significantly upgraded staff. Not only do the private bankers need to satisfy the needs of the end customer, but, in addition, they must view the commercial banker as their key client and respond to them in kind.
We have witnessed situations in which the private and commercial bankers fail to communicate or, even worse, compete for the same business. Management has to step in whenever this situation exists; the reality is that too often they look the other way.
4. Change compensation. Typically, commercial bankers are inadequately incented to pursue private banking opportunities. Most banks continue to be loan-focused; those with more sophistication have broadened their emphasis to include deposits, cash management, and a few other areas. All too often, the compensation plans continue to downplay private banking and wealth management despite its high returns and strong growth potential.
Yes, it always seems to come back to compensation as a critical factor. But, that makes sense, doesn’t it? Ultimately, banks want to develop a culture in which cross-sell is second nature. In most cases, enhanced compensation is a key part of making that happen.
Concluding Thought
Not all small business and commercial banking players have the capabilities or interest to pursue a private banking opportunity. However, those that succeed in doing so will create a profitability leadership position that competitors will both envy and be unable to replicate.