Have a checking account? You probably also need a mortgage, investment services and all kinds of other financial products, right? At least that’s what your bank is hoping.
In the face of declining income from fees on checking accounts and with plenty of cash on hand to lend, banks have become more aggressive about pitching checking account holders on everything from mortgage refinancing to investment services, says Sophie Schmitt, a senior analyst at the consulting and research firm Aite Group.
“Cross-selling is key to getting profits per client up, to making the synergies that the bank can provide work,” Schmitt says. “To carry out that one-stop shopping model, you need to get cross-selling to work.”
But banks’ push to cross-sell is also born out of necessity, Schmitt says.
“Banks have been suffering since the crisis,” Schmitt says. “A bunch of regulatory reforms have impacted the retail bank side.”
Between the Durbin Amendment to the Dodd-Frank financial reform bill, which limits the amount banks can charge businesses to process debit card transactions, and changes to regulations on overdraft fees, banks are pulling in much less revenue on checking accounts, she says.
Have I got an IRA for you
One of the key products banks are looking to sell is wealth-management and investment services, Schmitt says.
“The retail bank isn’t generating as much revenue, and so banks are looking to the wealth-management division,” Schmitt says. “If you’re a high-net-worth client and you have most of your investment money at (Charles) Schwab and you just use Bank of America for bill-pay and your checking, clearly they’re vying to get some of that investment money.”
But what’s good for a bank’s bottom line isn’t necessarily good for you, says Barbara Roper, director of investor protection at the Consumer Federation of America.
It’s important to remember that just because an institution does a good job servicing your checking account needs, its investing services will not necessarily be up to snuff, she says.
“People trust their banks and are likely to bring that trust over to a relationship where it may or may not be warranted,” Roper says. “They need to evaluate this new set of services on their own criteria. Are they competitive in terms of the fees that they charge? Are the products they sell highly rated? Are they salesmen who are operating on commission?”
The standards that banks’ investment professionals are held to are particularly important, Roper says. Many investment professionals are held to a “suitability standard,” which requires them to recommend only investments that might be suitable. On the other hand, the more stringent “fiduciary standard” requires investment advisers to recommend only investments that are in the best interest of the client.
That can mean the difference between an investment professional offering you a stock or bond mostly because it will earn him a commission rather than because it will help you reach your financial goals.
Loans! Loans! Get your loans!
But brokerage services aren’t the only financial products you’ll probably hear about from your bank’s staff. Banks also are looking to sell mortgages and other credit products to customers who they deem qualified, Schmitt says.
“Banks have a lot of cash, so they need to do something to monetize it by lending it out,” Schmitt says.
Bank personnel might even be able to throw in a sweetener: a lower mortgage rate than what might be offered to a noncustomer with similar qualifications, Schmitt says.
“They’re not going to take stupid risks. They’re not going to reduce the loan-to-value just to get the client,” Schmitt says. “But they will take money off — (for example) 25 basis points off your mortgage if you also open a checking account. If you do direct deposit to that checking account from your employer, you get another 15 basis points.”
A basis point is one-hundredth of 1 percentage point.
“For that client who is willing to provide them with that multiproduct relationship, they do (offer incentives),” Schmitt says.
Plastic proposals proliferate
Credit cards are another big product your checking account provider may try to sell you, says Kathleen Day, a spokeswoman for the Center for Responsible Lending.
“There are a lot of come-ons now about how you can transfer your balance on your credit card and have a zero percent interest rate for a year,” Day says. But those offers often come with hefty fees that don’t make it into the sales pitch.
“You have to read the fine print,” Day says. “Don’t ever be afraid to say ‘no.'”
There’s one big reason to be careful about taking out loans or signing up for credit cards at the same bank that holds your checking account. Most checking agreements contain a clause that allows the bank to draw out funds to satisfy debts you owe to other divisions of the company. For instance, if you have a delinquent credit card balance, your bank may be able to drain your checking account to pay it off.
If you have a deposit account with a bank you owe money to, when the debt comes due, there’s substantial legal precedent for allowing the bank to take the money out to cover it, says Justin Hosie, an attorney and partner in the Tennessee office of the law firm Hudson Cook LLP.
Roper says in the end, the choice of whether to purchase an additional product or service from your bank should come down to the individual qualities of what exactly it is selling.
“You may decide that while you like them perfectly well as a bank, their fees aren’t competitive for their other products,” she says.