Chief Investment Officer
Commercial Loan Automation
trends in bank-wide cross referrals
My 2007 outlook drew many comments, and I learned a lot from all of them. Let me share some:
My friend Ben Crabtree, noted bank analyst, said: "I get a little irritated when bankers say they operate to minimize interest rate risk, and then say that their margin is bring hurt by the shape of the yield curve. I believe that, if a bank is truly match-funded over the curve, the shape of the curve should have very little impact on spreads. What these banks should be saying is that they typically "play the curve" on a moderate, controlled basis, and that this strategy is no longer profitable". CFOs, what do you say to that???
David Mooney, CEO of Alliant Credit Union, wrote: "As short-term rates rose, premium pricing of CDs, and more recently high yield MMDAs, helped to keep cost of funds low in the short run, as depository institutions avoided repricing their entire portfolios of liquid savings/MMDA. But over an extended period this has resulted in the mix shift you described, and ultimately raises the overall cost of funds. With margins being squeezed by the flat yield curve and this mix shift, those institutions face a dilemma: reduce premium rates to harvest the acquired deposits and risk losing them; or maintain premium rates to retain deposits, and sacrifice margins while continuing to shift the mix. If short-term rates decline, the earning impact will be more acute because institutions have little room to lower their savings and "regular" money market rates which were kept low for the past two years...
My credit union competes on an "everyday great rate" value proposition, supported by a very efficient operating model. While we compete on price, our pricing is consistent and reliable. Our embers know that we always offer high deposit rates and low plan rates, and we eschew rate promotions, "teasers" and premium rates for "new money" that would undermine our positioning. We lose some deposits to higher rate offers, but often see those funds return, and our member attrition is extremely low, around 5% annually (AB: WOW!).
Mooney continued, "Internet offerings from traditional providers are the next wave and will further short deposits into higher cost. I imagine that it is very hard for any bank to watch CitiDirect capture over $8 billion in deposits in 6 months, and suspect that many are struggling with launching their own internet offerings at the expense of mix shift and potential reduction in deposits served by an increasing number of branches.
Until individual providers can deliver and articulate distinctive, compelling and consistent value propositions, the trends you describe are likely to persist." Readers, don't dismiss Mooney's comments just because he runs a credit union; I agree with his observations and think he is right on the money!
Cross-referrals are a perfectly logical yet ever-elusive bank objective. Bringing the entire gamut of bank resources and solutions to bear on every single customer is the path to customer satisfaction, profitability and retention. The problem is, we live in silos. In addition, many book of business owners don't trust anyone else to touch their precious customers with whom they built relationships over many years. The last thing they want is to introduce someone else into the relationship who will mess things up. Also, they aren't quite sure what value the other products the bank has to offer truly represent to customers, nor do they know how to sell them. Last, our incentive programs generally validate silo performance and do not support cross-discipline goals. As a result, effective cross-selling across lines of business has not been a resounding success in many institutions.
The article below offers some actions step to deal with the issue, many of which I learned from the great Dick Kovacevich, and others that our Forums have taught me as well. Your additional insights will help round off this initial set of thoughts, so thanks in advance for sharing them.
Also note the fabulous Pumpkin Chiffon Pie and Washington Cookies from my good friend Cyndee Prisby on www.anatbird.com. They are both worth making and, even more so, worth eating!
Trends in Bank-Wide Cross Referrals
For decades banks have been searching for the magic formula to help them leverage the entire set of bank resources and products toward any single customer. Not only would success in building cross-referral cement further customer relationships and increase their share of wallet as well as their retention, but the true value of the entire institution will finally be brought to bear on every customer situation.
This goal has proven more elusive than most of us imagined. However, best practices in cross-referrals continue to emerge, and many are shared in our Forums. I'd like to outline a partial list if what I'm seeing among the more successful banks in the cross-referral business, and trust you'll put them to good use.
Start with forced marriage counseling. At a recent Wealth Management Forum, my friend Kirsten Weisser of Mechanics Bank came up with the most apt name for the best start of a cross-referral drive: forced marriage counseling. Even though many of the players don't have any interest in learning more about each other's business, this first step requires that they do. Too many of us are too flexible about this step, and allow lines of business to opt out of gaining deep familiarity with other lines of business, their sales forces and their customers across the bank. Familiarity breeds trust, not contempt, when the product and the sales-force are high quality. We all know that the first impediment to effective cross-referrals is a deep rooted fear that relationships that took decades to build will be wiped out by one botch up by another line of business. Most star sales people consider their book of business their greatest asset, and rightly so, if any of the signing bonuses paid to successful loan officers, brokers, insurance sales people or trust officers are any indication. The last thing they want is for some incompetent sales person to tick off their customers and damage the trust they worked so hard to earn. The best way to combat this reluctance is by forced interaction, which is what this step is.
Put your money where your mouth is. Any process without teeth is bound to be less successful, since management is indicating to the parties involved that they don't feel strongly about the ultimate goal. The only place where I've seen institution-wide referrals work is where there were meaningful rewards for success and penalties for failure. Specifically, incentives were withheld from sales people who achieved their own goal but did not contribute enough to the success of others through cross-referrals. By the same token, those who delivered on both counts got significant financial incentives and bank-wide recognition as organizational heroes. Both incentives and recognition are important to signify to the entire employee base that cross-referrals are important.
Make expectations clear and specific. Cross referrals must be goals at every level of the company, starting from the individual sales person and all the way to the CEO's direct reports. An example of structure is for a lender to provide Wealth Management with one qualified referral a week. Again, incentives and recognition should be available at all levels, and results widely celebrated.
Structure a collaboration process through teams. Familiarity doesn't only breed trust, but also mutual understanding. Successful cross-referral banks establish structured cross-functional teams lines of business such as lending, retail, insurance, wealth management, cash management, brokerage, private banking. Each team is expected to meet a certain number of times each month, and report results to management regularly and frequently. The process might appear artificial and forced at first, but once it takes hold and sprouts results it is welcomed by most participants. The key here is to make the meetings and what transpires during such meetings a non-negotiable requirement. Success almost has to be forced upon the participants, since they are unlikely to initiate customer sharing and standing meetings on their own.
Include "book reviews" in the collaboration process. All attendees in the team meetings must bring a certain number of qualified leads or high quality customers to the table each meeting. Mutual sharing builds credibility for all participants and also makes the value of the process self-evident as it becomes obvious that product gaps exist for most, if not all, of each line of business' best customers. Reciprocity is essential; reciprocal goals where a certain percentage of each line of business customers are expected to buy the other line of business products and vice versa is an effective way to equalize the expectations. In addition, expecting each line of business to bring a fixed number of quality leads to the table helps equalize the perception of contribution.
Publish the results, rank order them and share with executive management. Rank ordering is a powerful tool, and this process is no exception. Exposure to executive management (some go as high as the board) gives the process additional teeth and visibility.
Be clear what is the definition of referral. One of the major negative side effects of such a process is a slew of garbage referrals that bury your best sales people in wild goose chases. Clearly defining what counts as a referral can eliminate the noise and assure process effectiveness. Referral can be defined, for example, as a face-to-face meeting. The definition has to be actionable enough to ensure that only true leads are shared, and that goals are met with quality referrals.
Revenue sharing, not a zero-sum game. One of the main issues in enhancing cross-referrals is the built-in conflict between making one's own goals and doing what's best for the customer by referring that choice customer to another line of business, and, with that, the entire income stream associated with the customer. For example, if you measure your retail folks on deposit generation, they have a serious disincentive to refer deposit-rich customers (who happen to be the most likely customers to need that product set) to Wealth Management. Such referrals mean that the entire deposit will be moved out of retail to the other line of business, and the branch manager is now in a deficit position regarding their deposit gathering goal. Using shadow accounting to make cross-referrals win-win situations is the bane of many CFOs but at the crux of creating a collaborative spirit among business units. I have much faith in CFOs that they can structure shadow accounting without double counting at the executive management level, which is where accuracy and reality count the most.
Adapt your style to the business you're working with. Obtaining referrals from the retail business is quite different from building credibility with your insurance unit or cash management team. Bringing doughnuts and other delectable edibles to the branches goes a long way toward creating product awareness and familiarity with the sales person who comes bearing gifts. Other sales forces might appreciate golf, lunch or a good customer referral more than other alternatives. Customizing your approach at the individual sales person level to the center of influence you're trying to influence should be encouraged and rewarded.
Executive management edict. Without it, nothing major happens around any institution, and cross-referrals are no exception. One excellent way to extend the CEO's authority through others to demonstrate the importance of cross-referrals is appointing a sales council that is comprised from the leaders of the bank's major lines of business. That sales council can sponsor the formal process described above and deal with tactical issues such as revenue and incentive distribution, perceived inequities and other cross-disciplinary issues. A sales council is an important body to enable and support the process, as well as offer timely and effective arbitration to thorny issues.
Crossing silos is one of the toughest challenges any organization faces. This is especially true in banking, which was created as a highly silo-ed business, given the industry's initial customer-specific product line. Early on in the industry's life cycle each product set was dedicated to a customer segment with little, if any, overlap. As the industry grew and deregulation took place, products and customer sets became commingled, yet our organization did not adjust to the change in both our product offerings and customer needs. Building a strong cross-referral program can bridge the organizational gaps we created to the point of making them transparent to the customer, which is the first step toward bringing greater value to each customer while creating greater value to our sharholders.