Bank Cross-Selling: Taking Money From One Pocket And Putting It Another?

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The Kehrer-ENSI Financial Institution Investment Program Benchmarking Study has measured disintermediation — the percentage of a bank’s investment sales funded by its own deposits — since 1991. The most recent study (2005) found that 34% of the funds used to purchase bank investments came from deposits of the same bank. That was up from 33% in 2004, but way down from the low 40%s found in the 2001-2003 period. According to the study:

Over the years, we have observed a general downward trend in this statistic…[which] suggests that banks have learned how to control the extent of disintermediation as they have gained experience selling investments.”

My take: I’m not so sure about that conclusion, for three reasons:

1) The (non) measurement effect.
According the study’s own data, about half of the banks included in the study don’t monitor the extent to which investment sales cannibalize deposits. If they’re not measuring it, then I fail to see how they can “control the extent” of it.

2) The pendulum effect.
The study found that the disintermediation rate jumped from 35% in 2000 to 43% in 2001. This was right about the time when many banks began to shift their focus from acquisition to retention/cross-sell. Which suggests to me that one cause of the disintermediation increase was the relative decline in new customers to the bank. Why the decline in 2004? 1) banks instituted policies to incent customers to open new accounts with funds from other firms, and 2) the pendulum began to shift back to acquisition.

3) The stock market effect. The market was down between 2001 and 2003, which means that consumers had less funds in existing investments accounts to move into new bank investment accounts. As the market rebounded in 2004 and 2005, account levels rose, potentially freeing up funds for new accounts.

Whatever the cause in the change in disintermediation, this is an important metric for banks to measure. Coordinating sales efforts across lines of business is a critical success factor, and banks must ensure that they bring in good business — not just more business. The study, however, appears to have some interesting data points that makes it worth checking out.

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