Many banks have been struggling to produce acceptable returns in recent years, as near-record-low interest rates have made the traditional savings and loan business much less lucrative than in the past. As a result, banks are looking for new and innovative ways to boost profitability, including strategies like lending against client brokerage assets or getting customers to sign up for more banking products. Here are three of the newest ways banks are attempting to profit from their customers, as described by three of our experts.
Low interest rates have been around for a long time, but only recently have banks tried to find ways to start collecting money from depositors by charging negative interest rates. The trend has really taken hold in Europe; the European Central Bank has brought rates so low and implemented such aggressive quantitative-easing policies that yields on many euro-denominated debt issues have fallen below zero. The ECB's moves have spurred many European financial institutions to pass negative rates on to their customers, essentially charging them for the privilege of holding their money for them.
Even in the U.S., where rates are nominally positive, JPMorgan Chase (NYSE:JPM) announced earlier this year that it would start charging deposit fees on large clients, essentially making them pay a negative interest rate. For JPMorgan, this move was less related to the money markets and more of a response to regulatory costs imposed on large banks for holding excess reserves. In JPMorgan's case, the bank actually wants to push depositors out in order to reduce its size and improve its overall profitability. Whatever the cause, though, low interest rates have finally pushed some banks to break below zero, and the net result is that customers will pay for something they're used to receiving interest for.
As their core business suffers from low interest rates, banks are looking to deploy more capital into loans any way they can. Recently, banks have turned to lending money against the stocks and bonds of their wealthiest clients. The premise is simple: Wealth management clients have hundreds of thousands or millions of dollars held in stocks and bonds with the bank. The bank can use these assets as collateral for a secured line of credit with a low yet profitable interest rate.
In a clear sign that it's becoming a big business, banks are incentivizing loan origination by their financial advisors. Morgan Stanley (NYSE:MS) nearly doubled the maximum lending bonus compensation for its advisors in 2014. Its CEO also noted that he hoped to triple lending volume from its 2012 levels by 2015. Nearly a third of Bank of America's (NYSE:BAC) lending in its wealth management unit was attributed to securities-based lending in the first quarter of 2015. JPMorgan's loans in its asset management arm have been growing faster than in its core banking businesses.
Securities-based lending is not without its risks. FINRA is taking a hard look at it, worried that the practice may be better for bankers than for their clients. Because securities-based loans are usually callable, the bank can request repayment at a moment's notice. Unfortunately, this could leave some borrowers in the perilous position of paying off debt borrowed at a market peak by selling stocks at bottomed-out prices.
One way banks are attempting to increase their revenue is cross-selling, i.e., getting existing customers to purchase more of the bank's products, such as credit cards, insurance products, brokerage accounts, and more. The average banking household has about 16 total banking products, according to a report by Wells Fargo (NYSE:WFC), so there is definite potential for banks to capitalize on this.
For big banks especially, this can be the most effective way to increase revenue. Wells Fargo is known as a master cross-seller, and it actively encourages its customers to sign up for additional products and services. Currently, the average Wells Fargo banking household has just over six different products through the bank, and Wells has set a target of eight. The company hopes to achieve this by getting a Wells Fargo credit card into the wallet of every one of its creditworthy customers and by capitalizing on its brokerage business, whose customers tend to use many more of the bank's products and services.
Bank of America has started to emphasize cross-selling over the past few years, and this effort seems to be quite successful so far. The bank has issued more than 1 million new credit cards per quarter recently, and the majority (66%) are going to the bank's existing customers.
Cross-selling is so important because when banks get as big as Bank of America and Wells Fargo, their expansion potential is rather limited in terms of new customers. For example, nearly half of all American households have some kind of banking relationship with Bank of America.
Cross-selling is not only the obvious choice to increase revenue, but it also makes good economic sense. According to a Fiserv report, selling a product to an existing customer costs up to 10 times less than finding a new one.