The enforcement order against Wells Fargo over unauthorized accounts has focused some needed attention on banks' cross-selling strategies.
What Wells did was wrong. Hopefully, it is not representative of practices at other banks. But the problem with cross-selling, long the holy grail of bank marketing, runs deeper than the risk of it leading to misbehavior. There is also a questionable economic rationale for cross-selling to begin with.
In theory, cross-selling — in which banks sell additional products to existing customers — allows institutions to increase revenues with little or no increase in marginal cost. It is frequently compared with McDonald's selling french fries when a customer purchases a sandwich.
But deeper analysis highlights complications with the McDonald's example to justify bank cross-selling. Cross-selling works best in that example since the additional products are purchased at the same time in the same location as the primary product. It is less likely to succeed when a financial institution subsequently tries to sell, for example, wealth management to an existing checking account customer who may have limited interest in the product.
Attempting to sell products purchased at different times and locations, like credit cards and mortgages, frequently confuses the client, complicates the relationship and rarely reduces costs. This was highlighted by the failure of the one-stop-shop financial supermarket model of the 1990s, exemplified by Citigroup. Cross-selling requires a large and expensive infrastructure to produce, track and market the products. This is one of the reasons why efficiency ratios remain stubbornly high at many institutions.
Furthermore, not all products are profitable. Determining product profitability is a complex process involving transfer pricing and cost allocations issues. Finally, there are increasing problems related to compliance and salespeople's conflicts of interest when an institution engages in cross-selling. Those concerns will undoubtedly increase following the Wells Fargo episode.
The real problem with the cross-selling strategy is its misplaced emphasis on the bank and its products instead of the customer relationship and needs. The keys to a successful long-term client relationship are trust based on an understanding of the client's needs and the value proposition of an institution's products and services relative to those needs. Ironically, Wells recognized this fact in its Visons and Value Statement, but failed to reconcile its cross-selling efforts with its purported values.
Furthermore, banks are unlikely to offer best-in-class products at competitive prices in all categories. All too often, cross-selling involves selling mediocre and mispriced products that are unrelated to client needs. It is no wonder the financial services industry receives the lowest Edelman industry trust rating, although that rating is improving. Other similar ratings show a different quality of performance on this issue between large and small institutions. The Chicago Booth/Kellogg Financial Trust Index shows credit unions and local banks with higher trust levels than larger national institutions.
Meanwhile, the ease with which customers can now search for products and switch institutions — thanks to mobile banking — means they want unbundled product options. In fact, mobile banking increases customer demand for unbundled choices by exposing them to a digital-first experience. Digital banking options allow customers to search for and switch providers effortlessly in pursuit of the lowest prices.
Ignoring this trend by trying to lock in clients with multiple product sales is unlikely to end well. A bank's chief competition is likely to come from nonbank providers with different cost structures like PayPal or Rocket Mortgage than another bank. Unfocused commodity product cross-selling is being disrupted despite its seductive allure. Its promised benefits are likely to be elusive.
Looking at customers as wallets is no way to gain their trust. Banks focusing on profits at the expense of trust will achieve neither.
Focus on what you can do to provide the best value to your customers and not how many products you can sell them.
J.V. Rizzi is a banking industry consultant and investor. The views expressed are his own.