The Hindu Business Line : Banks must cross-sell for retail asset explosion

INDIAN banking industry is chanting the retail moola(h) mantra for its tech initiatives, customer base expansion, retail asset explosion, profits, net interest margins, and so on. Almost all banks, including those with the public sector, are following standard strategies with a slew of housing, auto, education and consumer loans and other niche products to add volume to their retail asset book.

The pricing of these products (a maximum of 25 basis points) and value propositions offered being almost same, the gap which existed in the price value grid among the different banks has shrunk considerably.

The technology advantage boasted by the foreign and new gen private banks has also evened out. Now, all banks are fighting the retail battle, targeting the prospective customer universe with almost similar strategies and insignificant product/value differentiation, trying to expand the customer base and achieve their retail asset targets and profits.

The success depends on how far they are able to translate the strategies into business. The result is evident from the growth in numbers in retail asset expansion of scheduled commercial banks by almost 50 per cent and the amount went up by more than 130 per cent from Rs 28,000 crore to Rs 82,000 crore between March 1997 and March 2002 (CMIE data).

All are successful is a general statement, but how to succeed better than others is a the business objective. To achieve this, what can banks do? One of the answers to this question is "Search thyself".

In a situation where banks are stepping on the accelerator to expand their customer base and develop and implement strategies to bring additional customers involving additional cost, searching thyself (customer mining) will give definite clues for cross selling.

What is cross selling? In simple terms, it is selling an additional product/service to an existing customer. Relating it to the retail asset expansion scenario, it is generating new/additional retail asset(s) from a liability. In other words, if the bank is able to sell an asset product (housing/car/educational loan) to a savings/current/deposit account holder successfully, then it is cross selling.

Is cross selling not happening in banks now? It was and is, but how? In the olden days of liability-oriented marketing, cross selling was happening mostly on the liability side by marketing a high-cost term deposit product to a savings/current account holder, resulting in additional cost. This was done at the instance of customers as well as prompting by the branch personnel.

In the present day retail banking scenario, systematic cross selling of assets is happening in some banks, but in most others, an integrated approach to retail asset expansion through cross selling is still at a nascent stage.

Details and data of cross selling initiatives and results by banks are not available, but the international data make a strong case for systematic cross selling initiatives by banks, especially PSBs.

The Celent Report on Cross Sell Ratio (the number of products per client) in retail banking, which analysed the strategies adopted by leading retail banks in Europe to increase the cross sell ratio, lists the cross sell ratio among banks in different countries. The ratio is 2 for the US and slightly above 2 for the UK and Germany, above 2.5 for France and a high 3 for Scandinavia.

In addition, the traditional banks (all customers) with a cross sell ratio of 2.5 out performed the internet banks with a ratio of only 2. Another research study observed that selling three products to a customer who already holds one increases profitability by up to 500 per cent. This makes a strong case for scientific cross selling initiatives by banks.

Why should banks cross sell?

The prime point for cross selling is the cost factor. It zeroes in on the cost of new customer acquisition for asset expansion and the cost of cross selling to an existing customer.

According to Money magazine, it costs a bank five times less to cross sell an existing client than to acquire a new one. Another finding says that it costs four times as much to get a new customer as it does to keep an existing one. The underlying is the cost advantage of selling to an existing client.

The second important reason is the profit. Cross selling an asset/additional asset product to an existing customer improves the profits, in general, and profits per customer, in particular.

Cross selling fosters brand loyalty. A customer who has availed himself of more than one product from the bank is drawn closer to the bank than a customer who has taken only one product. If a customer having a savings account has taken a consumer/personal loan, the chances of switching to another bank is less than when he has only savings account. If, in addition, he takes a housing loan or any mortgage product, the chances of bank hopping reduces further.

Research studies have established that the percentage of loyalty increases with the number of products the customer takes. The reasons may be for convenience, service, price and value offerings by the bank for the total product solutions to the customer.

Cross selling helps banks to plan, implement and maintain better customer relationship management programmes as it gives clarity to developing plans based on the customers' relationship profile.

Potential for cross selling

The success of a cross selling programme stems from the potential available for the same. A research study of a sample of rural, semi-urban, urban and metro customers revealed that the percentage of savings, current and term deposit customers who have additionally taken a credit product from the bank is very low indicating the enormous scope for cross selling.

The scope may be determined by the percentage of total asset accounts to the total deposit accounts after applying discounting and filtering tools based on segments, incomes and existing relationship.

The Table (constructed from CMIE data) gives the potential for cross selling. Strike rate is the percentage of the cross selling initiatives directed at the cross selling targets getting converted into a retail asset. For a strike rate of 10 per cent, it is assumed that out of 100 customers targeted for cross selling,10 will use a credit facility.

The resultant increase in retail asset base will work out to Rs 600 crore, a 20 per cent increase over the existing retail asset book, that too from the existing customer base. The figures are calculated based on the simple premise of same strike rate for all types of deposit accounts. If the bank budgets for different cross selling targets and strike rates based on their customer database and their cross selling model, the results will be more rewarding.

The bottomline is that there is an unexplored goldmine right within you to unearth and encash profitably. The asset expansion figures even for a strike rate of 5 per cent and 2 per cent (Rs 300 crore and Rs 120 crore) deserves serious consideration.

Strategies for effective cross selling

A robust customer database is foremost for effective cross selling. The database is the core on which the entire cross selling strategy is built.

Based on the customer relationship history and the cross selling model, a broad mapping of the customer profile and retail products to be cross sold has to be done.

The mapped data has to be sliced and diced to develop specific asset related cross selling information.

The cross selling information has to be put in place for staff (internal customers) to view and communicate to the target customer group.

The internal customers should be trained to effectively cross sell and convert the initiatives into business

Cross selling is a team effort and success depends on the attitude and involvement of all the staff concerned.

The success of cross selling depends on offering at the right time, the relevant product to the customer. It will be a futile exercise to cross sell a product which is not needed or relevant for the customer.

The strategy has to percolate from the corporate to the branch level based on customer database across geographies.

Dynamic feedback from the line level should be taken cognisance of for fine-tuning /re-tuning the strategies.

Selecting the target customer group is essential for cross selling success. Selling the right product to the right customer improves the relationship.

Cross selling is more relationship- than transaction-based. At any point of time, the cross selling initiative by the line staff should not be an irritant for the customer.

The above are only some illustrative strategies and success depends on the bank management's belief and commitment in retail asset expansion through cross selling as a viable tool and also customer acceptance of the initiatives by the bank.

In the present day networked scenario and availability of customer database, banks can adopt a pilot run in some potential regions and based on the success rate, extend it in a phased manner to other regions.

The indicative asset expansion figures for different strike rates surely point to a serious attempt. Cross sell and see the difference.

(The author is with Indian Overseas Bank, Funds Department, Central Office, Chennai. The views are personal. He can be reached at dr_jsethuraman@yahoo.com or dr_jsethuraman@hotmail.com)