What Is Relationship Banking?
Relationship banking is a strategy used by banks to strengthen customer loyalty and provide a single point of service for a range of different products and services. A customer of a bank may start out with a simple checking or savings account, but relationship banking involves a personal or business banker offering products designed to help customers attain financial goals while increasing revenue for the financial institution.
Understanding Relationship Banking
Banks that practice relationship banking take a consultative approach with customers, getting to know their particular situation and needs, and adapting to changes in their financial or business lives. The relationship banking approach is easily observable in a small-town bank, but it is also practiced in the retail branches ofthe large money center banks.
Key Takeaways
- Relationship banking is strategy used by banks to offer a variety of different products, strengthen customer loyalty, and generate additional revenue.
- Small, mid-sized, and large money center banks all use relationship banking strategies.
- Relationship bankers often approach customers with offerings such as insurance, investments, and certificates of deposit.
- Relationship banking can be pushed too far, as with the Wells Fargo scandal when bankers opened accounts without permission from customers.
Whether for an individual or small business, relationship bankers will engage in high-touchservice to try to make their banks the 'one-stop shop' for their customer's A-to-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 card or payroll processing). Relationship bankers may also include specialized financial products designed for specific demographics, such as students, seniors, and high net worth individuals.
Cross-selling is the modus operandi of relationship bankers, but they must be careful. Federal anti-tying laws established by the Bank Holding Company Act Amendments of 1970 prevent banks from making the provision of one product or service contingent on another (with some exceptions).
Advantages and Disadvantages of Relationship Banking
Customers may be able to take advantage of a bank's desire to develop relationship banking by obtaining more favorable terms or treatment with regard to rates and fees, as well as to obtain a higher level of customer service, which is especially true in a smaller bank such as a community bank.
For example, if a customer takes out a mortgage loan at a bank, the customer may be able to open up a checking account that is not subject to fees below a minimum balance. As another illustration, if a small business takes out a revolving line of credit, it would be in a favorable position to negotiate a lower fee for merchant processing fees.
However, relationship management presents some downside for clients—such as being held captive by one bank for most financial services and the risk of becoming complacent rather than comparing services and cost among financial institutions. Privacy and data security are another client risk, since the bank has access to integrated financial data about the client and might use it for the benefit of the bank and as a negotiating lever. If there is a data breach at the bank, client accounts are exposed in a large way. From the bank's side, relationship management might increase bank's risk exposure with specific clients in case of default
Client approval is mandatory when cross-selling bank services in the course of relationship banking. As the recent Wells Fargo scandal demonstrated, such trust can be violated. A flawed and aggressive incentive (and punishment) system that the bank implemented for relationship bankers at a number of retail branches from around 2002 to 2016 led to millions of new account openings. The problem was that customers did not authorize the bankers to open them. Trust is the foundation of successful relationship banking, but Wells Fargo broke that trust for millions of customers. A bank must have a culture of ethical service to practice relationship banking for the mutual benefit of bank and customer.
FAQs
Relationship banking is a strategy used by banks to strengthen customer loyalty and provide a single point of service for a range of different products and services.
What are the pros and cons of banking? ›
In conclusion, traditional banking offers a range of advantages such as personalized customer service, physical branches, and a sense of security and trust. However, it also has its drawbacks, including potential fees, limited accessibility, and lengthy processes.
What is the disadvantage of relationship banking? ›
Some of the major disadvantages have been mentioned below: Harder to Leave: The relationship of a corporate with a commercial bank keeps on deepening over the years. Hence, after some years, there is a complex web of services that creates a high level of dependence on a partner bank.
What is the goal of a relationship banker? ›
It is your responsibility to cultivate strong working relationships with clients and to steer their financial dealings toward the organization you represent. You build trust with clients in order to manage their personal finances and investments. The ability to manage multiple accounts is a must.
What are the duties of a relationship banker? ›
Working as a Relationship Banker
Understand clients' needs and direct them towards the appropriate professionals. Assist clients with opening new checking or savings accounts. Give clients information about banking tools, services and promotions. Help tellers keep their lines and customer waits at a minimum.
What are the 4 benefits of banking? ›
- Your money is safe. ...
- Your money is protected against error and fraud. ...
- You get your money faster with no check-cashing.
- You can make online purchases with ease and peace.
- You have access to other products from the bank. ...
- You can transfer money to family and friends with.
- You have proof of payment.
Health benefits of strong relationships
The benefits of social connections and good mental health are numerous. Proven links include lower rates of anxiety and depression, higher self-esteem, greater empathy, and more trusting and cooperative relationships.
Do banking relationships matter? ›
A trusted banker can be a valuable partner that provides guidance and customized financial solutions. Building and maintaining a strong relationship with your bank can benefit your business every step of the way.
What are the 2 pros and cons of online banking? ›
The pros include higher yields, lower fees, and high-tech features that help with account maintenance and budgeting. The cons include more difficult access to customer service, as well as online security concerns. Ultimately, you have to decide what's right for you.
What are the 4 advantages pros of online banking? ›
The 5 benefits of online banking
- Check balances on accounts and view records of your transactions.
- Pay bills automatically each month with easy-to-set-up auto payment.
- Transfer funds between accounts.
- Download or print statements for your tax or personal records.
- Access your account 24/7.
Savings Account Disadvantages
Most savings accounts have minimum balance requirements or monthly maintenance fees. If your savings account falls below the minimum balance requirement, the bank will deduct fees from your account, negating from interests you earned.
What is the difference between relationship banking and transaction banking? ›
What's the difference? Transactional banking focuses on instant solutions and one-off services, attracting potential customers by offering competitive rates for whichever service they require. Relationship banking focuses on long-term client retention by getting to know an individual and their financial needs.
What is the difference between a relationship banker and a personal banker? ›
A relationship banker helps clients resolve any issues they have with their accounts, and helps them to optimize and manage their accounts. In addition to relationship management, a personal banker also helps acquire new clients for a bank and performs administrative duties.
What is an example of a banker customer relationship? ›
In the relationship between banker and customer, the banker act as an indemnity holder if any wrong transaction is done while making the payment by the customer. For example, if you make an online transaction with another person but the transaction failed and your money is deducted.
What are examples of relationship banking? ›
Relationship Banking Example
Suppose you open a checking account with a bank. A few months later, your bank informs you of a money-saving feature that allows you to round up your purchases and put the extra money in a savings account. So you open a savings account to take advantage of that feature.
What is relationship banking and transaction banking? ›
What's the difference? Transactional banking focuses on instant solutions and one-off services, attracting potential customers by offering competitive rates for whichever service they require. Relationship banking focuses on long-term client retention by getting to know an individual and their financial needs.
