H.R. 10, the Financial Modernization Act, defines a new category of financial holding companies that will be empowered to lend, insure and invest. Combining these functions under one company has been prohibited since the 1930s when Congress passed protective Depression-era legislation.
Lobbying on the new bill from banks and direct marketers was intense. Observers described industry representatives lining the halls of Congress in recent weeks trying to make their case.
As recently as mid-September, Democratic congressional staffers considered approval of the legislation over a year away. Perhaps recent setbacks by the administration caused an eagerness to generate an agreement with the Republican majority for legislation so long overdue.
The agreement provides a privacy policy that offers a base level of protection for consumers considered workable by industry experts. This was a relief for marketers. Consumer advocates pushed for a European-style opt-in requirement. Smaller financial institutions were concerned that stringent rules prohibiting use of customer data for third-party programs would shut them out of the cross-sell opportunities, which favor larger institutions; bigger companies can simply purchase product providers like insurers.
Proponents point out that this new policy defines a standard that all marketers will have to follow. Veteran insurance and banking attorney Dennis Toivonen, senior vice president of Wachovia Corp., Winston-Salem, NC, commented, “Opt-out, with regard to sharing of nonpublic personal information with unaffiliated third parties, is now a requirement that must be presented to all customers at least annually and immediately to all new customers. Sharing of customer-level data with affiliated and contracted third-party marketers – except for account numbers – is not prohibited. We hope the final wording of the bill will allow for use of encrypted account numbers.”
Offering opt-out is a policy that most major banks have been following for 10 years or more and has been preached, and now is insisted upon by the Direct Marketing Association. Some major banks have recently developed internal policies against sharing customer data with even their highly supervised, contracted marketing partners.
State laws can supersede the new federal legislation. Financial marketers will continue to be highly concerned about the aggressive investigative practices of state attorneys general. It’s not hard to imagine that some states will desire to maintain tougher privacy standards than the federal legislation. As DMA president H. Robert Wientzen pointed out, “There are a dozen state privacy bills being pushed for every federal action.”
At the DMA’s annual show last month in Toronto, relief on the moderate outcome of the bill was expressed, as well as much speculation on the future. Hayley Weinper of APAC Customer Services, Deerfield, IL, said, “Anything that protects the consumer is good for us. We believe in creating ‘positive call outcome,’ that is leaving the customer feeling good about our call so that they will react positively to the next call they receive, whether it is from us or someone else. Unscrupulous telemarketers are the problem.”
Opportunities to cross sell products and inevitable mergers could abound as organizations scramble to determine the best ways to use the new freedom. Wachovia’s Toivonen added, “This new law provides explicit statutory authority for banks to cross sell insurance and investment products. This is what banks have been waiting many years to be able to do.”
Others speculate that a new wave of mergers will hit the industry as banks buy up second-level underwriters; and perhaps smaller banks will be acquired by top insurers.
Those who worked in the era of the Sears, Roebuck & Co. and American Express financial supermarket attempts of the 1980s and the often painful bank consolidations in the 1990s know the difficulties involved in making this new cross-sell opportunity work. Considerable strategic and tactical planning will be needed.
The significantly different corporate cultures of the three major financial functions will need to find common ground. It is not hard to imagine the immediate demands for new plans that were heard coming from corner offices when news of the H.R. 10 agreement came out.
At the DMA conference, during a session on the subject of psychographic research for banking, I suggested to a group of professors and consultants that they work on the topic of how customers of merged institutions feel about their service. Do bank customers maintain brand loyalty that will lead to acceptance of cross-sell offers? Or will the flood of mergers push disenfranchised customers to search the Internet for what they may view as commodity products and services? Hopefully, we can avoid the distinctly caustic perception of large financial service firms who merge – an image presented at the DMA opening general session by author Tom Peters.
The short-term impact of the Financial Services Act appears to validate the best practices followed at most major banks for many years, while creating the new world of opportunities that will challenge financial marketers in the early years of the 21st century.
Kenneth G. Kraetzer is vice president of CBSI, Harrison, NY, a banking and insurance direct marketing management firm.
