Publications & Resources

February/March 2007
Focus: Balance Sheet Management

Building Balance: The Secret By-Product of Bundling

By Rick Barham

Building balance is tough to do in today’s U.S. banking market. The cost of funds is up, loan yields are down, and the yield curve is expected to remain flat - or worse - resulting in unprecedented margin compression. Rates are trending downward again, so offering a product mix that rewards your customers for doing more business with your community bank will work to your advantage.

What’s different now as opposed to previous lending cycles is that the largest money center banks are getting current customers to use more of their product at a disproportionately higher rate than community bank competitors through the magic of product bundling. Interestingly, we do not yet see much bundling among community bankers, and if we did, we believe they might have an easier route to building balance.

Taking a Lesson from Retailers

To illustrate our point using a different industry, let’s take a look at Proctor and Gamble (P&G), arguably the finest packaged goods manufacturer and marketer in the world. P&G doesn’t just sell toothpaste, it offers retailer incentives to sell bundles of Crest toothpaste (e.g., buy three, get one free). P&G also attaches Crest toothpaste to a bottle of Scope mouthwash (another P&G product) to sell even more toothpaste. And, it bundles a Crest toothbrush with its toothpaste. All of these tactics obviously increase the number of P&G products per household, loading the household shelf with its brand. Innovative bundling lowers the cost of goods sold, increases its market share, and most importantly gives customers the feeling that they got a better deal from the bundle than they would purchasing each product individually.

Unlike most packaged goods companies, banks are manufacturers, distributors and retailers, so having end-to-end control of both profits and volume is not only possible, but expected. It’s surprising that more financial institutions don’t take advantage of this end-to-end control by offering more bundled products.

Bundling Yields Superior APY

Money-center banks use their end-to-end control of profit and volume to take the strategy of “getting current customers to use more product” to a whole new level. They empower customers with tools such as indexed products (i.e., not set by bank officers), odd-term CDs, bumps, steps and ladders. And they maximize volume and profit with bundled products (i.e., by requiring two or more products in the mix), demanding higher account balances, requiring new money and more.

The result is that customers generally get a superior annual percentage yield (APY), while the bank gets higher profit and volume. The secret by-product of bundling is the superior APY; it is what your customers seek, it has the potential to drive balance with profitability, and it is a strategy largely overlooked by community banks.

Of course, there are other considerations that are equally important when it comes to building balance, such as defining customer needs and segmentation, elasticity modeling and cross-elasticity modeling, transfer prices, credit loss, costs of credit loss, risk management, and operating costs. But if we agree that the strategy at hand is to build balance by getting current customers to use more of your community bank products (rather than shifting share from one of your competitors or developing new products), then community banks need to adopt bundling strategies. The easiest way to start is to test the market by shuffling the existing product mix and creating new bundled offerings to optimize deposit growth.

Compete Like the Money-Center Banks

To stay competitive with money-center banks, community banks need to start seeing how they can develop a similar win-win strategy to build balance by re-thinking their product mix and cost structure to offer customers greater value through product bundling. Bundling will help community-oriented institutions garner their fair share of deposits, moderate their cost of funds, increase the number of products per household, and empower current customers and prospects alike to reap more rewards from doing business at the community bank level.

Rick Barham is president and CEO of Market Rates Insight, a leading provider of market intelligence tools that help banks set price by providing customized reports on deposits, loans and fees. He can be reached at 800 275-5556, or Rick.Barham@MarketRatesInsight.com. Market Rates Insight is a WIB-endorses Value & Income Program Partner (VIP).