The hidden costs of cross selling

> Posted by Sergio Guzman
Many microfinance institutions are looking to provide a wide array of financial services to their clients. Financial service providers often bundle their products in order to strengthen the value proposition of that particular product by marketing them as additional included “benefits”. A common practice is credit-life insurance which, for a fee, pays off a borrower’s debt if that borrower dies.
Product bundling or cross-selling may provide the clients convenience of obtaining many products from the same provider and in fact may be less costly that purchasing the same product from another provider. Cross selling is also a way that providers raise more revenue from their customers. However, it’s a problem when providers bundle their products without the consent or knowledge of the client or without properly disclosing the costs, conditions or terms of the additional products or services.

In the United States, this was the case when the recently established Consumer Financial Protection Bureau (CFPB) in its first enforcement action, found Capital One Bank guilty of “deceptive marketing tactics.” The CPFB required Capital One to pay fines and compensation to clients totaling $210 million.
The particular practices that earned the Bank the hefty fine was a product called “Payment Protection Insurance” a product which promises to forgive or trim the debts of card holders in the event that they lose their jobs, become disabled or die. Nevertheless, the products were “marketed and sold … to ineligible unemployed consumers, who despite paying for the services, never received the full benefits.” Moreover, according to reports, the products were often advertised as being free or mandatory.
Capital One’s ordeal and the CFPB’s brave enforcement delivers a warning, not only for financial services providers in the United States, but to all financial services providers, about adequately designing and transparently marketing bundled products.

  1. Providers should disclose all costs associated to the bundled products in question, insurance fees and other costs must be disclosed to clients.
  2. Product eligibility and benefits must be clear and up-front, not buried in the small print.
  3. Customers must be informed about the optional nature of the bundled products they purchase; this means that “mandatory credit life insurance” should disappear from our lexicon and become an optional product for consumers.
  4. Clients should not be enrolled in products without their consent.

Again, offering a wide array of financial products and services is important, but, providers must take care to do it in a transparent manner that adequately informs clients about their options. Finally, some observers question whether payment protection was of any value at all to most of the consumers to whom it was marketed. Value and fit for customers is often hard to evaluate, but it is the foundation for good client protection, as the Smart Campaign’s first Client Protection Principle states (Appropriate Product Design and Delivery). Capital One sought to raise revenue with these products. In the end, these products cost the bank not only a hefty fine, but – we hope – also put its reputation at risk.
Image Credit: callcenterevents.blogspot.com
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