What is relationship banking?

Relationship banking is a strategy used by banks to build customer loyalty and provide a single point of service for a range of different products and services. A bank customer may start with a simple checking or savings account, but relationship banking involves a personal or professional banker offering products designed to help customers achieve their financial goals while increasing the institution’s income. financial.

Understanding banking relationships

Banks that practice relationship banking take a consultative approach with customers, learning about their unique circumstances and needs, and adapting to changes in their financial or professional lives. The relationship banking approach is easily observable in a small town bank, but it is also practiced in retail branches of large money banks.

Whether for an individual or a small business, relationship bankers will engage in high quality service to try to make their bank the “one stop shop” for their clients’ A-Z needs. Examples of products offered in the banking world include certificates of deposit, safe deposit boxes, insurance plans, investments, credit cards, all types of loans and business services (e.g. credit or payroll processing). Relationship bankers may also include specialized financial products designed for specific demographic groups, such as students, seniors, and high net worth individuals.

Cross-selling is the modus operandi of relationship bankers, but they have to be careful. Federal anti-tying laws established by amendments to the Bank Holding Company Act of 1970 prevent banks from tying the provision of one product or service to another (with some exceptions).

Advantages and disadvantages of relationship banking

Customers can take advantage of a bank’s desire to develop relationship banking by obtaining more favorable terms or treatment with respect to rates and fees, as well as obtaining a higher level of customer service, which is especially true in a small bank such as a community bank.

For example, if a customer takes out a mortgage with a bank, the customer may be able to open a checking account that is not subject to fees below a minimum balance. As another example, if a small business takes out a revolving line of credit, it would be in a good position to negotiate lower processing fees for merchants.

However, relationship management has some disadvantages for customers, such as being owned by a single bank for most financial services and the risk of becoming complacent rather than comparing services and costs between financial institutions. Another risk to the customer is data privacy and security, as the bank has access to embedded financial data about the customer and can use it for the benefit of the bank and as leverage in negotiation. If there is a data breach at the bank, customer accounts are widely exposed. On the bank side, relationship management can increase the bank’s risk exposure with specific customers in the event of default.

Customer approval is mandatory when cross-selling banking services within a banking relationship. As the recent Wells Fargo scandal demonstrated, such trust can be breached. A flawed and aggressive incentive (and punishment) system the bank implemented for relationship bankers at a number of retail branches between around 2002 and 2016 led to millions of new account openings. The problem was that customers wouldn’t allow bankers to open them. Trust is the foundation of a successful banking relationship, but Wells Fargo has broken that trust for millions of customers. A bank must have an ethical service culture to practice relationship banking in the mutual interest of the bank and the customer.