Recent regulatory acts, coupled with continued changes in consumer behavior, are positioned to slice deeply into the profitability of U.S. banks-furthering the need to look for new profit streams. This places new emphasis on the age-old issue of cross-selling at banks in order to earn a larger share of consumers' wallets.

Nearly 90% of banking industry leaders noted over-regulation as the "biggest threat to their growth prospects," according to a new PricewaterhouseCoopers (PwC) survey. Dodd-Frank alone is set to restrict fees and increase compliance costs, potentially cutting profits by 12% over the next five years, says PwC. The CARD Act could also decrease the amount that financial institutions collect from interest and fees, further reducing income for large banks by $500 million to $1 billion, or for mid-tier banks, some $50 million to $100 million, notes PwC. "Some of the regulatory changes are impacting the profitability of banks," says Dave Hoffman, a partner with PwC and co-leader in the U.S. for the banking operations and technology group. "And that pressures banks on how they price and market their products."

Industry insiders believe that it's now critical for banks to step up their cross- selling practice, particularly from the brokerage side. With interest rates still low, banks are collecting less interest-rate income and, consequently, are focusing more on the fee income that their brokerage units can provide. That has increased pressure on the retail side to find ways to secure larger portions from customers' wallets.

Merrill Lynch, for example, now rewards advisors through their compensation plans for selling clients on multiple products, says Sophie Schmitt, a senior analyst with Aite Group, which focuses on the sales process in banking.

Still, financial advisors may not be as encouraged to cross-sell as banks might hope. When asked if they feel more motivated now to cross-sell during a recent Aite Group survey, Schmitt says the most common answer from advisors was that their interest hadn't changed.

"Given the challenges with mortgages, for example, it's taking so much longer to close a loan," Schmitt says. "And many advisors don't want to run the risk of having a client have a bad experience and then come back to them to complain. Plus, financial advisors want to control that relationship as much as possible, and in sending them off to another product they run the risk of losing that client. The monetary incentives are not enough of a motivator."

Still, banks need to find a way to push advisors or locate other avenues where they can engage and capture clients, say analysts.

Non-U.S. banks have succeeded in keeping more of clients' entire financial holdings, from banking to investments, all under one umbrella, notes PwC's Hoffman.

And part of this stems from the "relationship view" those banks tend to have. Indeed, those non-U.S. banks tend to look holistically at customers' financial needs rather than push individual accounts or loans.

In addition, many foreign banks have adapted more quickly to integrating online channels to reach customers. "The customer perspective is less about the product and more about the different ways I can interact with the banks," Hoffman says. "The ease of doing business is important as well."

Canadian banks, in particular, have excelled at connecting an Internet presence to branches, says Schmitt, especially for the mass affluent market, allowing consumers to move easily between their online accounts and a physical advisor.

Hoffman agrees that banks should work more on this kind of "channel harmonization" to reach more clients and their wallet share.

As regulatory requirements threaten to shave profits from the banks, these new avenues could be critical to their bottom line.

"If you're in a branch, and you start the process of an unsecured line of credit or a mortgage, can you finish that online?" asks Hoffman.

"For most banks the answer is no. From a customer standpoint, how those channels work together is going to be imperative over the next three to five years."

Register or login for access to this item and much more

All Bank Investment Consultant content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access