Relationship Banking - Essay Example

As banking regulations loosen up across the globe, universal banking is gaining attention and attraction. These banks opt for long-term relationship with industrial firms or individuals. Banking services are now considered as products to be sold and aggressive marketing takes place. Gummesson (1995) held the view that relationship marketing/management is more often focussed on one-to one relationships and less on mass marketing and that its core is based on what is mutually beneficial where supplier and buyer remain satisfied. It is also important to remember of course that a firm does not always want to keep all of its relationships. Sale of banking products has become extremely competitive. This paper will discuss how relationship marketing has penetrated the banking sector and what are its pitfalls or benefits. It will also discuss the type of relationship that banks have with customers and what marketing activities it performs to establish and maintain such relationships. Banks have adopted the concepts of marketing in the highly competitive market as the consumers have become highly literate and empowered. Customers are increasingly using technology for using banking services, and hence the bank-customer relationship have become of great importance. To stimulate the improvement in the quality of service from the banks, deregulation brought in a range of suppliers in the financial services (Durkin & Howcroft, 2003). Because of the pressure on the bank margins from new competitors, banks have had to reengineer their internal and external delivery process to make profits. Technology is used to increase market share and reduce costs. Banks have been forced to consider this because in the new and emerging delivery channels the bank-customer interactions do not involve face to face contact. Relationship marketing (RM) means to identify, establish, maintain and enhance, and when necessary even to terminate relationships with customers and other stakeholders. In doing do both parties gain and the objectives have been met (Durkin & Howcorft, 2003). This conforms to Gummesson’s concept of relationship marketing. Thus it involves mutual satisfaction, gains and attainment of objectives. In RM the customer is treated as a partner and their needs are identified, and loyalty developed through quality service (Fjällborg, Morin, Mannberg, Rosell & Heckscher, 2005). Relationship between the buyer and seller differs across industries and firms and customer service forms the core of RM. Effective customer service creates loyalty, long-term bonds with mutual benefits. RM focuses on minimizing customer turnover. Relationship banking is partly a marketing issue – it is based on gaining and retaining of profitable customers (Seal, 1998). In the banking context relationship banking refers to the interest of the banks to establish and maintain long-term bonds with customers. It poses a great challenge in the context of online banking transactions (Mukherjee & Nath, 2003). According to Gummesson interactive marketing rather than traditional marketing and mass marketing are widening the vision of personal selling. Interaction leads to better contact with the customer. While it is essential to attract new customers, retaining existing customers is equally important and this can be done of product and services are perfect. RM banking has grown in the financial services sector where customer relationships are managed through information technology. Using remote delivery channels presents both opportunities and challenges. Remote banking eliminates the human touch and hence to remain competitive banks must ensure that customers do not feel alienated. In the banking sector, technology has driven customers to seek services through low-cost channels like ATM, internet IVR call centers (Ferguson & Hlavinka, 2007). Relationship banking has gone to the extent of recognizing and rewarding consumers for their entire relationship with the bank. In fact the concept that is now being developed is that the bank’s organization structure exists to serve the customers rather than the product lines as in the case of Banco Popular as observed by Ferguson and Hlavinko. Internet has been considered as the ultimate tool effective in relationship marketing. It provides one-to-one marketing and nurtures loyalty (Durkin & Howcorft, 2003). It provides scope for establishing enduring relationships with customers and a wider network of contacts. Through internet a high level of interaction can take place between the buyer and the seller. Firms are able to alter the products and services catering to individual requirements because of information revolution. Thus each customer has a unique relationship with the firm. At the same time, not having to go into a bank branch, where there may be a constant queue, offers significant efficiencies especially now when time is a constraint for every individual or business (Ibbotson & Moran, 2003). As the customer response to e-banking is revolutionized, banks need to promote relationship banking and develop an understanding of who specifically is adopting and utilizing this new technology and why (Lassar, Manolis & Lassar, 2006). This would help them to customize services and products depending upon the diverse customer needs. Mukherjee and Nath (2003) state that retail banks can build a relationship of trust with customers but the consumers’ trust in online banking is a challenge that most managers encounter. Trust is important to relational exchange as it is the cornerstone of the strategic partnership between the buyer and the seller, they quote. To build trust, to gain loyalty and confidence of the customers, banks need to be ethical. Providing incomplete product information or divulging confidential information would amount to breach of trust. Banks have to build trust by addressing security and privacy concerns. Once a financial exchange is recognized as being relational, then the relationship can be analysed in terms of information required, bonding and mutual trust (Seal, 1998). The banks gain by way of cost reduction and enhanced customer service while the customers gain on personalized service and time. As Gummesson points out, relationship marketing focuses on one-to-one relationship, relationship banking facilitates exchange of information between the bank and the borrower. Boot (1999) points out that with relationship banking a customer may be more inclined to reveal information than in a transaction-oriented interaction. Because there is one-to-one relationship, there is room for flexibility and discretion in contracts leading to long-term relationship. Relationship banking makes it easier to renegotiate contract terms compared to capital market funding arrangement. This relationship is based on mutual commitment and trust. Successful banking models include HSBC’s First Direct which is purely based on remote relationship. In the case of banking customers Carrington et al., (1997) argue that banks may lose power of control because through technology the power is now in the hands of the individual customer (Cited by Durkin and Howcroft) . Once the customers realize the power that technology can give them they would want to move in search of higher returns. Ferguson and Hlavinka also foresee that customers would become indifferent and would not be bothered about consolidation or loyalty. They would shop around for the best products available. At the same time, a well informed customer induces competition and drives an innovative market. Despite this, there are customers who still feel comfortable only when they visit the branch for availing services. It is also argued that relationships where social interaction is limited may lead to erosion of trust. Research suggests that there is decreasing level of customer loyalty in the banking industry which strengthen the case for relationship marketing/banking in the financial services sector (Ibbotson & Moran, 2003). Another disadvantage of relationship banking is whether a bank can deny additional credit if the need arises. If the borrower is on the verge of defaulting, the bank may extend further loan to the customer, in the hope of recovering its previous loan, which other lenders would not (Boot, 1999). It has been found that older, less educated customers prefer face-to-face banking and are even hesitant to use the ATM service although ATM has gained popularity. The role of branch staff is becoming critical as technology becomes pervasive particularly in the delivery of financial services. Roth and Van der Velde observe that for maintaining an servicing customer accounts initial customer relationship is essential (Durkin & Howcroft). Managing relationship is relationship banking is extremely important because it is important to retain customers. The market is volatile and there are new products on offer everyday. Financial services are increasingly doing aggressive marketing to attract new customers but building a relation of mutual faith and trust is essential. Technology may have provided different platforms for banking from the convenience of the home or the office but certain transactions do require face-to-face interaction. Customers, with access of loads of information on the web, try to shop around and are not willing to consolidate at one place. Relationship banking on the other hand wants to hold on to such valued customers and hence this becomes a challenge to relationship banking. Customers today are educated and well informed and expect quality service. Even though relationship banking has certain disadvantages but it is here to stay as it provides satisfaction both to the buyer and the seller. At the same time, traditional channel of delivery can also not be totally eliminated. Hence, even though customers are more comfortable with relationship banking, both channels of delivery of service will continue simultaneously. References: Boot, A. W. A., (1999), Relationship Banking: What Do We Know? Journal of Financial Intermediation 9, 7–25 (2000) Durkin, M. G., & Howcroft, B., (2003), Relationship Marketing in the banking sector: the impact of new technologies, Marketing Intelligence & Planning, 21/1 [2003] 61- 71 Ferguson, R., & Hlavinka, K., (2007), Choosing the right tools for your relationship banking strategy, Journal of Consumer Marketing 24/2 (2007) 110–117 Fjällborg, P., Morin, K., Mannberg, J., Rosell, C., & Heckscher, P., (2005), The Business to Consumer relationship, 17 April 2007 Ibbotson, P., & Moran, L., (2003), E-banking and the SME/bank relationship in Northern Ireland, International Journal of Bank Marketing, 21/2 [2003] 94-103 Lassar, W. M., Manolis, C., & Lassar, S. S., (2006), The relationship between consumer innovativeness, personal characteristics, and online banking adoption, International Journal of Bank Marketing Vol. 23 No. 2, 2005 pp. 176-199 Mukherjee, A., & Nath, P., (2003), A model of trust in online relationship banking, International Journal of Bank Marketing, 21/1 [2003] 5-15 Seal, W. B., (1998), Relationship banking and the management of organisational trust, International Journal of Bank Marketing 16/3 [1998] 102–107 Read More