“Replace Fee Income with Free Checking.  Really”

I had to read the above headline several times to ensure I wasn’t misreading it.

As a long-time advocate for free checking I was initially stunned by this headline.  Even more shocking is that it appears atop a June 22 article on the American Banker website.  It was written by John Rountree and Scott Kluge – principals at the Cambridge Group, a growth strategy consulting firm.

Just when I thought the much aligned free checking account was on the ropes, it finds its way back into the ring to go another round.

The gist of the article is quite simple – instead of relying on elusive fee income, the future of consumer banking depends on the successful implementation of the financial supermarket strategy.  You know – offer a wide variety of products and services and make sure your customers have and use as many of them as possible.

To ensure success, your employees must focus on cross-selling to drive revenue while enhancing customer “lifetime value.”

Now here’s where it gets really interesting.

The authors believe that the most effective approach to initiating this new strategy is by using free checking as the “carrot” or incentive to begin the customer relationship.

Wow!

I couldn’t agree more.  In fact, many community banks came to this realization in the early 1980s with the introduction of the turnkey High Performance Checking marketing campaign built around Totally Free Checking and a Free Gift Too!

Totally Free Checking self-mailer from the early 1990s

Apparently, thanks to Rountree and Kluge, the idea that free checking has mass appeal has finally come full-circle.

Unfortunately, while I applaud their recognition of the role of free checking as the best incentive available, I am skeptical about two major pieces of their recommendation:

• I have my doubts about the ability of most community banks and credit unions to implement a successful cross-sell program to drive revenue.

• I don’t fully buy into their comment that “It’s common knowledge that consumers with multiple accounts with one bank are typically more profitable than consumers with only a single checking account.”

Cross-selling

With the exception of the manager, branch personnel tend to be the lowest paid people working at the bank or credit union.  Yet, they are expected to have total product knowledge, have outgoing personalities, and possess exceptional selling skills.  I believe that most people hate selling as much as they hate public speaking.  Your bank or credit union can spend all sorts of time and money training branch employees to sell and most of them will continue to dislike selling.  They hate rejection and hate that “pushy” feeling they get while selling.

Think about it – most of us dislike a pushy sales person.  We dislike the hard sell.  Turning branches into cross-selling havens will require hiring a totally different type of employee – one with selling skills who loves the challenge of selling.  These employees don’t come cheap.  And I don’t believe incentives work on unmotivated people.  And I can’t imagine turning part-time employees into successful cross-sellers.

Establishing a successful cross-selling environment in your branches is, at best, a chimera.

The Fallacy of Multiple Account Profitability

During the mid-1990s I came across one of the best articles ever written about cross-selling in the banking industry.  It was based on consulting experience and research conducted by one of the nation’s premier management consulting firms.  I can’t remember if it was done by Bain & Company or the Boston Consulting Group.  To this day, one of my biggest regrets is losing my copy of this article.

It was one of the findings that grabbed my attention – searing itself into my memory.

What the consultants had discovered is that just because a banking customer has multiple accounts, he or she isn’t necessarily more profitable than those customers with fewer accounts.

Often, what happens is that customers are cross-sold to the point where the next new relationship actually lowers customer profitability.

When you think about this in the context of customer behavior at your bank, you quickly realize it can easily be true.

One great example is the equity line of credit.

Some customers open a HELOC for emergency purposes and never use it.  That emergency never comes along.  Others establish the line for a particular purpose and spend the next few years paying down the balance.  At some point it becomes an inactive, zero-balance account.  Too often HELOCs are sold to customers who really need an equity loan.

Regular savings accounts are also problematic.  Have you ever taken a close look at the balance distribution for savings accounts at your bank or credit union?  Many of them are low-balance accounts with some number being inactive.

How much revenue is generated by certificates of deposit?

Aside from fee income, the three biggest revenue generators these days are all consumer loan products – mortgages, auto loans, and credit cards.  The fact that consumers can get all three from a wide variety of non-bank sources makes cross-selling these relationships extremely difficult.

And a credit card portfolio isn’t a guaranteed source of revenue – particularly for community banks and credit unions with small portfolios.  You have a number of low-use and inactive accounts and many customers who never revolve a balance – not to mention delinquencies and charge-offs.  For the most part, successful credit card portfolios are an economy of scale issue.

One of the downsides to an aggressive cross-sell environment is that some consumers will finally relent, opening an account that is seldom, if ever, used.  Such an account has a negative impact on revenue.

Bottom line – you simply cannot assume that a multiple-relationship customer will be more profitable than one with a single high-balance auto loan or a huge mortgage.

When it comes to cross-selling in the branch, there’s a fine line between effective cross-selling and aggressive cross-selling.  Based on comments from at least two people who bank with Wells Fargo, this bank crossed the line a long time ago.  Almost every interface, no matter how mundane, now includes an often unwelcome sales pitch.

Perhaps a mega-bank like Wells can get away with this – I doubt a community bank or credit union can.

Personally, I’m tired of hearing about Wells’ great cross-sell ratio.  I’m sure it comes at great expense to customer loyalty.

Historically, banking was not a sales environment.  It’s tough to change peoples’ attitudes toward, and perceptions about, consumer banking.

On the other hand, I’m really excited about the prospect of the return of free checking as the most effective incentive for attracting new customers.

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