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Time to sharpen the focus on current banking relationships

Relationship banking—prioritizing existing primary banking relationships—allows banks to strengthen their bottom line and remain resilient.

Jul 31, 2023 / Business Banking

Bankers are gathering deposits to strengthen their balance sheets, provide loans and prepare for a potentially challenging economic environment. Instead of focusing on an open market crowded with competition, there are great gains to be made with existing customers. Historically, 70% of deposit growth comes from existing customers. It is easier and more cost effective to grow within the customer base, yet most banks are not taking advantage of that fact. They aren’t identifying primary relationships and properly leveraging them.  

Understanding customers’ challenges and offering relevant products and services helps both the customer and the bank. It all goes back to the basics of relationship banking. 

Defining relationship banking 

Banks are built on relationships. The fundamentals of relationship banking haven’t changed over the years, but now banks have more ways to care for customers. These additional channels, products and services provide many customer advantages, such as convenience and ease of use, but siloed data makes it more difficult for banks to define and understand each customer’s full banking relationship. Breaking down silos for a full customer picture starts with building a clean data environment, defining a full client relationship and aggregating a comprehensive view of the client’s relationship and behavior. Understanding the entirety of a banking relationship will help banks determine which relationships are both primary and profitable. It’s often not what the relationships bank might think.  

Each bank defines primary bank relationships differently—be it based on the number of accounts, services, transactions, loans or deposits they have with a relationship. The industry has no standardized definition of primacy, so it should be adapted to each financial institution’s needs.    Customers identify their primary bank as the one where they pay their bills and deposit their income. This definition can be built on customer transaction behavior.  

Once primary relationship factors are identified, bankers will need to have an accurate view of their customers, including their accounts, transactions and product usage. Banks can then use this information to prioritize which relationships to gather deposits. For consumer clients, about 15% of all relationships drive 75% of deposits and 50% of revenue. These same relationships more than likely have deposit balances at other banks. Their transaction data will provide banks with the name and transfer activity. Focusing on primary relationships that have a history of contributing to the bank’s bottom line will be especially important when capital and liquidity are constrained. 

Why invest in primary bank relationships? 

As the economic cycle and regulatory changes evolve, banks will be challenged to find ways to use their capital and liquidity more effectively. They will need to understand how each relationship uses capital and liquidity and whether the bank is getting paid for it. For example, a business relationship with treasury management and the primary operating account will have three times the return on capital as a standalone loan. Banks must strategically and intentionally allocate capital and liquidity if they want to continue lending.  

Reduction of lending to non-relationship customers provides banks with more capital and liquidity for primary bank relationships. Instead of focusing on new customers, banks can spend time understanding the needs of their existing customers and helping them navigate challenging financial times. They can find ways to deepen these relationships as well as educate customers on products and services they might not be aware of, based on their product usage and transactions.  

Investing in primary relationships can help banks remain resilient and continue to serve their customers. Banks can’t afford to lose these relationships, so they must prioritize and protect them. Taking care of primary relationships is the essence of relationship banking. Many banks believe they act in a relational manner, but in reality, they are purely transactional. Understanding how many primary relationships they have, or if loans and lines of credit are priced and sized appropriately for the relationship and risk profile, is how banks can truly become relational. Banks focusing on the relationships they have today will be able to deliver on their commitment to relationship banking now and in the future, despite the economic circumstances.  

Mac Thompson is the founder and president of White Clay.