Being Boxed in by the Big Banks in Canada

February 21st, 2012 | Author: Mitch Reynolds

Keeping Clients Loyal with Multiple Products is a Bank’s Strategy

One size fits all service and advice model from the bank

Banks would sell life insurance badly. Do you like big organizations that treat you like a number, put you in a queue and focus on how efficiently they can process you? Well, for some people this is a great fit. They like to know they are part of a larger system that has all the efficiency in the world and don’t care about the personal touch or the relationship they can build with a financial advisor. For others, they hate being treated like cattle – herded through the lines and given the same canned advice and products as everyone else.

The banks have models and do manage clients very efficiently. They have to, since millions of Canadians do multiple transactions with them every month. Bank staff are authorized to move clients up the chain of service, with more experience bankers and better products offered to clients with higher balances, more products at the bank, and larger monthly deposits. For those with fewer products and less cash deposits, there is less service and advice. The real issue comes when you want more than basic advice from your banker. You want a relationship and trusted guidance. You want to know your advisors name, and be able to call them after hours to ask a question.

This is where the banks fall flat. They just can’t afford to give everyone that level of service and advice. It would eat up all the time of their personal bankers, and nothing would get down. This is why bank staff are sales driven. Get more loans, sell that credit card, bring the mortgage over, etc. Each client is a sales opportunity, and they are always looking to move you up the profit line, not down it with time wasting advice.

Complexity ties you to your bank and limits your choice

One way banks create loyalty is to heap on complexity to your financial affairs. They will sell you multiple products and so that you have so much going on with them it is hard to close down all your accounts and move to another bank. The average Canadian family has 2-3 bank accounts, a line of credit, a mortgage, at least one credit card, a high interest savings account, savings accounts for their kids, an RRSP, RESPs for Kids, and more, and more, and more…

Do we need all this? The banks are making killer profits off the small administrative fees on each of these accounts. It basically costs them nothing to administer your accounts once they are set up, so the small monthly fees really add up. And that line of credit, mortgage, car loan, etc. all might be insured with the worst type of life insurance on the market – bank’s mortgage/creditor life insurance. This is almost a 100% profit margin product to the bank’s bottom line.

The average Canadian family can’t make heads or tails out of all the different products and services they have going on. The banks have them so confused it is like mentally and emotionally tying them up, and keeping them “loyal” because they can’t imagine the pain of switching everything to another bank.

Felling you must do business with your bank

Now here’s a funny thing –many Canadians think that when it comes to financial services and advice, their bank is THE ONLY place to go. The huge marketing dollars banks spend to give you that message is amazing. The impression that if you need a loan, set up an account, save into your retirement program, etc., that THE ONLY place to go is your local bank – and there are just 5 to choose from in Canada.

Well the truth is so far away from this perceived reality it makes me laugh. You can get much more efficient loans and bank accounts from major financial services companies that don’t have the bricks and mortar branches across Canada (costing millions of dollars to run). They can invest in advanced product development, offer higher interest rates, and generally be more competitive. But the average Canadian doesn’t know about these products and services unless they get to know a financial advisor or insurance broker who can show them options.

Just know that you don’t have to do all your business with the bank if you choose not to. You do have options, and they might save you money or make you a lot more money.

Products/Service/Advice very streamlined by your bank

As I said above, products, service and advice are put into boxes for clients that fit into different categories. For the highest net worth clients with big loans, there is an elite level of service, with bankers that have been 15 plus years in the business and have the best rates and most advanced products to offer. For middle income Canadians there is mid-grade service with in-branch personal bankers (grouped into A, B, C type categories of authority, so they can only sell certain products).

Not everyone can get the platinum credit card with no annual fees (but you can if you’re a high value client). Not everyone can get prime minus 2% on their mortgage (but you can if you have a huge mortgage, other loans and large deposits at the bank). You get slotted into a certain level of service and advice based on how valuable you are to the bank. Unfortunately the types of products available to you are also limited based on your value to the bank.

Again, this allows the bank to be more efficient and streamline their service levels. Certain clients get more attention and time, others get only basic service and hardly ever a telephone call. Where do you fit in the bank’s service model?

Life insurance planning will always be secondary to bank model

I can just imagine where life insurance planning would go if bank’s were allowed to sell personal life insurance in branches (which they are not allowed to yet because of the Bank Act of Canada). Banks would slot the vast majority of Canadians into a Term Life Insurance offering. If you were self employed, then some basic form of Disability Insurance for income protection would be offered, stripped of important benefits and riders to keep the price down and increase sales. Critical Illness Insurance would only be available online, like one of the major banks current offers, covering only the top 4 major illnesses and offered in simple, $25K, $50K or $75K amounts (all term 10 coverage meaning the price goes up every 10 years).

If you were making over $150,000 per year you might warrant some personal advice for permanent life insurance, like whole life or universal life and more advanced disability insurance advice. Maybe. It all depends on whether or not it would be more profitable to keep selling you the cheap, simple insurance with lower long-term value for the client and higher profit margins for the bank (for example, term life insurance which is very cheap is much more profitable for life insurance companies because they rarely pay a death claim, while more expensive permanent life insurance, like universal life, has a much lower profit margin because they pay out much more money in claims).

Insurance would also be treated as the ugly cousin to the bank’s traditional products, such as loans and investments. I have worked in banks and they generally don’t understand life insurance and bankers want their clients to have very little to do with the product. If banks were allowed to sell life insurance, and bankers were forced to offer it to their clients, they would generally do a poor job of explaining and selling proper life insurance protection.

Tell us what you think about banks boxing their clients in

From my many years working inside two of Canada’s largest banks, and seeing how they operate, I know how people are boxed in. I know the banks’ strategy to overwhelm you with products and complexity. I know their service models for different levels of clients. Do you want to be boxed in by the big banks, or do you want a personal relationship with a trusted financial and insurance advisor? Tell us what you think of this article and how banks might sell life insurance if they were allowed to do so in branches.

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