Chief Investment Officer
Commercial Loan Automation
relationship banking - the real thing
Is "Relationship Banking" more than just a word? It's at the heart of SuperCommunity Banking, yet execution continues to falter. The article below tackles this critical topic. I'd love your comments on it and stories where you've seen Relationship Banking work, and why.
Liat is back in school so I imagine we'll see more articles from her. In the meantime, an article on Santa Fe restaurants has been posted for your review, as well as a stick-to-your ribs short rib in red wine recipe.
Relationship Banking - The Real Thing
The word "relationship banking" has joined other venerable words such as "synergy" and "re-engineering" in our vocabulary. It means many different things, and it's long on concept and short on execution.
One company that has cracked the "relationship" code was the "old" Wachovia, pre- First Union merger. That company employed a book of business approach and dedicated high-quality personal bankers to discrete groups of customers. There is much to learn from their model in both commercial and retail banking today.
A solid relationship banking model has four success requirements:
- Distinctive target (focus on customers that are relationship-oriented themselves; not all customers are)
- Distinctive value (truly keep their best interest at heart)
- Distinctive execution (balance local market expertise with institutional and industry knowledge)
- Distinctive passion (sweat every detail and truly care)
A personal banking strategy that is effectively executed will yield profitable relationship optimization, which is what we're all after: large share-of-wallet and less price sensitivity among our clients. The idea is to create customer intimacy by proactively reaching out to those customers that value the benefits that relationships bring, and offering them products that will suit them well when the time is right.
This "mouthful" is extremely difficult to execute, since it requires intimate customer knowledge; proactive action; a sales-force that is committed to both the strategy and to the customer; and a good understanding of the right timing from the customer's perspective. At the same time, a true relationship banking approach optimizes the sales force's time and call effectiveness, while delivering greater value to the customer since the approach is proactive and tailored to each customer; it makes the bank more relevant to their lives, and improves with time as the bank and its sales people learn more about what the customer needs while improving their own professionalism and delivery.
Robust customer information is a pre-requisite to a relationship-based strategy. The information then needs to be carefully analyzed to yield actionable data. The best outcome is to have customer leads that are scored, prioritized and distributed electronically, who are then contacted by the sales force for a relationship-based dialogue. Results from these customer contacts should then be analyzed to assess productivity and its root causes (e.g. good prospect selection? Effective sales force behavior?), and then entered into a feedback loop that enriches the customer file and facilitates further learning.
Robust customer information. Some customer files contain 2,000 data elements per customer. Such rich data increases the likelihood of finding the appropriate product solution greatly. Strong database management banks update their data weekly from sales force input sources and append it with external information. The customer profitability is also updated continuously to ensure that all customer behavior and product usage are accurately reflected in the profitability number.
Effective customer profitability calculations. Too many customer profitability analyses I've seen are 100% volume-driven: the larger the average balance of the account, the greater the profitability. This is so because the models fully allocate expenses and miss the marginal value each new account contributes to the bank and its shareholders. In addition to the fundamental issues of transfer pricing and cost allocations, solid profitability analysis includes product use (e.g. how many times a month the customer use their debit card; what is average transaction size); transaction by channel (branch, ATM, ACH, phone); account level profitability (product-based costs including transaction and maintenance expenses); customer level profitability; household profitability and, then, household insights on future unmet needs (by overlaying external information such as demographic, psychographic, lifestyle and market research data).
Understanding of customer deciles profitability. Most banks top 20% of customers use don't pay for 120% of the profits. That level of concentration has abated in recent years, but the 90%-10% rule of profitability concentrations still persists. In the past, bankers over-reacted by looking for ways to exit bottom-performing deciles. Today they know that through effective marketing they can turn almost every unprofitable customer into a profitable one. Plotting customers' current profitability against their potential profitability can help to not only more fully mine the customer base but also to deploy the appropriate sales force against the best opportunity. For example, customers who are currently highly profitable yet still have a high profit potential should be serviced by the best sales force you have, such as personal financial advisors. Conversely, currently high profitability customers who have little future potential for profitability should be focused on for retention efforts by bankers and possibly the call center.
Understanding profitability drivers. In most banks, the main drivers of customer profitability are product ownership and its sequence of purchase; product usage; accounts and products/services per household; tenure with the bank; channel usage; demographics and lifestyle. Knowing these drivers is critical to designing product sales flows that will maximize both customer satisfaction and shareholder value.
Investing in technology. Relationship banking happens when bankers do the right thing, but technology can greatly facilitate the process. Having integrated data bases that tell bankers all that a customer has with the bank and their behavior patterns can be most valuable in directing sales force activities. Unfortunately, most banks look for the best and most perfect technology, which delays system availability and often is so complex it's off-putting to the common banker. Offering simple systems that depict only the relevant data to a relationship manager, coupled with automated sales management software, can be a winning combination. Getting everything right in round one is too much to expect!
Relationship-oriented sales strategy. Relationship banking doesn't work when the sales approach flies in its face by seeking to optimize short-term sales quotas. Leveraging strong local market presence with brand identity of trust and knowledge and the conviction that the best solution is the one that keeps the customer's best interest at heart is an important first step in designing a sales strategy that optimizes the long-term value of the customer.
A relationship-oriented sales strategy is proactive and contact-intensive. Well executed, such a strategy yields a 25% close ratio (1 out of 4 contacts), and strong gains in wallet share and customer retention. Consistent deposit and fee income growth will follow.
Customers appreciate a relationship-driven approach. They like to be contacted, especially when they see that their best interest is at the heart of the contact. Trust will follow.
Shopping for the right stuff. You already know of my view of mystery shops. Here are some questions that can help you assess whether your relationship banking orientation is being felt by your customers and prospects. In addition to the "one question" (will you refer a friend?), consider the following:
- Will you contact us the next time you have a need for a financial product?
- Is there a financial services provider you can trust?
- Did we show interest in keeping you as a long-term customer?
- Did we suggest changes in your account that will save you money or save you time?
- Do we have your best interest at heart?
- Did we tailor our services to meet your unique needs?
- Do we help you make smarter decisions about your financial situation?
- Did we offer you financial services you didn't know we had?
Feedback analysis is a critical element. Every bank's institutional knowledge is increased when feedback is incorporated into the company's database. Such feedback enables each bank to develop more comprehensive information on their customers and prospects, and more targeted leads. This is true for both commercial and retail customers. Learning can and should be channeled intro sales coaching to refine the market management skills and sales approach, and data can then be used to validate the strategic direction and effective execution of the relationship-based approach. Good information can also allow you to further refine your strategy and tactics for best results.
Relationship banking is an over-used and under-delivered word. When effectively executed, it can make a meaningful difference in your customers', bankers and shareholders' lives. It requires a culture that fosters longer-term optimization and continuous learning coupled with highly tactical sales management activities in the short-term. Data can help improve your "hit ratio" and customer knowledge, but the very first step toward true relationship banking is up to executive management. Expectations for consistent behaviors and deepening of relationships, fewer rewards for "elephant hunters" and more celebrations of bankers whose customers retain the longest and continue to grow the profitability of their customer portfolio are executive management's tools of redirecting the company to focus on the customer and bring meaning to the words "relationship banking".
Relationship banking is an effective way to gain customer loyalty as long as it is executed properly, i.e. with the use of a robust profitability meter (not just volume), a knowledge base that is continually updated, a dedicated sales staff, and the ability to determine who is the best target for what service and an emphasis on the long term.