Relationship Banking: Meeting Sales Goals in Today's Economy - Research Paper Example

Running Head: Relationship Banking: Meeting Sales Goals in Today’s Economy Introduction Competitiveness within the global financial services industry inclusive of the banking sectors have ensured that commercial financial institutions engage in innovative and creative approaches to meet their sales goals. The exchanges and interactions of banks and its customers on variant dimensions may serve to increase sales outcomes thereby leading to the realization of pre-set targets within the bank. Relationship banking is defined by Perrien, Filiatrault, & Ricard (1992) as the practice of building on existing business relationship so as to enhance profitability for the parties involved. Within the banking industry there exists a number of approaches for example; bilateral credit transactions between banks and borrowers. It is hypothesized that Relationship banking is a sure approach towards meeting sales goals in today’s economy as it presents banks with opportunity to cross-market and sell customers other types of financial services. Relationship Banking and Sales Outcomes Relationship banking allows for seamless, multi-channel sales and services within the banking industry thereby providing banks with opportunities to increase its sales via an integrated approach, (Besanko & Thakor, 2004). One of the basic approaches to relationship banking is the personal-banker strategy. Research have shown that excellent personal banker increases customer’s satisfaction and loyalty comparative to other customers who do not engage in personal banking with a given bank, (Besanko & Thakor, 2004). The strategy has been critical to developing trust and relationship commitment by customers besides improving communications between the two groups. Bank to customer exchanges has become more profound with technological advancement. Mukherjee & Nath (2003) notes that, technological interfaces have increased interaction between bankers and their customers thereby leading to better communication, increased trust and commitment and the desire to engage the bank in additional transactions. Banks may therefore integrate client information with IT systems thereby achieving a more complete view of their customer relationships and its profitability. Relationship banking is directly correlated to an increase in sales figures within the banking industry. Logically speaking, the total sum of a bank’s relationship will impact on its sales outcomes since although each borrower is concerned solely with the value of its bilateral relationship with the bank; the bank takes a multilateral portfolio approach taking into consideration the cumulative value of all its relationships, (Besanko & Thakor, 2004). Benefits Danaher (2000) affirms that the benefits of developing customer relationships within the banking industry are well established. In most cases, banks accumulate borrower-specific information as a result of the bilateral relationship thereby leading to the creation of informational rents which are thereafter shared between the bank and the borrower. The mutual sharing of these rents lead to mutual benefits hence the parties desire to protect their relationship. The strategy also creates multi-channel banking experience thereby increasing customer loyalty, (Colgate, & Donaher, 2000). Relationship banking empowers customers such as borrowers enabling them to possess sufficiently strong bargaining power when dealing with the bank yet the bank controls the entire process. This symbiotic relationship between the bank and its customers leads to interesting developments such as optimally fixed interest rates for borrowers, (Mukherjee, & Nath, 2003). The approach also leads to private information to borrowers providing them with a wide range of products which results into better decisions and improved sales outcomes. Since relationship banking allows banks to profile its customers, they are able to learn their needs hence gaining informational advantage in pricing its products similar to ones offered by its competitors. However, Fohlin (1998) affirms that informational advantage may not always be beneficial with respect to sales outcomes as it may create distortions. Since many banks have realized the importance of relationship banking in meeting their sales target, Perrien, Filiatrault& Ricard (1992), report that many banks have made substantial progress in improving their customer-bank relations. Furthermore research indicate that majority of customers preferred a single provider for their banking solutions since this was more convenient. Better delivery of total customer experience arose from the cultivation of deep knowledge of customers and the building of more customer-centric experience. Bank-customer relationships have also been beneficial in promoting stronger and more efficient investment between the two parties, (Parlour & Platin, 2007). Loan Sales and Relationship Banking Loans accounts for the greatest proportion of bank’s sales outcomes since banks sell loans to either recycle their funds or to trade on private information. For banks, liquidity in the loan market depends upon where it will be used and its potential effects on the customer’s optimal financial structure. Although varied, on average, more than 50% of individual bank’s sales targets arise from loans with figures on loan sale from the US growing from $8 Billion in 1991 to $154 billion in 2004, (Parlour, & Platin, 2007). Securitization or sale of a loan enables a bank to gain either more control or more information on the buyer furthermore thereby leading to increased relationship within the bank. Loan facilities further strengthen relationship between the client and the bank as it allows for personal interaction between a bank’s loan officer and the client. Globally, meeting sales target within the banking industry has become a tall order due to the unprecedented turmoil in the financial markets. Investors have become more risk averse hence banks must introduce a wide range of products to meet their sales targets and increase their profit margins while building superior customer relationships. It is estimated that superior customer relationships reduces customer attrition by 30% within the banking industry, a figure that is representative of billions of dollars in asset base, (Fohlin, 1998). It is also estimated that a whooping 68% of customers will prefer banking products with institutions they have strong ties rather than new banks. Research have indicated that nearly all individuals and firms borrow for the first time in their life from a single bank but starts borrowing from other banks as they mature, (Farinha & Santos, 2002). This substitution of a single client-bank relationship with multiple relationships increases with duration and perceived customer satisfaction with his/her bank. Firms and individuals with more growth opportunities are also likely to seek products of other banks comparative to those with poor financial performance hence relationships encompasses exchanges and interactions between banks and its customers, (Colgate, & Donaher, 2000). Product Centric Vs Relationship Centric approach Among corporate clients such as insurance agencies, relationship banking affects the link between a given bank and the market structure, the capital market and the bank’s portfolio choice, facets that directly affect the bank’s sales outcomes. Due to the global financial crisis and the complex and competitive banking industry, relationship banking has enabled banks to shift from a product-centric to a relationship-centric approach enabling banks to discourage its customers from defecting to other institutions thereby retaining their annual sales volumes, (Besanko& Thakor, 2004). Parlour, & Platin (2007) stipulates that to strengthen bank-customer relationship, banks must focus on three fundamental actions. The first target is the creation of a customer-relationship business model with a single organizational owner for customer relationship, without regard to products or customer preferences. This allows concentrated actions making the process more consistent and connected across different channels. This unit when linked with the bank’s sales department leads to increased sales outcomes. Secondly, developing and utilizing deep customer knowledge will increase sales outcomes. Besanko& Thakor (2004) affirm that banks have been unable to effectively deepen their customer relationships although approaches such as micro-segmentation can assist banks in pinpointing customer preferences and styles. Additionally, strategies such as developing a customer-value metric will enable banks to identify specific customers and segments enabling them to anticipate customers’ needs, present their products and in overall increase sales. The third approach is to create relationship-based services and pricing aimed at boosting sales. Banks may use their formidable pools of data to target customers through the creation of relationship based services and prices. Tailor made services and pricing enables banks to gain insights into customer needs hence deepens their relationships as they create valuable service offerings to clients. Researchers such as Farinha & Santos (2002) affirm that to meet sales target, banks must go ‘back to basics’ and focus on the importance of developing strong relationships with its both retail and corporate customers the former of which accounts for between half to three quarters of most bank’s net operating revenues. Analysis Based on the existing research, relationship banking will be an imperative approach towards meeting an organization’s sales goals. However, as noted by Danaher (2000) well designed relationship banking strategies often fail as a result of poor implementation approaches. Parlour, & Platin (2007) states that when developing a relationship banking strategy aimed at improving sales, the bank must understand customer’s needs, identify emerging and profitable customer segments and incorporate strategies that will attract them. A number of major problems have been raised as being impediments towards the implementation of an effectively designed relationship banking strategy thereby leading to limited sales outcomes. Although having a personal banker may increase customer satisfaction thereby improving sales outcome, the banker’s competency is also of great significance. It has been shown that the personal banker strategy may be counterproductive as a poorly performing personal banker may lower overall customer satisfaction thereby impacting negatively on the sales outcome of the organization. Danaher (2000) states that the negative affects of a poor relationship strategy within the banking industry may exceed the positive benefits thereby having a negative resultant outcome within the sales outcomes of the bank. Relationship banking also ensures that customers make more referrals, yet referrals have over the years increased banks’ sales outcomes. Customers with established relationship with banks tend to account for an estimated 35% of all referrals the remainder being from employees, accountants, attorneys and other channels. The approach must be used in collaboration with other strategies developed by a bank’s sales team. Fohlin (1998) affirms that although relationship banking will lead to increased sales outcomes, a bank must strive to develop a sales culture with a dedicated, trained, well managed and financially motivated sales force. Conclusion Effective implementation of an elaborate customer relationship strategy within the banking industry will determine the extent to which the organization’s sales goals are met. A bank should not only aim to achieve its sales goals but to maintain positive outcomes throughout the defined time periods hence it must strategize to sustain the already developed relationship since future commitment by the customer will be dependent upon service delivery and perceived trust. Banks should strive to upgrade customer service yearning to forge strong, long-term customer relationships. True to Farinha & Santos’ observation (2002), bank’s ability to meet their sales targets in the coming years will depend upon their ability to build strong and lasting relationships and their ability to enhance consumer experiences. References Besanko, D. & Thakor, A. V. (2004) Relationship Banking, Deposit Insurance and Bank Portfolio Choice. EconWPA. Retrieved October 17th, 2009 from: http://129.3.20.41/eps/fin/papers/0411/0411046.pdf Colgate, M.R. & Donaher, P. J. (2000) Implementing a Customer Relationship Strategy: The Asymmetric Impact of Poor versus Excellent Execution. Journal of the Academy of Marketing Services, 28(3) 375-387 Farinha, A. L. & Santos, J. A. C. (2002) “Switching from Single to Multiple Lending Relationships: Determinants and Implications.” Journal of Financial Intermediation, 11(2) 124-151. Fohlin, C. (1998) “Relationship Banking, Liquidity, and Investment in the German Industrialization.” The Journal of Finance, 53 (5), 1737-1758 Mukherjee, A. & Nath, P. (2003) “A Model of Trust in Online Relationship Banking.” International Journal of Bank Marketing, 21(1) 5-15 Parlour, A. C. & Platin, G. (2007) Loan Sales and Relationship Banking. Retrieved October20th, 2009 from: http://faculty.haas.berkeley.edu/parlour/Research/plantin_parlour.pdf Perrien, J. Filiatrault, P. & Ricard, L. (1992) “Relationship Marketing and Commercial Banking: A Critical Analysis.” International Journal of Bank Marketing, 10(7) 25-29 Read More