Add one more trend> to the list of old fads now back in fashion: relationship banking, the financial industry s term for selling one customer multiple products. This type of cross-selling has long been profitable for financial firms, but a changing regulatory landscape is providing banks a renewed incentive to broaden their relationships with consumers.
Industry experts say cross-selling can lead to higher-quality customers. Customers who use more than one service are more profitable, remain customers longer and are less likely to default on loans, says Bob Hammer, the chairman and founder of R.K. Hammer, a bank card advisory firm.
Research suggests the untapped market for cross-sold products is large. The average consumer owns about nine financial products, but only two of those products are with the same firm, according to a 2009 survey by Forrester Research.
In the years leading up to the financial crisis, credit cards became so profitable on their own that the industry drifted away from other product lines, Hammer says. Last year, for the first time in 25 years, credit cards weren t the most profitable part of the banking business, pushing bankers to place a renewed emphasis on their other products, he says.
Increased regulation of the financial industry is also cutting into bank profits in a variety of ways, adding greater pressure to banks to lure customers toward these deeper, more profitable relationships, says Curtis Arnold, the founder of CardRatings.com, a credit-card comparison site.
Nontraditional banks, including online brokerages like Charles Schwab, and credit-card firms like Capital One and American Express, have also been expanding into traditional banking products like savings and checking accounts, says Brad Strothkamp, a principal analyst covering e-business and financial services at Forrester Research. Capital One, for example, introduced an InterestPlus Online Savings Account in December that offers a quarterly bonus on interest earned to consumers who use a Capital One credit card once a month, or maintain a minimum balance of $15,000.
Everybody s kind of getting into everybody else s business to try to do more cross-selling, Strothkamp says.
For consumers, the question is whether getting a credit card, checking account and other financial products from the same firm makes sense.
New regulations are making it harder to find credit cards without annual fees or free checking accounts, but a consumer whose banking is consolidated with one institution will find it easier to avoid these new fees, Arnold says. Consumers who already fit this relationship model should ask about getting any new fees waived, Arnold says.
Customers at large, traditional banks will likely have to do some research on their own and may have to speak to a bank representative live to get a clear picture of the benefits of using multiple products, Strothkamp says. Consumers are going to have to do a little bit of work, Strothkamp says, because many institutions don t do a good job of marketing these benefits to their customers.
In one common option, linking a credit card and a checking account can get consumers access to a different type of overdraft protection that carries lower fees than the protection available on stand-alone accounts, says Gerri Detweiler, a personal finance advisor for Credit.com. Wells Fargo offers this type of overdraft protection but consumers should know they ll be charged interest at the rate they d be assessed for cash advances, Arnold says. M&T Bank also introduced a new line of credit cards that can be linked to its checking accounts for overdraft protection this month.
For consumers who don t already have multiple accounts with one institution, attempting to set up such an arrangement can make comparison-shopping harder, Detweiler says. Plus, the more relationships a consumer has with one bank, the more difficult it is to switch banks if necessary, she says.
Consumers who run into financial trouble might find that owing money to the same institution where you keep your money can be more risky, Detweiler says. For example, a consumer struggling with credit card-debt might have a harder time negotiating repayment options with a bank that also knows exactly how much cash he has on hand, she says. However, in many cases information-sharing between divisions of an institution isn t good enough to make this a serious concern, Strothkamp says.