Should retail banks be retailers?

There’s a great write-up by one of my guest contributors Alex Johnson, about the bad sales culture of most banks. Admittedly, he says it’s partly inspired by my blog of last year about challenger banks, but his write-up takes it further and has a swipe at the whole bank culture of cross-selling and being retailers of credit.

“I Want to Work at a Bank with No Cross-sell”

Banks aim to cross-sell and get as much share of wallet of the customer that they can get. I call it the pushing products through channels via traditional media focus. It’s completely wrong and irrational in a digital world but hey, it’s the way most old banks work. In a digital world, banks would focus upon engaging with customer through digital media and dealing with their needs. The focus is switched from selling products to dealing with needs.

Back in the 1990s, I used to deal with this a lot. Banks would talk about their need to increase the cross-sell ratio and technologists would spend their time focused upon how to help them do that. This attitude led to the global financial crisis, because banks became retailers selling credit to everyone to push them into debt.

The best illustration of such a culture is perhaps Wells Fargo, although there are many other examples (just look at PPI in the UK or what happened in the Aussie banks). As Alex points out:

“The key question facing banks was ‘How do you sell money?’ Dick Kovacevich’s (CEO of Wells Fargo) answer was that financial instruments – ATM cards, checking accounts, credit cards, loans – were consumer products, no different from, say, screwdrivers sold by Home Depot. In Kovacevich’s lingo, bank branches were ‘stores,’ and bankers were ‘salespeople’ whose job was to ‘cross-sell,’ which meant getting ‘customers’—not ‘clients,’ but ‘customers’—to buy as many products as possible. ‘It was his business model,’ says a former executive. ‘It was a religion. It very much was the culture.’”

This attitude led to a toxic culture in many retail banks of leveraging credit to the hilt. Pushing mortgages, loans, credit cards and more on consumers and maximising their debt became a sales culture of finance. The issue is that the more debt, the more expensive things become. Just look at housing which, for the majority, is now unaffordable whilst a small group of buy-to-let landlords rule the world.

In fact, I always remember a panel discussion I hosted where one journalist accused the banks of being like drug dealers of credit, pushing their clients into more and more financial ruin in the same way that drug dealers push their clients into physical ruin. A strong statement but one that has stayed with me.

Anyways, Alex argues that this toxic culture of selling money needs to change, because it is based upon three incorrect assumptions:

1. Our employees frequently interact with customers, particularly in the branch. This is a great opportunity to sell.
2. Customers in our community may not know about all the financial products they could qualify for and will appreciate learning about them during interactions with our employees.
3. The more products a customer has with us, the less likely they are to switch to a competitor.

On number one, customers no longer come into branches; on number two, customers are well informed online; and, on number three, customers are multi-banking and products do not lock them in any more.

Anywho, you can read Alex’s article in full over here. The reason I am referring to this is that his article created quite a twitter storm. From his original tweet:

New Fintech Takes Newsletter.

The way that banks have been cross-selling for the last 20 years has had a ruinous impact on the industry. We need a new model.

Building on thoughts from @jentescher and @Chris_Skinner https://t.co/lNhE1GM9Lu pic.twitter.com/1OfUzuWR1M

— Alex Johnson (@AlexH_Johnson) April 13, 2020

Through a thread of to’s and fro’s …

The 'transparent, fee-driven models' part is interesting because it might fit into a broader shift across industries.

I think consumers may start moving, en masse, away from the "free" business models that monetize consumer data for advertising.

— Alex Johnson (@AlexH_Johnson) April 14, 2020

I would recommend reading his write-up as, if nothing else, it will make you think.