First National Case - Commercial Bank Management
1. By adding fee-income generating services, First National will be able to supplement traditional deposits, which will help meet liquidity requirements and provide for future loans. The bank can utilize economies of scope by offering multiple services in existing locations, which can lower production/operating costs and increase earnings. Another important benefit will be income diversification, where revenues from poor performing services can be offset by better performing services, thus reducing the overall risk to the firm (Rose & Hudgins, 2013). Some services are less interest rate sensitive than others, which can help lower interest rate risk for the firm. In lieu of increased income and lower risk, First National’s choice to expand services will allow them to have the ability to cross-sell traditional services with the new services offered to existing customers. Sophie Schmitt, a senior analyst at the consulting and research firm Aite Group mentions that “Cross-selling is key to getting profits per client up, to making the synergies that the bank can provide work. To carry out that one-stop shopping model, you need to get cross-selling to work” (Bell, 2013). Also, the offering of new services might entice new customers to join the bank, bringing in revenue from the new services offered and possibly new deposits.
2. There are potential disadvantages and risks that could arise from selling these new services. First National’s reputation could be at risk from investment customers who may hold them to a higher standard than a traditional stock broker, especially if returns are not up to par. Another disadvantage could stem from offering annuities. Selling annuities tend to compete with selling deposits (Rose & Hudgins, 2013).
3. First National’s increase in services offered could also possibly open them up to a lawsuit by clients who claim to be misled in investment services. This is evident form the recent lawsuits against Wells Fargo and JP Morgan and their recommendation to clients to invest in Breitburn Energy Partners (BBEP) or (BBEPQ), where these institutions claimed Breitburn was a sound investment. However, Breitburn ultimately went bankrupt resulting in major shareholder loses and sparked