The Expansion of Diversification activities: the Change of Cross-Selling Behavior after the Financial Crisis: A quantitative study of European commercial banks

Abstract: This study investigates the change in the application of cross-selling strategies within European commercial banks by analyzing the relationship between banks net interest margins and non-interest income. Cross-selling consists of promoting additional products and services to an already existing customer with the intention of increasing the volume of earnings. The essence of cross-selling involves reducing lending rates to attract customers who buy non-traditional services. Thereby, cross-selling explains the negative relationship between non-traditional activities and interest margin. In other words, income from diversification increases at the expense of interest margins. Due to several reasons banks started to pay higher attention to income generated from other activities than lending and deposits before the crisis in 2007/2009. This increased the level of competition among banks. The intensified competition and the shift towards diversification activities have raised incentives for banks to adopt cross-selling strategies. The extent of cross-selling after the recent financial crash is important to analyze. Regulators have raised concerns that commercial banks might earn greater service fees by underpricing loan rates and therefore credit risk. Data from commercial banks within 12 European countries have been gathered between the years 2004-2006 and 2011-2013 representing pre- and post-crisis. A regression analysis was performed to assess the relationship of diversification activities with interest margins. Our results support that non-interest income has a weaker negative correlation with net interest margin after the financial crisis, compared to before. We conclude that cross-selling behaviors have decreased in European commercial banks. Our findings can contribute to the knowledge of how the relationship between net interest margin and diversification has developed after the financial crash. The current application of cross-selling strategies is of importance for regulatory policy. The regulatory institutions have shown interest in developing a framework to supervise these strategies. Therefore, our findings might contribute to the evaluation of current guidelines for cross-selling.