By Gareth Vaughan
Many banks have the potential to sell more products to existing customers and ought to investigate things like the use of online gaming to attract young customers, loyalty incentives, and target the selling of high margin investment products to their wealthier customers, Deloitte says.
The auditing and financial advisory firm makes these comments in a report, done in the United States, entitled Kicking it up a notch, taking retail bank cross-selling to the next level.
To stay competitive in a saturated market with limited revenue opportunities from new customers, cross selling opportunities are crucial to banks' growth, notes Deloitte.
Among the major banks here in New Zealand, Westpac has provided the most detailed disclosure on cross selling in recent times. With its half-year results released in May, Westpac said of its 1.29 million customers, 49.8% were taking at least four of the bank's products. And having culled its National Bank brand, ANZ is focused on stepping up cross selling.
"To remain competitive in a largely saturated market where revenue opportunities from new customers tend to be limited, deepening relationships with existing customers will likely remain critical to increasing banks’ top-line growth," Deloitte says. "One important way this might be achieved is through more refined strategies and targeted execution of cross-selling programmes."
The Deloitte report slots bank customers into four pigeon holes, - basic users, value shoppers, diversifiers, and consolidators.
Basic users
Basic users have limited financial means, less access to credit, and an average bank product ownership rate of 1.7. Deloitte suggests there are two groups of basic users being young people whose product needs may evolve as they get older, and middle-aged and older customers whose needs and behaviour are unlikely to alter much.
"One way to attract young basic users could be through education. Providing information and advice on financial challenges, such as debt management, benefits of improving one’s credit score, and the importance of saving early for retirement may help banks become the go-to institution for this group," Deloitte says.
To target young basic users Deloitte, not surprisingly, suggests use of social media and mobile banking. It also advocates online gaming, citing Britain's Barclays Bank.
"Banks can use the concepts of gaming to design applications that provide financial literacy to the young consumers. For instance, in 2010, Barclays launched 56 Sage Street, an online game that shows how to manage money judiciously, which helped the bank build its brand equity," Deloitte says.
"As young basic users progress in their professional and personal lives, their needs are likely to evolve. Banks could leverage their primary relationship to engage early with this group to provide products that meet their needs at various life events - education, marriage, purchasing a home, starting a family, investing, or retirement. This can allow their product needs to be met sequentially and appropriately, rather than pushing products prematurely with limited success or failing to cross-sell at all. A consultative approach as opposed to hard-selling may be particularly effective with this group."
Meanwhile, Deloitte suggests retail bankers could learn from product bundling strategies common in other industries. It says one strategy is mixed bundling offering consumers a flexibility to purchase products in bundles as well as individually.
"A Harvard Business School study on effectiveness of bundling practices revealed that sales were higher in a mixed bundling scenario compared with those where the consumer is left with no choice but to purchase a pre-determined bundle. This is because mixed bundling allows customers to opt for products and services they consider important and save on paying for those they rarely use."
"Retail banks can adopt a mixed bundling strategy by pricing ancillary services separately. For example, all add-on elements of checking account such as debit card usage, in-network ATM usage, paper checks, overdraft protection, and wire transfers can be priced individually. Such a pricing approach will likely increase the affordability of the product, allowing basic users to pick and choose services that fit their wallet size," says Deloitte.
It also advocates low-cost products such as prepaid cards with low usage fees, no minimum balance requirement or overdraft fee.
Value shoppers
Value shoppers, Deloitte's second category, are described as being the least loyal customers with only 1.1 products with their primary bank. A lack of trust among this category of customers can mean they are prepared to take their business elsewhere even over a "slight" fee increase.
Nonetheless, Deloitte suggests targeting value shoppers can be an attractive proposition for banks.
"They have all the attributes that banks typically look for in high-value customers: financial strength, broad product needs, and higher channel engagement levels (67% pay their bills online and 58% use bank tellers) - the second highest among all the segments. Winning over this segment will likely involve changing their negative perceptions and incentivising product consolidation at the primary bank,"' Deloitte says.
Its report notes that generally, companies seen as having transparent pricing are best placed to win customers' trust.
"Given value shoppers’ low affinity with their primary banks and their tendency to shop for the best offers, loyalty incentives could be effective in influencing them to consolidate some, if not all, of their financial relationships with primary banks. Leading practices from the credit card industry and others, such as airlines and hospitality, may provide meaningful insights on incentives that prompt recurring purchases," says Deloitte.
"Although banks have effectively implemented rewards programmes at the individual product level, they will have to build a more holistic structure that incentivises customers to achieve the 'preferred' status in multiple product categories."
Deloitte says one such approach could be incrementally subsidising interest rates and services with each additional product.
"Wells Fargo’s Portfolio Management Account (PMA) is a good example of incentivising customers for consolidating accounts with the bank. The PMA package begins with a checking account, which is then linked to other eligible Wells Fargo accounts, including savings, deposit, credit, mortgage, and brokerage."
"It gives customers an opportunity to save money in the form of bonus interest rates, bigger discounts, and fee waivers for many common banking services by expanding the product relationship beyond a simple checking account to other eligible products. For instance, customers can get a waiver of the $30 monthly service fee if they maintain a minimum balance in the linked banking and brokerage account. In addition, the package simplifies financial management by giving a combined view of checking and linked account balances in a single PMA financial statement," says Deloitte.
Diversifiers
This group, according to Deloitte, takes the highest average amount of bank products at 6.3, with about half from their primary bank. What they don't have through their primary financial, institution is the likes of investments, life insurance, and annuity products.
"This is most likely because their needs are advanced and they do not trust their primary institution for the best investment advice," says Deloitte. "Retaining this segment will likely require banks to gradually shift focus from pricing to value-added benefits by endeavouring to provide consistently high service quality."
Advice given here includes personalised service at the branch level, access to dedicated financial advisors, and immediate resolution of any complaints.
Deloitte suggests banks could impress diversifiers by creating more flexible pricing structures with a range of options from fees on percent of income earned to a flat fee for trading to hourly fees for professional services. The report highlights an example of Bank of America utilising its Merrill Lynch unit.
"Bank of America (BAC) is marketing Merrill Edge Select Portfolios - an investment product launched for mass-affluent customers - by highlighting the value of Merrill Lynch’s professional advice and the convenience of BAC’s banking. In addition, the retail bank is offering online and mobile capabilities, such as remote check deposit functionality, to enable customers to access and manage their investment accounts at their convenience."
Consolidators
This group comprises banks' most loyal consumers, holding an average of 4.1 products with 3.6 of at their primary bank. They clearly hold a positive view of their primary bank, often in terms of service and even fees.
"What strategy should banks use with consolidators?" Deloitte asks. " Banks should retain them and leverage their loyalty by converting them to advocates."
"Personalised attention to consolidators’ needs and prompt response to their concerns will strengthen their relationship with the primary bank, increasing the possibility of turning them into advocates. Embrace community marketing: Peer influence-based, community-oriented marketing holds the potential to create authentic customer relationships."
The report goes on to suggest banks could create dedicated virtual space, both on websites and social media pages, for consolidators to share their experiences and influence the perceptions and buying decisions of other customers.
"Banks may also consider devising reward programmes to incentivise consolidators to help generate referrals."
Deloitte concludes by saying customer-focused initiatives should be supported by a focus on incentive structure coupled with sales force training to influence their staff's cross-selling culture.
"Deepening product relationships with consumers may be challenging. But banks that embark on this journey with the appropriate focus and commitment are likely to reap substantial competitive advantage in the future."
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