When it comes to integrated investment products, banks are moving to catch up to the brokerage industry.
Most banks are jumping into the investment product industry for the same driving reason: They want to defend, retain, and expand their relationship with their customers, particularly their high-margin affluent customers.
Banks want their customers to shop at the bank for all of their financial needs, including spending, savings, and investments, and they want customers to know that the services were brought to them by the bank.
Integrated Product Line
Just as in any retail setting, a complete product line spells survival, and shelf space is limited. Banks have recognized that investment products are critical to this survival mix, and that the bank's house brand has to compete with all the other brands for shelf space.
A logical way to respond to this reality and to reinforce the key messages the consumer is for banks to provide integrated investment products, By integrated we mean composite products that combine the benefits of traditional bank products (such as unlimited check writing, credit or debit access, and local convenience) with the performance benefits of investment products,
Consolidated statements, ATM access, and local bank branch locations sound like a winning set of ingredients.
And ATM access and checks cut from your own bank account certainly link the investment program to the bank in the mind of the consumer. And to it the obvious logic of promoting your bank's own brand of investment product (if you have one), and you're building assets in the proprietary program.
With all these positives, why have so few banks co me to market with these integrated programs?
Our research indicates that the prevalence of these programs is surprisingly sparse.
In a recent survey of 51 randomly selected banks (ranging in size from total assets of $250 million to over $200 billion and evenly dispersed throughout the country) only 22% offered ATM card access to investment products, only 5% offered debit cards, and only 41% currently offer or plan to offer consolidated statements.
But fully 94% of the responding banks offered some type of investment product.
At the same time, every responding bank cited its mounting concern about the disintermediation they experience to their competitors, especially the well-known brokerage account equivalents.
Not only are deposits fleeing the bank, but whole customer relationships are lured away in the quest for convenience and the performance delivered through an integrated cash management product.
And the customers who leave are, in all likelihood, precisely the profitable high-balance commercial, retail, or trust account the bank wants to keep most.
The constraints to banks' offering integrated products are numerous, but are surmountable over time.
First, the bank investment product is still in its infancy, and it is developmentally correct that its product offerings be straightforward and relatively simple.
From an organizational and technological standpoint, a bank-sponsored integrated investment product presents a Herculean task of interdivisional coordination.
The retail area of the bank that controls the deposit-based products is rarely the driver of the investment product line (which typically is managed by the trust side of the bank).
The systems used to support the deposit base versus the investor base were built separately and were not designed to interface.
Lastly, the regulatory environment has driven a wedge between the sale of an investment product and a deposit product insured by the Federal Deposit Insurance Corp., making the packaging and promotion of an integrated composite product a delicate balancing act replete with cumbersome disclosures.
But the outlook is promising. Consumer research indicates that one-fifth of all households would be likely to open a bank-sponsored brokerage lookalike product, with the number even higher for affluent households.
If banks charge the same average annual fee of $65 for the account that brokerages charge, it represents a $1.2 billion annual fee base to the banking industry - and that's just the account charge.
Add to it the opportunity to maintain customer relationships and cross-sell other bank services, plus the commissions associated with investment product sales, and you are looking at an industry potential that cannot be ignored for long.
Already we see banks gearing up in small, but determined, ways. In our survey, 24% of banks with proprietary programs have plans to offer ATM access.
It is inevitable that as the bank investment industry matures, and the shelf becomes more crowded with products, banks will need to seize the opportunities to differentiate through the creative packaging and effective marketing of these integrated products and by using their vast distribution channels and breadth of product capabilities wisely.