What Is Relationship Banking?

Relationship banking is a strategy used by banks to strengthen customer loyalty and provide a single point of service for a range of different products and services. A customer of a bank may start out with a simple checking or savings account, but relationship banking involves a personal or business banker offering products designed to help customers attain financial goals while increasing revenue for the financial institution.

Understanding Relationship Banking

Banks that practice relationship banking take a consultative approach with customers, getting to know their particular situation and needs, and adapting to changes in their financial or business lives. The relationship banking approach is easily observable in a small-town bank, but it is also practiced in the retail branches of the large money center banks.

Key Takeaways

  • Relationship banking is strategy used by banks to offer a variety of different products, strengthen customer loyalty, and generate additional revenue.
  • Small, mid-sized, and large money center banks all use relationship banking strategies.
  • Relationship bankers often approach customers with offerings such as insurance, investments, and certificates of deposit.
  • Relationship banking can be pushed too far, as with the Wells Fargo scandal when bankers opened accounts without permission from customers.

Whether for an individual or small business, relationship bankers will engage in high-touch service to try to make their banks the 'one-stop shop' for their customer's A-to-Z needs. Examples of products offered in the banking world include certificates of deposit, safe deposit boxes, insurance plans, investments, credit cards, all types of loans, and business services (e.g., credit card or payroll processing). Relationship bankers may also include specialized financial products designed for specific demographics, such as students, seniors, and high net worth individuals.

Cross-selling is the modus operandi of relationship bankers, but they must be careful. Federal anti-tying laws established by the Bank Holding Company Act Amendments of 1970 prevent banks from making the provision of one product or service contingent on another (with some exceptions).

Advantages and Disadvantages of Relationship Banking

Customers may be able to take advantage of a bank's desire to develop relationship banking by obtaining more favorable terms or treatment with regard to rates and fees, as well as to obtain a higher level of customer service, which is especially true in a smaller bank such as a community bank.

For example, if a customer takes out a mortgage loan at a bank, the customer may be able to open up a checking account that is not subject to fees below a minimum balance. As another illustration, if a small business takes out a revolving line of credit, it would be in a favorable position to negotiate a lower fee for merchant processing fees.

However, relationship management presents some downside for clients—such as being held captive by one bank for most financial services and the risk of becoming complacent rather than comparing services and cost among financial institutions. Privacy and data security are another client risk, since the bank has access to integrated financial data about the client and might use it for the benefit of the bank and as a negotiating lever. If there is a data breach at the bank, client accounts are exposed in a large way. From the bank's side, relationship management might increase bank's risk exposure with specific clients in case of default

Client approval is mandatory when cross-selling bank services in the course of relationship banking. As the 2018 Wells Fargo scandal demonstrated, such trust can be violated. A flawed and aggressive incentive (and punishment) system that the bank implemented for relationship bankers at a number of retail branches from around 2011 to 2016 led to millions of new account openings. The problem was that customers did not authorize the bankers to open them. Trust is the foundation of successful relationship banking, but Wells Fargo broke that trust for millions of customers. A bank must have a culture of ethical service to practice relationship banking for the mutual benefit of bank and customer.