Ken Zagrocki says that when he arrived at South Holland Trust and Savings Bank near Chicago in April 1999 he found a small-town commercial bank almost too content in its smallness.

“There was a malaise of comfort,” say Mr. Zagrocki, who had been hired as the senior vice president of retail banking. “No one on the platform was referring customers to the brokers.”

That complacent culture had to change, he says, if the bank was to get serious about cross-selling, especially of investment products — and the key was more referrals.

So he launched an aggressive referral incentive program like the one he had known at Indiana Federal Bank for Savings in Valparaiso, Ind., where he had been head of retail banking.

“We make it an expectation for the account executives to help us grow our business,” Mr. Zagrocki said. “Just because we are a typical commercial bank doesn’t mean we can get lazy about cross-selling investment products.”

South Holland had no referral or cross-selling programs before he arrived.

The incentives worked, Mr. Zagrocki says. In just over two years, he says, the number of referrals has skyrocketed, and the amount of new money coming into the bank’s investment unit through stocks and bonds alone has more than tripled.

Mr. Zagrocki said that in 1999, South Holland account executives made a total of 200 referrals — for customers to open checking accounts or get loans from the bank, or to buy mutual funds, annuities, stocks, and bonds from Vision Investment Services Inc., the brokerage subsidiary that the bank had owned since 1993.

But in the 16 months from January 2000 through the end of April, South Holland’s account executives made 7,000 referrals, he said — including 800 to Vision Investment.

Business soared at Vision Investment, which gets 99% of its customers from South Holland. In stocks and bonds alone, customers invested $49.6 million of new money in 2000, up from the $15.7 million invested in 1999, Mr. Zagrocki reported. The bank does not break out money that comes into mutual funds and annuities, as the products they sell are from third parties.

South Holland’s program rewards its account executives — the platform customer service representatives — for making referrals around the bank. The executives are expected to accumulate a set number of “referral points” each quarter. Each product has a point weighting, and referrals for investment products are worth more than those for, say, a checking account.

Reps have to accumulate 525 referral points each quarter to earn a cash bonus. The referrals do not have to result in a sale. If they do not reach the referral goal, it affects their review.

Mr. Zagrocki said 50% of Vision’s business comes from referrals from the bank’s retail division.

The results from South Holland’s aggressive referral strategy are not the norm. Referrals have declined steadily at banks since 1994, according to the Consumer Bankers Association 2000 Consumer Investment Study, the latest one available. Bank-generated investment referrals averaged 1.1 per $1 million of retail deposits in 2000, the study found. In 1994 referrals averaged 2.1 per $1 million of deposits.

This means a bank of South Holland’s size — $513 million in assets in 2000 — averaged 564 referrals that year, less than the number of investment product referrals alone that South Holland chalked up that year.

Mr. Zagrocki instituted the program after bank referrals across the industry had dropped off precipitously. According to NewGround, a St. Louis bank research and marketing firm, 14% of bank customers were referred for additional products by bank employees in 2000, down from 31% in 1998. The decrease was attributed to the market’s downturn. NewGround helped train South Holland employees to make referrals.

Analysts said that practicing customer referral is crucial, especially during a dormant period in the market when banks must rely on their existing customers to keep them afloat.

“It is all about creating a culture where referrals are the norm and not something extra,” said Burton Greenwald, a Philadelphia bank analyst. “Many banks look at a referral as an employee ‘going the extra mile.’ Referrals are part of the job.”

Jeff Waterman, an executive vice president at South Holland and the chairman of the board at Vision, said that the referral program works with investment products because of relationships.

“The customer has a relationship with an account executive [on the platform], and then that account executive walks that customer to a broker. It is important that a person they trust is taking them to a broker,” Mr. Waterman said. “They are doing more than handing over assets — they are illustrating that the customer can trust this broker. It gives the broker a much better chance to make a sale.”

Mr. Zagrocki said the next step for South Holland is to move this aggressive pursuit of referrals to the front lines — the bank’s tellers. Mr. Zagrocki said when the referral culture is completely ingrained at South Holland, the employees could easily double their 7,000 referrals.

“We have only skimmed the surface so far,” Mr. Zagrocki said. “Our tellers see our customers every day.”

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