Private-Label Pop

How far can the private-label envelope be pushed?

That's the question I ask myself when thinking about the future of wholesale banking.

Bankers have historically walked a wholesale-banking tightrope. On the one hand, the nation's largest banks have sought to serve their wholesale clients absolutely. In fact, the need for profound wholesale banking was one of the arguments against nationalization of the largest US banks at the height of the credit crisis.

Yet, banks have actively sought to minimize encroachment on their turf by non-banks. The last 20 years of banking history is littered with knockdown fights over non-banks getting into financial services, with in nearly every case, the first punch thrown by the banking industry.

There are notable exceptions, of course, with private-label credit card lending being the most prominent among them. But the private-label machine largely stops pumping at credit cards. I see opportunity here. With bank brands in the dog house, it makes sense for bank wholesale banking units to think more creatively about selling financial services products through a proxy.

This goes well beyond an equipment leasing program. Payments, online banking, factoring, general financial support to suppliers all fall under the umbrella of potential private-label initiatives. Sure, some such initiatives are available to corporate bank clients, but I see far greater opportunity for vastly more. Will banks be giving up something to gain something in the long run? Sure, but banks have lost a degree of leverage coming out of the credit crisis and it would behoove them to adopt a more agreeable posture in their wholesale banking businesses. Put another way, the tightrope has moved somewhat.

Tags: corporate-banking, jv, marketing, private-label, wal-mart, wholesale

Comment by Tim_Cleveland on March 19, 2010 at 10:35am: Not sure if you consider it in the same context, but I have seen some banks experience some success by private labeling of overdraft protection. The bank generates additional fee income with minimal additional administrative burden with the service provider bearing the burden of risk. Typically, the service providers are non-traditional/wholesale bank. Some of the servicing providers are actually owned by the larger traditional banks.

An area of concern is that we have also seen this become an area of major losses when the bank who is eager for additional fees and a flow of business fails to do its due diligence on the the organziations providing the services as well as their prinicpals. Particularly so in the area of leasing. You may have heard of the situation totalling in the tens of milliosn of dollars in which a supposed Lease Originator, run by principals who would not pass even the most meager of smell tests, has defrauded many banks with fraudulent leases. Not sure if this is the same type of thing you are referring to in spirit, but thought it was worth tying in. And we have all heard of the scam run by the former Boy Band promoter whose name is escaping me just now.

The deal is, from an insurance standpoint, we see banks get into the most trouble by becoming "too entrepeneurial" ( I know that sounds oxymoronic) and lettign their desire for new areas to generate income get the better of them and take a beating as a result.

Feel free to correct me if I am off base on your point.

Tim

Comment by JJ Hornblass on March 19, 2010 at 10:46am: No, that is exactly what I had in mind -- not the scam part, but the extension of private label beyond bread-and-butter retail credit cards. I understand your leeriness about entrepreneurship at banks, but I believe that such spirit needs to invade banking. If not, even the insurance providers will eventually suffer, Tim. I hope that is not off-base either.

Comment by Tim_Cleveland on March 19, 2010 at 12:13pm: Not at all, JJ. The key is due diligence on the service providers and staffing up with or tarining folks experienced in the area pursued. Too often it just becomes the perview of whoever had excess time, and soemtimes not, to ride rough shod over the new venture. ANother issue as I see it is from a regulatory standpoint. The regulators are not allowing creativity these days. I have seen them squash proven prfoitbale ventures jsut because they didn't like it. And us insurance folks are in th best shape when banks are healthy, entrepeneurship or no.

Tim

Comment by John Marlin on March 20, 2010 at 11:12am: This is a conversation near and dear to my heart, having worked in private-label credit cards for many years. I consulted for retailers seeking a PLCC for the past two years and now work for a public corporation seeking a PLCC provider. The providers seem to have dried up. Unless you are bringing a billion $ opportunity to the table, the big boys (GE, HSBC, TD, ADS, Wells, AmGen) aren't interested and there doesn't seem to be small players anymore. I have heard "We're hunkering down" a hundred times. Is anyone stepping forward to fill the void?

Comment by Tim_Cleveland on March 20, 2010 at 9:09pm: I can;t believe that I forgot the private label that I run into quite frequently. Private Labeling an insurance agency which is supposed to get Bank's into sellign insurance overnight. I have seen dozens try it. I have never seen any work. Anone know of any banks opening agencies in this fashion and making a real go of it. They can usually barely manage to write their own insurance.

Tim

Comment by JJ Hornblass on March 21, 2010 at 6:51pm: John, and here I thought PLCC was still working. Your experience in PLCC really amplifies the need -- and opportunity -- in private labeling. Thanks for your comment.

Tim, don't you think insurance has its own challenges that go beyond whether the private-label model works? I am not sure I can put my finger on why, but I always thought insurance products had little hope of success within the confines of a bank.

Comment by JJ Hornblass on March 23, 2010 at 1:06pm: A video on why Chase dumped the Starbucks Duetto private-label card here.

Comment by Tim_Cleveland on March 24, 2010 at 7:04am: You are right, JJ. Insurance agencies rarely work as far as I can tell in a banking environment. I think the biggest reason is that Bankers are uncomfortable with how insurance agents are compensated. Commission up front enough to pay the staff and keep the lights on, with contingency commissions for producing good business for your major carriers if all goes well. They also misunderstand the insurance buying process. They seem to think that the typical insurance buyer, even fairly complex businesses, do their own research and then go ask for what they want. The fact is, many insureds need counseling on what they need by a competent professional who cann assess their exposures and help describe the varying options that are out there. The bankers seemed to think that just get a licenses and sit soembody out by the front door with a sign and the cosnumer would just come and buy. The only banks that I have seen make a decent go at insurance are those that bought well established agencies, with well reputed professionals and plenty of markets and excellent account loyalty and retention and left them alone. And they came to grips that there is typically very little cross polenation of bank customers into the agency operation or vice versa.

Tim

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