Relationship Banking

Relationship banking is a strategy used by banks to strengthen loyalty of customers and provide a single point of service for a range of 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 certificates of deposit, safe deposit boxes, insurance, investments, credit cards, all types of loans and business services (e.g., credit card or payroll processing). They may also include specialized financial products designed for specific demographics, such as students, seniors or high net worth individuals.

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. Whether for an individual or small business, a relationship bankers will engage in high-touch service to try to make their banks the 'one-stop shop' for their A-to-Z needs. 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).

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.

As Wells Fargo demonstrated, relationship banking can go too far. 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. (See: Wells Fargo Releases Report on Fake Account Fraud)