RELATIONSHIP BANKING
“No marketing asset is more effective than a satisfied customer or member. As you build loyalty and trust, the people who do their banking with you become your strongest brand advocates.”
Relationship Banking is a process wherein banks try and attempt to establish a relationship with their customers. The relationships they cultivate help these banks in predicting the demands of the customers and fulfil them even before the customer has asked to do so! This makes the customer feel special and they continue to purchase the services of the bank. On the other side, banks can also check the reliability of a borrower. This approach is mostly linked with smaller banks that use a more personal approach with customers, even though an increasing number of large banking corporations are beginning to motivate similar strategies in their local branches.
Banks that practice relationship banking take a consultative approach with customers, that is, they get to know their particular situation and needs, and adapt to changes in their financial or business lives. This helps banks in decreasing their default rate as well as increase their customer loyalty. For example, a borrower might feel a sense of personal responsibility towards their loan officer and be more hesitant to default. If having a personal tie with the loan officer makes banking easier, the client may be reluctant to switch to a different bank given that building new relationships takes time and effort.
Whenever a relationship is made, banks try to find more information about the customer and at the same time try to be a little flexible in their policies, this is done to strengthen the customer’s loyalty towards the bank by making them feel special and cultivate a bond between them.
A study shows that relationship accounts have a 7 percentage point higher utilization rate compared to non-relationship accounts, ceteris paribus. Also, a customer which has at least 1 relationship with a bank might have a default rate of just 6%, which is much less than the average default rate with non-relationship accounts.
The two main strategies used by banks to develop a relationship with their customers are:
1) Personalised Relationship– In a personalised relationship, dedicated relationship managers work with the sole objective of establishing as many relationships with as many customers as possible. This strategy can be adopted in several ways. For example:- giving relationship customers the highest priority through the provision of loans at costs lower than that to the general public, giving them additional and new services according to their requirements, etc. If a bank offers you these many services, you are bound to think of them whenever you need banking services.
2) Digitalised Relationship– In digitalised relationships, the banks try to offer digitised services, by using data to provide all those services which are needed by the consumers. Banks learn a customer’s spending capacity, credibility, and previous defaults. This will help the banks to examine and determine which services will be needed by a particular customer, how credible they are, and if special services offered to the customer would help in growing their relationship.
There are many case studies done on Relationship Banking and all of them show a positive relationship between the loyalty of customers and the number of relationships with banks. One such case study was Ritu Agarwal’s (2009) PhD thesis, “A Comparative Study of nationalized and Private Bank concerning customer relation management,” submitted to the School of Management Studies Punjabi University, Patiala (2009). The core objective of the study was to identify and study the process of customer Relations management with performance indicators of Banks in the industry. The study covered two leading public sector banks- SBI and PNB and two private sector banks ICICI and HDFC. The results of the study revealed that the banks are in dire need to make proper strategies to improve their working. By adopting the strategies of relationship banking, banks will become more efficient and the number and duration of relationships will directly affect the profitability of banks. Further, the study also suggests that to meet the customer needs and to beat the competition, they must deliver superior quality service. The CRM or relationship banking approach adopted by banks focuses on maximizing the value for the customer and the bank. The key drivers of customer loyalty are:
(a) Positive Staff Attitude. (b) Honesty, Integrity, and Reliability. (c) Productive advice and delivery of the promised service. (d) Consistent delivery of superior quality service. (e) Simplicity and ease of doing business. (f) A fair and efficient complaint resolution.
Also, the number of relationships with a customer is important. Studies suggest that if a bank has 6 established relationships with one consumer, the default rate decreased to a low of only 1% as compared to a default rate of about 4-5% of customers having only one established relationship with the bank. This study concluded that a proper strategic alliance between various partners in the process of implementing CRM should be decided well ahead. Moreover, once the concept is accepted it should be implemented in good faith and spirit to derive customer delight.
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