A new kind of private banking, focused on integrating services to affluent customers, is being launched by more leading banks every day.
These banks realize the strategy is not rocket science. But the hard part - crucial for their success - is doing it right.
In the 1980s, product-focused profit centers became fiefdoms that served the banks, not the customers. But that system won't work in the 1990s.
In the last decade or so, many banks enjoyed handling the credit-driven needs of the baby boomers. Unfortunately, these banks also grew accustomed to waiting for sales to walk in.
New Breed of Customer
This laissez-faire approach to sales will fail in the 1990s. Customers' needs have changed, and banks must, too.
The largest generation in U.S. history is less interested in buying things and more interested in investment options - to save for retirement, college bills, and a buffer against the unstable economy, among other new goals.
Now that the baby boomers have accumulated more money, they have more power to dictate terms. They need to be sold to.
Banks must undergo a major cultural change in how they operate. They must change how they measure success, must learn how to really sell - and must integrate.
Pulling It Together
As Michael M. Cassell found as executive vice president and officer in charge of private banking at Manufacturers Hanover:
"Organizational integration facilitated the bank's ability to respond more readily to the evolving . . needs of the individual, thereby enhancing profits for the institution."
Linking transaction and credit products, investment products, and trust and fiduciary products lets a bank focus "without organizational distraction" on the customer's changing needs, he said. With prompting from technology, "the appropriate need-driven products may be delivered at the proper time."
A Growing Trend
A movement toward integration started about five years ago. But blending departments to serve customers better has picked up momentum in the past two years, as more banks have seen the success they can have with this strategy.
A bank in the Southeast with strong leadership integrated last year. It already has experienced a fourfold increase in referrals and revenues.
Furthermore, disintermediation - widely feared as an effect of this sort of integration - has been no real problem for this bank. In fact, disintermediation has become a specific strategy, because of the greater profitability and growth in fee income.
As managers analyze their most profitable areas, they keep finding that private banking credit, trust, and investment management services offer superior returns. Customer-focused, integrated marketing can accelerate the growth of these services.
At any given bank, approximately 10% of the customers can be classified as affluent - people who earn $100,000 a year or have net worth of at least $500,000, excluding a house.
This segment of the population is growing quickly. But until recently, banks had been slow to capitalize on that growth. They haven't cross-sold aggressively enough.
For every 100,000 customer households a typical bank serves, it is losing to competitors more than $20 million a year in potential private banking revenues. Unless new strategies are adopted and implemented right, those losses will continue.
With a focused, well-organized effort put together soon, a bank should attract from its own affluent customers at least two-thirds of the tens of millions of dollars it is currently missing.
CEO Clout Needed
But most banks fail to profit from that potential because of four barriers.
The first is lack of awareness by many CEOs of the importance of integration.
Richard G. Scheide, a senior consultant at our firm and a former executive vice president at Bank of New England and Fleet Financial Group Inc., says that without a mandate from the top, individual departments protecting their turf will not respond with the needed effort.
CEOs who promote integration, get involved in selling, and refer clients to private banking services will quickly convince other employees that the bank is dedicated to the new strategy, Mr. Scheide says.
No Time to Dawdle
The second barrier to success is that leading bank and nonbank competitors are moving so quickly that there is no time for extensive analysis before acting.
Many chief executive officers are used to exhaustively analyzing new developments and studying other banks as models.
But now, waiting can cost millions of dollars that can never be recouped. Leading banks and nonbanks are busy gobbling up market share with enticing investment products. Pilot testing your own models will speed progress now.
The third barrier: Bankers are human. Human beings - that is, employees throughout the organization - react predictably to conventional programs.
Retail branch employees, for example, are often given incentives for the many products they sell and the referrals they provide.
But if their best customers are peeled off and turned over to private bankers, the retail employees believe that unless they work harder they will be penalized for not meeting their quotas. Furthermore, they believe they can do at least as good a job as the private banker.
A solution is to build a new partnership between private banking and retail, with mutual benefits.
The last barrier is that most bank distribution systems are product-oriented, which too often results in a confusing number of bankers calling on the same customer:
One alternative system, nicknamed "hunter-skinner," is also badly flawed. It features a salesperson who finds clients, turns them over to a product specialist (often part of a team), and then goes out to get another client.
To replace this system, a growing number of leading banks are choosing a single-point distribution system that allows a relationship manager to find and serve new clients with the backing of specialists.
These four barriers have root causes. Unless the causes are addressed, symptoms are being treated, not the disease.
First there is the traditional form of measuring success at a bank - historical comparisons.
That's the wrong standard to use. Like history, it's outdated.
It's also a classic leadership problem. CEOs, pressed by stock analysts to show improvement each quarter, too often miss major long-term profits by being overly concerned with historical short-term comparisons.
Bank executives should at least plan by comparing this year with the real potential.
That's hardly an impossible task. In fact, many who are doing that are realizing they are missing 80% to 85% of the business they could be reaching, because their own affluent clients are being actively served by the competition.
Innovative strategies me-tooism, are required.
Focus on the Customer
Second, product orientation must be replaced by customer orientation.
One key strategy is integrating services for the affluent into one organizational unit that will focus on building relationships and serving each client.
The alternative is trying to make customers adjust their needs to fit the bank's products. But customers won't do it; they will just go elsewhere.
Third, banks must accept the fact that cultural change means more than just tweaking and refining. It means doing things really differently.
That's often painful and requires real leadership, not just lip service.
Finally, sales productivity must increase sharply. Integration combined with a focused effort to increase sales productivity will yield tens of millions of dollars quite quickly.
The importance of increased sales productivity cannot be overstated. Today, it's abysmally low among private bankers, who on average spend just 10% to 15% of their time in proactive business development.
To compete with some nonbank competitors, they need to be selling 50% of the time.
Sales training alone, though, has not solved the problem. Sales productivity efforts must be backed by a consistent sales management process that features constant reinforcement.
Without such reinforcement, sales will drop.
Complete integration will take approximately two to three years. Results will begin to appear in six to nine months. Significant results - more than just repaying start-up costs - will appear in 18 months.
With reinforcement, the momentum will build, enabling the bank to capture more than two-thirds of the tens of millions of affluent dollars it is losing today.
As integration results build and client-base penetration deepens, a sharp increase in profits will be seen.
Mr. Palmer is managing director and principal of David Ross Palmer & Associates, a New York consulting firm that specializes in the marketing of private banking.