The other day we were presenting our business model and as we were talking about our Five Core Values of being locally market-driven, having a long-term horizon, offering world-class service, focusing on relationship banking and being both faith and family based when we ran into trouble. We got asked to define what we meant by “Relationship Banking.” After nailing the answer, that is when things went south. In this three-part series, we explore what “relationship banking” means, what it should mean, is it profitable and how effective banks use it to their advantage. We will also look at the aspect of if you are going to be “relationship-driven” which part of that customer’s relationship do you really want to play a part in? The answers to these questions may be counter-intuitive to many bankers and may help change the course for your bank and how you go after new business.
The Myth of Relationship Banking
A recent poll we conducted at a conference showed almost 73% of community banks in the room considered themselves “relationship bankers.” When questioned why the bank focuses on the relationship, more than half the bankers said “Profitability” was the reason. We drilled down and got a list of factors that bankers believed contributed to greater profitability (graphic below).
All this sounds good and it is probably true at some level, but the evidence doesn’t support that relationship banks are more profitable. If you look the return on equity (ROE) of banks that say they are about relationships versus banks that are focused on being transactional, you get a major difference.
Admittedly, we would not place too much credence on the above data, since business models are hard to decipher from a call report, those banks that claim they are focused on the relationship might not be, and the data is just a snapshot in time. In addition, in the future we will show how if done right, relationship banking can be profitable. However, consider the economic realities of being a relationship banker. Being a relationship banker usually means offering a wide variety of products and services and spending time on a variety of non-business producing activities.
It is no coincidence that a majority of the top performing banks have a single purpose. They do one thing, they do it well, and they scale. It doesn’t much matter if you are underwriting credit cards, selling financing for Harley Davidson motorcycles, hospitality lending, leasing office equipment, banking fintech companies or handling trust services, the top performing banks, almost exclusively are transactional at their core. That is, of the top 20 banks, 15 make their excess return due to focusing on a specialty product.
The Product Portfolio Dilemma
Transactional banks have the opportunity to gain operating efficiencies. Relationship banks rely on their one-stop nature and offer a portfolio of products. The problem is, that portfolio of products is likely not well managed. It contains products such as retail certificates of deposits that have a low (often negative) risk-adjusted return compared to other deposit offerings. Few relationship banks consider managing product profitability when delivering service. As such, one of the major levers of profitability is lost.
The Inefficiencies of Managing A Relationship
The other important aspect of being a relationship bank is the amount of time calling officers need to spend on non-business producing activities. Bankers are going to grand openings instead of selling more deposit relationships. In the past thirty days, here at CenterState, our calling officers have spent time on advising on a lease, helping a company find a new CEO, assisting with strategy, supporting vendor selection, educating on capital, working with the customer on how to qualify for a loan and helping a customer find new employee parking. If you go further back, we have served in the role of a babysitter (literally), leasing agent, investment banker, chief marketing officer, therapist, domestic dispute arbitrator, vacation home checker and a host of other roles that no one thought would spill over to a banker.
Like you, we hire the very best bankers we can find on both the retail and the commercial side. This usually means our bankers are a bunch of talented go-getters ready to do whatever it takes to help the customer. These bankers are capable of many job responsibilities and eager to help in any way possible. If that means doing a drive-by of a second home to make sure the storm windows are up, most of us would relish the chance to prove our value. However, that begs the question, what should we be doing?
Next Up – Focusing On Profitable Relationship Banking
Here at CenterState, we are not about to stop helping out anyone in a time of need, let alone a customer. However, the better question to ask is, “What areas add the most mutual value to a banking relationship and how can we get better at it?”
We are anxious to hear your thoughts and in the meantime, stay tuned as next week we seek out one of the foremost experts on the topic of relationship banking and get his objective opinion.
Submitted by Chris Nichols on October 02, 2017