What Is Relationship Banking?

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DEFINITION
Relationship banking is a banking strategy that targets clients' multiple needs.

Relationship banking is a banking strategy that targets clients' multiple needs. Rather than trying to sell you a one-off financial product, a bank would aim to develop a long-term relationship with you through several products and services.

The idea is that over time, that institution becomes your go-to when you need a new financial product such as a savings account, a mortgage, or auto loan. Then, the bank benefits from increased customer loyalty and more revenue.

Let’s take a closer look at how and why financial institutions use relationship banking.

Definition and Examples of Relationship Banking

Relationship banking is a strategy banks use to increase customer loyalty by targeting all of a customer’s banking needs. With relationship banking, banks actively analyze a customer’s wants, needs, and goals, then cross-sell various products and services.

The bank’s goal is for you to view it as a one-stop-shop so you go to it throughout your life each time you need a new financial product—whether it’s a deposit account, a loan, an investment account, or even a safety deposit box.

One way banks build relationships with customers is by offering them interest-rate discounts, waived fees, and other perks when they have multiple accounts with the institution.

For example, if you currently have a deposit account with Citi, you can get access to special “relationship pricing” on mortgages, which includes an interest-rate discount or a closing-cost credit. If you have a linked checking and savings account with Chase, you can earn a higher “relationship rate” on your savings account balance. These are both examples of relationship banking.

Banks are usually willing to offer these types of perks and rewards because relationship banking often leads to increased profitability and strengthened customer relationships over the long haul.

How Does Relationship Banking Work?

Banks spend a significant effort trying to anticipate their customers’ wants and needs. They believe that the more you view them as a trustworthy institution that can solve your problems, the more likely you are to turn to them for more than one financial need. Once you have multiple accounts with that institution, you’ll be more likely to think of them first the next time you need an account, loan, or service.

Banks offer all types of “relationship” perks for current customers. Aside from general perks such as loan discounts and lower fees, high-net-worth and elite clients may even receive perks such as their own relationship manager or private banker to turn to 24/7 for personalized advice on many financial issues.

Another way banks strengthen their relationship with you is by offering intuitive apps and platforms that integrate all your accounts and make banking with them easier.

Relationship Banking Example

Suppose you open a checking account with a bank. A few months later, your bank informs you of a money-saving feature that allows you to round up your purchases and put the extra money in a savings account. So you open a savings account to take advantage of that feature.

Later, you might use your bank’s investing platform so you can make instant transfers from your checking account. Then perhaps you’ll open an IRA account with your bank so all your financial accounts are in one place.

With relationship banking, your bank will offer your products and services to fit each stage of your life, such as a mortgage or auto loan.

When your bank focuses on you as a client instead of focusing on delivering one product, it is practicing relationship banking with a goal of creating brand loyalty.

Pros and Cons of Relationship Banking

Pros
  • Access to special “relationship” perks

  • Potential for more personalized customer service

  • Increased profitability and customer loyalty for the bank

Cons
  • Harder to leave a bank once you have multiple accounts

  • Can lead to predatory cross-selling

Pros Explained

  • Access to special “relationship” perks: Banks are more likely to give better interest rates, lower fees, and special discounts to existing customers. This is one way they incentivize you to open multiple accounts.
  • Potential for more personalized customer service: The more accounts you have with a bank, the more data it can collect about your needs, and the better it can offer services you could use.
  • Increased profitability and customer loyalty for the bank: For banks, the biggest perk of focusing on relationships is increasing revenue and improving customer retention.

Cons Explained

  • Harder to leave a bank once you have multiple accounts: With perks from relationship banking, like the convenience of having all your accounts in one place, you may not be on the lookout for alternatives with even better terms.
  • Can lead to predatory cross-selling: If relationship bankers are being pressured to meet aggressive sales goals set by the bank, it could lead to fraudulent and unethical activity as it did in recent years at Wells Fargo.

Relationship Banking vs. Transactional Banking

Relationship banking is different from transactional banking. Relationship banking is more focused on making customers feel valued and offering an array of banking solutions that can solve customers’ problems.

Transactional banking, on the other hand, focuses more on one-off services or products. It’s often referred to as “hit and run” banking because it’s a calculated, transactional type of business in which the customer doesn’t really take into account their relationship with the institution.

Relationship banking Transactional banking
Focuses on building a relationship with customers so they view the institution as a one-stop-shop for their financial needs. Focuses on one-off services and products based on which institution has the best rate, regardless of customer relationship.

Key Takeaways

  • Relationship banking is a strategy in which banks analyze their customers’ needs, then cross-sell them different products and services.
  • Relationship banking helps a bank increase customer loyalty, reduce expenses related to gathering information, and foster long-term profits.
  • Customers can benefit from relationship banking because it results in a more personalized banking experience based on their wants and needs.
  • With relationship banking perks, customers might get better interest rates, discounts, or special services.

Article Sources

  1. Credit Union. “Relationship Banking.” Accessed Dec. 2, 2021.

  2. Citi. “Citi Mortgage Relationship Pricing.” Accessed Dec. 2, 2021.

  3. University of Pennsylvania, Wharton School of Business. "Benefits of Relationship Banking: Evidence From Consumer Credit Markets.” Page 1. Accessed Dec. 2, 2021.

  4. Citi. “Gold Private Client.” Accessed Dec. 2, 2021.

  5. Wells Fargo. “Making Things Right for Customers.” Accessed Dec. 2, 2021.