Many community bankers are looking to increase profit growth, and management teams are focusing on cross-sell opportunities to accomplish this objective. For the banking industry, unlike many other industries, upselling and cross-selling has a high and disproportional impact on profitability. With proper tools and strategies, community bankers can upsell and cross-sell their products to maximize profitability. In this article, we will consider the common features of upselling and cross-selling, and explain where the greatest opportunities exist for upselling and cross-selling commercial loans.
Upsell versus Cross-sell
First, let us be clear about the difference between upselling and cross-selling. Upselling is defined as selling the client more of the same product in quantity, volume or time. In the banking industry, the time factor is extremely important, and we will discuss this further. The upsell may occur at the initial purchase or subsequent purchases. Again, unique to banking, the subsequent purchases are crucially important to profitability.
Cross-selling, on the other hand, is defined as selling the client additional complementary products or services. Again, we believe that banking is a special industry where some products may appear profitable and are not, or vice versa. Being able to quantify profitability and identify profitable customers is key to using upsell and cross-selling techniques in banking.
Importance of Upsell and Cross-sell in Banking
For the average industry, upselling and cross-selling can increase revenue anywhere between 10% to 50% and add a few percentage points to ROE. That means that the primary product can be sold for $100, and the sales team can add another $10 to $50 in revenue with well-developed upselling and cross-selling strategies. In banking, those numbers are markedly different. The average community bank has thousands of customers, and the vast majority (close to 90%) have a zero or negative ROE. At an average bank, the top 10% of customers generate the entire profit for the bank. There is one common element to those top 10% of customers: they have been effectively upsold and cross-sold.
Consider the entire array of products that a community bank may offer in the list below:
- Business checking
- Business savings or money market account
- Point-of-sale credit card processing
- Wire transfer services
- Automated clearing house services (ACH)
- Overdraft protection
- Business debit card or business check card
- Business credit cards
- Electronic payments (Bill Payment)
- Money market mutual funds
- Remote deposit capture
- Credit lines secured by receivables, or inventory
- Certificates of deposit
- Unsecured short-term loans or working capital lines
- Payroll processing
- Company sponsored 401(k), SEP, pension
- Commercial real estate mortgage
- Account reconciliation processing
- Commercial real estate mortgage
- Equipment leasing
- Term loans or equipment financing
- Overnight investment or sweep accounts
- International (foreign exchange, import/export letters of credit)
- Accounts receivable collection (lockbox)
- SBA loans
- Private placement of long-term debt
- Interest rate risk management (SWAPS)
- Import/export letters of credit
- Foreign exchange
- Electronic data interchange
- Merger & acquisition advisory services
Not all community banks will offer all of the above services, and no bank can offer all of the above services equally well. However, there is one product that is specially designed for upselling and cross-selling, and defines which customer can be profitable for the bank – it is the commercial real estate mortgage. If we mind map how community bank products are upsold and cross-sold, it may look something like the this:
Of the many products that community banks sell, the long-term credit facility (commercial mortgage) is the platform that creates the greatest cross-sell opportunities for many other bank products. While bankers can sell customers cash management or deposit products and later cross-sell credit, in the vast majority of cases the real estate mortgage acts as the entrée to a new relationship. The real estate mortgage is a platform that drives cross-sell and upsell capabilities. The real estate mortgage holds this important role for a bank for the following reasons:
- The commercial mortgage has high entry costs (fees, appraisals, and underwriting), and, therefore, switching is expensive.
- Commercial mortgages are long-term commitments and typically contain prepayment provisions.
- Credit products are one of the very few products where the customer takes the bank’s funds, and this arrangement requires substantial scrutiny and underwriting by the bank. This builds a relationship and trust between lender and borrower, and further increases switching costs.
Once a bank sells a commercial mortgage to a customer, cross-sell opportunities open for every other product at the bank. Many community bankers complain that their bank excels at loans and deposits, and the other products are not best-of-class. However, these two products can produce tremendous value for the bank, and the biggest opportunity for the commercial mortgage is the upsell, not the cross-sell.
Remember that upselling is selling the client more of the same product in quantity, volume or time. Commercial loans are often overlooked for upsell opportunities. We will consider how bankers can structure commercial loans for upselling success.
First, let us consider the time upsell for a commercial mortgage. Most loans exhibit profitability as shown in the graph below. At the inception of the loan, after the bank has expanded time and resources to source, originate, underwrite and book the credit, the profitability for the loan is negative. Only over time when coupon revenue is realized does the loan become profitable. Profitability continues to grow over time.
Community banks should attempt to increase the expected life of the loan by using any of these features:
- Commit to longer terms,
- Include prepayment provisions,
- Eliminate balloon features,
- Make loans assignable and assumable (more on that below)
Second, let us consider the quantity upsell for commercial loans. This involves booking multiple loans for different projects or properties. After the customer experiences the first loan sale with the bank, the lender's job, if possible, is to win 100% of the customer’s wallet. Profitable relationship accounts typically have more than one long-term credit need. Once the bank has underwritten the first loan, subsequent underwriting costs are both cheaper and more accurate as the lender becomes better informed about the client’s business and credit risks.
The third and last upsell for commercial loans is volume. That is taking the same loan and increasing its size. Banks that instill the sense that an increase in the commercial mortgage involves a “new” loan are missing the upsell opportunity. At CenterState we seek borrowers who we believe will have rising credit needs in the future. We want to help our borrowers grow, and we want our bank to grow with their success. Many times that initial loan will increase in size as the borrower’s business grows and expands. We create loans that are assignable from collateral to collateral, and assumable from borrower to borrower – always with our underwriting approval. Creating this assumable and assignable mortgage eliminates all of the downfalls of having to compete in the market for the borrower’s credit because the loan size changed. We upsell the $1mm loan into a $2mm loan, and the borrower can maintain the terms, conditions, and pricing on the original $1mm without calling the total $2mm loan a “new” loan. This is the greatest upsell that exists in banking today to drive profitability.
Most community banks can be profitable with just two best-of-class products – loans and deposits. Being able to upsell and cross-sell commercial mortgages can be highly profitable for community banks and does not require the purchase of new systems, no substantial change in processes and only modest product redesign.
Submitted by Chris Nichols on March 04, 2019