The “Relationship Banker” And Profitability Trap – Part 2

Relationship Banking - Trusted Advisor

This is the second in a series of articles exploring the concept and implementation of a trusted advisor approach in banking. In Part I (HERE), we compared the profitability of a transactional banking model versus a relationship-driven model and questioned why so many banks want to be relationship-focused given the higher cost and execution risk. In this article, we explore the main issue with the relationship model and start down the path of uncovering ways to fix the framework and deliver a higher level of banking success.


The $34,000 Reversed Engineered Question


Given the cost of acquisition, maintenance, retention, and risk, it takes about $34,000 of profit to return a bank a 15% return on a commercial loan customer. Take that number with a grain of salt, as averages are deceiving, and every bank faces a different cost structure, risk profile and customer base. However, the point is relevant - how do you plan to make whatever hurdle that you have? For transactional banks, that answer is clear – sell enough volume of your limited product suite while lowering incremental costs. If you are a credit card bank, you want more credit card activity – simple. However, for a relationship-driven bank, the answer is not clear as there are many ways to produce an above average return:


Relationship Banking - Trusted Advisor


But What Does Being “A Relationship Bank” Mean?


Once your bank is clear on the business model, the harder question to tackle is what does being a relationship banker mean? Sure, you want your bankers to be consulted and turned to for guidance but guidance for what? Just banking products? General business questions? Human Resources? Operations? Risk?


To help us answer this question, we turn to one of the best relationship banking advisors we know - Nick Miller, President of the Clarity Advantage Corporation. Nick first had us agree on some core assumptions that support the underpinnings of relationship banking:

  • If relationship managers perform well on core banking and relationship management attributes, clients are very likely to see them as trusted advisors.
  • “Performing well” can be defined as matching banking products and services to the client’s needs in a way that has less friction than the competition. This is table stakes entry into the relationship banking marketing.
  • Bank clients do not expect their commercial bankers to demonstrate any of the thought leadership attributes that typical trusted advisor models suggest, for example, “Offers ideas to help us improve the financial performance and strength of the company,” — but if they did, they would further distinguish themselves from the competition.
  • Not every client warrants a relationship approach.

So far, so good, but then things turned confusing when Nick had us answer some increasingly difficult questions.


Eight Golden Topics


Good answers start with good questions, and these eight topics made us think. If you are a relationship bank, see how many you can honestly answer:


  1. What, specifically, do you expect your relationship development officers to advise on?
  2. How do you determine if a customer requires a relationship banker?
  3. How do you manage our human capital across geography, industry expertise and functional expertise? Does your bank have experts in certain industries, certain functionalities such as M&A, or both? How are these experts found within the bank and do they have any geographical limitations or expertise?
  4. How do you take entry-level bankers and teach them the basics of products, then move them to be relationship bankers and then develop them into “trusted advisors”? Is this process mapped? Do you have mentors to teach bankers to be trusted advisors?
  5. What attributes do you look for in hiring to determine if a candidate will make a good trusted advisor?
  6. What institutional tools do you provide your relationship banking team to give them a competitive advantage – a profitability model, a customer relationship management system, real estate data? What informational sources do you leverage to be able to generate industry specific insight?
  7. What are your benchmarks to let us know if you are doing relationship management right? What level of profitability is required to be termed the relationship a “success”? What customer-centric benchmarks need to be achieved? What happens if these two metrics conflict? 
  8. What are your expectations for the number of calls to a customer, the length of calls and the quality of calls? Are your calls centered around just developing business or are they honestly created to add value to the customer? How do you describe what a “good relationship” for the bank look like and would everyone agree?


The Problem In A Nutshell


As intoned by the questions, most banks fail to execute a relationship banking model because they don’t define what that model looks like and fail to hire, train and equip their bankers to assume that role. What you get is various degrees of success that equal the sum of the capabilities of the individuals, but no more.


As Nick’s research pointed out, only 20% of bank relationship managers have the right “DNA” and will learn through experience to develop trust-based trusted advisor relationships with clients. Banks can do better.


Banks that struggle with relationship banking often have higher than normal costs and lower than average closing rates plus fewer products per customer. Worse yet, many bankers think they are executing on the model when in reality, the “relationship banking” moniker rings hollow.


Solving The Relationship Profitability Model


Like a good sports coach, banks that do relationship banking well build an organization where the level of performance exceeds the capabilities of the bankers. This is where leadership and process can pay off. Executive management needs to lay out what they expect given the bank’s capabilities, brand and customer base. Management must have a system and a process to help develop the capabilities of the bankers in order for them to create more value for their customers. These are the hallmarks of an effective relationship-driven bank.


In Part III, we will sit down with Nick to get more specifics on how bankers might specifically build an organization to better answer the questions contained in the Eight Golden Topics.