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Personal Guarantee Insurance: A Cross-Sell Option for Bank-Owned Insurance Agencies

By: Mitchell R. Lubin

As banks continue to recover slowly from the downturn of 2008, they have been reluctant to take risks on borrower character without measurable collateral. This is especially true in the face of relentless regulatory pressure to increase capital ratios, a legacy of commercial real estate and housing loans and heightened regulatory scrutiny of loan portfolios. Thus, they become caught up in a low-margin, competitive fight for borrowers with sterling track records and impeccable credit, while many promising enterprises are denied funding because they do not fit the loan profile.

For this reason, banks are increasingly looking to cross-sell other products, like financial services and insurance, to augment their bread-and-butter loan business, providing both increased revenue and more stable, long-term customer relationships. 

Vested Clients Mean Higher Profits

It is a well-known marketing truism that acquiring a customer can be 10 times more expensive than retaining one. Thus, it is much easier to sell an additional product to an existing customer than to a prospect because of the established relationship, experience and level of trust.

Even so, it can be much trickier to deal in financial products, especially in this environment. For instance, many customers are wary of consolidating all their assets into one bank. Maintaining relationships with multiple banks, some commercial and everyday customers believe, reduces their risks or gives them leverage when seeking a loan, a refinance or another bank product.

Banks, on the other hand, see those with multiple products as being more likely to be long-term, profitable customers. While this makes cross-sell strategy a Holy Grail of sorts these days, successfully executing it is not as easy as it seems.

Financial Product Cross-Sell Best Practices. In a report titled “Teleconference 2011: Solving the Cross-Sell Imperative,” Forrester Research provided some insight into why some cross-sell strategies fail. According to its findings, an institution must be dedicated to the cross-sell strategy from within and be structurally prepared to execute it in order to achieve success. Here are some of Forrester’s key findings:

Contextual Selling. Banks should recommend relevant financial products at the right time and through the appropriate channel, such as initiating cross-sell during the application process.

Effective Pricing. When examining the different motivators behind vesting multiple financial products with one institution, favorable pricing (i.e., breaks on interest rates and fee) won out over things such as free services. 

Supported Internally. You must have institutional buy-in to make your cross-sell strategy a success. Executing it could require changes in institutional culture, resources, metrics and planning. For example, most banks do not rate their marketing performances by customer retention. However, customer retention, products per customer and increases in product vesting should all be examined on a regular basis and tied to employee performance reviews.

Another issue is that many institutions operate under a siloed structure, with each department having its own financial, marketing and strategic goals. Even if this structure remains, they all must cooperate, sharing in the expense, execution and reward of cross-selling.

For example, if relationship pricing is part of an institution’s cross-sell strategy, some checking account fees could be waved when a customer has a credit card. This would require checking account group to be willing to give up some of its revenue in order to offer this benefit. All groups need to collaborate and understand that revenue forgone actually is made back tenfold by retention, through increased customer interactions and additional product sales.

Leveraging a Unique Cross-Sell Opportunity

An example of a new insurance product that provides a clear cross-sell opportunity for commercial loan customers is personal guarantee insurance. Given the tight credit conditions today, even businesses with established operating history and profitability face a higher hurdle for approval. And in most instances, a business owner is required to sign a personal guarantee as a condition of loan approval, putting hard-won assets like homes and bank accounts on the line.

This nearly universal requirement of a PG for SMB borrowers, combined with their reluctance to sign it, creates a perfect opportunity for lenders to refer them to the bank’s agency. The vehicle for this referral, PGI, is an insurance policy that protects against personal asset loss in the event a PG is called. As noted earlier, one of the key tenants of successful cross-selling is to recommend the right product at the right time during the buying cycle. Offering PGI after a lending officer has asked the borrower to sign a PG makes for a strong contextual appeal. Banks that have the ability to offer their own insurance products now have a unique opportunity to:

This new-product opportunity is a rare example of how the economic downturn has led to the creation of something that helps all parties. Business owners benefit by decreasing their personal risk; banks improve customer relationships and further secure commercial loans against loss; and bank-owned agencies have a new tool in their cross-sell arsenal to help offset loan revenue declines. 

A New Way to Sell

Because changes in the market have forced banks to re-examine their products, strategies and tactical initiatives, maximizing revenue per customer is now the mantra. This can be easier for some than others. Larger institutions have the resources to offer a wide variety of products to match and meet their financial needs. Small to mid-sized financial banks need to take a more calculated, targeted and tailored approach to their cross-sell strategies. The most important thing is getting to know their customers and what best suits them.

Given all of that, PGI is a “right time, right place” product for banks, their commercial clients and insurance providers, helping borrowers to mitigate risk while institutions can secure new loan and premium income and enhance customer loyalty.

Mitchell R. Lubin is chief marketing and sales officer for Asterisk Financial Inc., www.personalguarantee.com. He can be reached at Mitchell.Lubin(at)asteriskfinancial.com.

Copyright (c) March 2013 by BankNews Media



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