While Thanksgiving Day has yet to arrive, our clients have already begun to focus on next year’s priorities. In this year’s remaining Newsletters, we will focus on some of the key themes that are preoccupying the minds of our contacts and clients. Our first theme centers on the heightened importance of cross selling.
Cross sell is here to stay. To some observers, it seems that banks have been talking about the need to cross-sell for decades. However, senior management at the best banks is now demonstrating a clear commitment to making cross-sell work. This initiative is not going to go away; rather, it is becoming part of the fabric at many institutions.
Five years ago, our typical client could cite multiple reasons why selling across bank silos did not work. These included: lack of inter-bank communication, poor knowledge of what other groups did, separate and often conflicting P&Ls, incompatible technology platforms, and little-to-no incentive for the individual salesperson. In addition, many bankers felt that sharing “their” client with another internal group could jeopardize their relationship with the customer.
We find the best senior managers addressing each of these issues…and more. Top management is encouraging, and even demanding, cross-silo communication and product knowledge; and they are adjusting P&Ls and individual compensation to encourage and even require increased cross-bank interaction. They are also focusing on how to institutionalize a client rather than have lines of business compete over ownership.
Cross-sell starts at the top. I remember a conversation from five years ago with a senior banker in which he stated that he supported cross-sell in theory, but that his group’s P&L saw no benefit from it. Today, his bank is one of the most successful cross-sell banks in the country.
What has changed? One of the basic changes involves what management views as the available customer wallet. Given their banks’ extensive product capabilities, executives know that they can serve virtually all the business and personal needs of their customers. Nevertheless, share and customer penetration assessments have focused on “does business with,” loans, deposits, and little else. Management knows that, typically, the bank is not aiming its full range of resources at the customer.
Further, the investor marketplace now plays an increasing role in spurring their focus on cross-sell and internal collaborating. Wall Street demands growth and some of the recent pillars of bank earnings (mortgage refinancing and the carry trade, among them) have disappeared or are unreliable for the future. If they are to make the numbers that the investment community requires, most banks have no choice but to emphasize core earnings growth. Selling deeper into current customers seems to be one of the greatest potential opportunities for doing so.
Even more important, the way bank employees approach cross-sell has changed. The banker of the past who dwelt on the agonies of cross-border cooperation has yielded to the banker who understands the economic power of increasing wallet share. This manifested itself most remarkably in the recent comments of a senior executive who works at one of the hardest charging and, traditionally, silo-based banks in the world. In discussing an intra-bank issue, the executive said, “We’ll do what’s right for the customer and figure out the [internal] compensation later.”
The internal environment supporting cross-sell activity has changed. While, years ago, bankers may have been at risk for promoting cross-sell, going forward they will be at risk if they do not do so.
Compensation will drive change. We cannot ignore the critical role that a well-aligned compensation structure plays infueling the cross-sell engine. Leasing provides an excellent example of the breaking down of silos, and the role that compensation plays in doing so. Until recent years, close cooperation between the middle market bank and the leasing area rarely existed. We recently completed the 2004 State of the Industry Report for the Equipment Leasing Association, and this year’s report shows a significant increase in leases generated by bank-owned companies.
Last year, banks generated almost 44 percent of leasing volume, up from 28 percent in 1999. One of the major factors driving that share growth rests on the close working relationships between traditional RMs and leasing specialists. In several cases, banks have changed compensation so that RMs are personally indifferent between selling a loan or a lease. In other cases, banks have shifted incentives to favor the leasing product because of its higher profitability. We see similar changes in other key areas, including Wealth Management and Consumer Banking.
Concluding thoughts. The big banks appear to be more focused on cross-sell than many smaller banks. The big players can leverage the depth of their product capabilities and, increasingly, operate with a sales discipline that permeates the bank. Larger players will continue to improve their cross-sell execution; small banks need to create a sense of urgency to address this growing threat to their relevance.