Pros and Cons of Relationship Banking

In the previous article, we studied what relationship banking is and how it is different as compared to transactional banking. The relationship banking model has become very popular, particularly in the field of commercial banking. It is important to understand the pros and cons of relationship banking in order to have enough information to make a better decision.

The pros and cons of relationship banking have been mentioned below:

Advantages of Relationship Banking

Relationship banking offers several benefits to its clients. The most popular benefits have been listed below:

• Win-Win Situation: Firstly, relationship banking helps create a win-win situation for the bank as well as for the corporation. The corporation gets to pay a lower cost for their banking services since they buy in bulk from the bank. At the same time, the bank does not have to spend a lot of money on advertising in order to obtain more customers. Hence, they are willing to pass on the benefit to the corporations. Therefore, prima facie, relationship banking appears to be a more efficient way of conducting business.

• Increasing Scope of Business: The banking relationship also tends to grow with the business. Almost each and every business will increase in size over the years. If a commercial bank is able to acquire a corporate customer at an earlier stage, it will see its relationship size grow effortlessly. This is because as the size of the business grows, so does the size of the underlying engagement.

• Personalized Products and Services: Commercial banking is all about providing a personalized experience to the client. However, providing a personalized experience is not possible till the bank is aware of the financial needs of the client.

  Hence, the best way to provide personalized services is to ensure that a bank’s representative completely understands the business model of the corporate as well as their banking needs. Since commercial banking is not about selling standardized products, it is difficult to imagine any other model being used in such a context.

• Priority Access: Commercial banking model is all about providing convenience to corporate clients. This is where the relationship manager comes in handy. The relationship manager is well aware of all the products and services offered by the bank and the process which has to be followed to avail them.

  Hence, the relationship manager can help the corporation seamlessly follow the process. In many cases, they even perform administrative tasks on behalf of the client. Hence, clients have access to priority customer service and all their issues and queries are resolved in the shortest possible time. Since corporate customers are unlikely to stay with a bank unless they get top-notch service, relationship banking is an appropriate business model, given the situation.

• Lower Chances of Default: Also, since the relationship manager has access to the finances of the firm, they are in a better position to help the bank minimize its risks. Relationship managers can pre-empt a crisis by carefully studying the cash flow of the underlying business. Hence, instead of letting the corporation default, the relationship banker can proactively propose a restructuring of loans and other credit products.

Disadvantages of Relationship Banking

The various disadvantages of relationship banking must also be considered while making a decision. 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. This can be problematic if the corporate is no longer satisfied with the services of the bank and wants to switch to a competitor. Ideally, larger corporations do not rely on the services of one bank for this reason. They do not want any business partner to have a monopoly over them and be in a controlling position.

• Over Emphasis on Cross-Selling: The entire model of relationship banking is based on cross-selling. Now, theoretically, relationship bankers are expected to cross-sell in a consultative manner. This means that the relationship manager should ideally only cross-sell products that are relevant to the customer.

  However, in reality, relationship bankers face a lot of pressure to increase their sales. As a result, they tend to push more and more products to the customer regardless of whether it is beneficial to the customer or not. Hence, having a relationship manager is like having a salesman within the premises of the company.

• Conflict of Interest: The relationship banking model is built on a conflict of interest. On the one hand, the relationship bankers are paid by the bank and hence are likely to stay loyal to the bank. However, the model assumes that they will actually be the advocates for the corporation which has been assigned as their client. It is quite likely that the relationship banker will try to ensure that the bank benefits even if it is at the cost of the client.

• Higher Acquisition Costs: Lastly, the relationship banking model is quite expensive. Corporations expect freebies at the start. Hence, banks are compelled to make loans that are not immediately profitable but may lead to other profitable ventures as the relationship matures in the future.

The fact of the matter is that relationship banking is the predominant business model as far as commercial banking is concerned. However, there are certain cons related to relationship banking that potential clients must be aware of.

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.