Everyone has something good to say about cross-selling.

The popular view is that increased cross-sales, or selling more products to the existing customer base, is a key to higher profits.

Lately, however, industry experts say there is no correlation between cross-sales and higher profits. Some customers who purchase more products from their banks may actually contribute lower average profits than single product users.

The fact is that cross-selling in and of itself is neither a positive nor a negative. More of a "good" customer's business is highly desirable, while more of a "bad" customer's can destroy a bank's value.

Most bankers will agree that the costs of acquiring new customers are exorbitant, often in the range of $500 to $2,000 for a retail customer and significantly higher for a commercial account. On the other hand, selling more products to the current customer base spreads acquisition costs over several product areas, increasing the margin on any new products sold.

The conflicting view of the value of cross-sales results from a quantitative analysis of the profitability of relationships at several banks. That analysis suggests that, on average, customers using four or five products do not contribute higher profits than those using one or two. Although the conclusion is surprising, it is easily explained.

The branch has been the primary channel for cross-selling in the retail bank. Platform staff and branch tellers have been charged with offering credit cards or overdraft protection to checking customers who visit the branch. While that strategy undoubtedly increases cross-sales, it also increases the number of products used by customers who are relatively high cost.

Cost analyses indicate that the branch is the highest-cost service channel in the retail bank. With the increased popularity of automated teller machines, telephone banking, and now PC banking, many customers have discovered ways to bank that are quicker for them and lower cost to the bank. However, since cross-selling has been largely branch based, at many banks these more sophisticated customers are typically ignored (or at least not successfully targeted) by cross-sales efforts.

Historically, many consumers have perceived a convenience in dealing with fewer, and often only one, financial services providers. But in the last few years, changes in the industry have begun to shatter that perception. More consumers are spreading their accounts among several banks and nonbanks in search of the "best deal" for each product.

Consumers, both individuals and businesses, are now more likely to go to a mutual fund company for investments, an insurance company for risk management products, and a finance company for credit. That often leaves only deposit/transaction products firmly with a banking industry that remains in control of the payments system.

The solution is not to abandon the goal of increasing profits through cross-sales, but to reengineer, in the purest definition of the word, the process of cross-selling.

An end product of such a process will include information systems that capture relevant customer information.

While many banks are now developing information systems that go beyond the traditional customer information file, few have taken the next step to develop effective marketing tools that take advantage of the full potential of cross-sales.

There are several problems with developing such a system. First, its value depends on the support of many individuals to maintain the information it provides.

It is no surprise that the information in most banks' customer files is inaccurate or out of date. There is little incentive in most institutions for account managers to maintain it. In fact, rarely do account managers (or business units) receive revenue credit for the sale of another bank product to the customers they originated. As with much change management, the secret to success is in the compensation.

Cross-selling at banks today is often a disorganized, inefficient process of sporadically swapping incomplete or inaccurate information. Little or no reward exists for contributing time or information, and at the same time a significant risk exists of being burned by relying on bad information from other internal sources.

In order to reap increased profits from cross-selling, banks must change their cross-sell process so that it is coherent and easy to use, and provides recognizable benefits in contributing vital background information and making the sale.

Mr. Wendel is president and Ms. Warner is an associate of Financial Institutions Consulting Inc., New York.

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