The Value of Relationship Banking

Relationship banking is a trite word. Along with world-class service, it implies differentiation from other financial services providers, implying care and customized attention. In reality, too few banks outside of the true community banking world have effectively executed on the relationship banking promise. I believe this has been to their detriment as well as to the detriment of their customers.

Relationship banking offers an age-old win-win proposition: better customer care coupled with greater franchise value and lower new customer acquisition cost for the provider. Other industries have found that to be true, and have spent billions of dollars to build relationships with their customers through varied methods: loyalty programs (airlines’ frequent flyer miles); membership programs (Costco); exclusive offers to valued, tenured customers (American Express); and old fashioned, individualized attention (Aman resorts).

Some banks have followed this model as well, and many met with great success. As you compare the stock price and volatility across banks, those with perceived stable customer bases and strong core deposits (the cornerstone of the banking relationship) command higher premiums and offer lower betas for their stocks, due to the predictability of much of their earnings streams from loyal customers.

Relationship banking works for customers too. Individual attention not only feels good; it pays off. My banker calls me on occasion with special offers and higher rates. They conduct periodic reviews of my accounts and explore ways to improve my overall returns, fully considering my cash flow requirements and anticipated future needs. Relationship banking means higher quality service to customers. Better customers, i.e. more stable clients who choose to do more of their business with the bank, receive better service, better returns and more attention. Again, this equation works for both parties.

The transaction model of banking is another valid approach to banking services. It often entails lower costs and is far less dependent on effective execution by each individual banker. There is room in this world for both, much like there is room for The Peninsula Hotels and Marriott, The French Laundry restaurant and McDonalds. Both provide value on the customer’s terms. I’m a special fan of relationship banking, though, because it creates value for the service provider as well as the customer, and, while it’s more difficult to deliver, it’s certainly more fun for the bankers and the customers alike.