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Banking on the Cross-Sale

As financial institutions reach to do more business with existing customers, Cleveland Fed examiners say institutions must keep an eye on growing concentrations and the risks they pose.

It’s clear in billboard ads, help‑wanted descriptions, and financial institutions’ publicly disclosed strategies: Banks are hungry to be the one‑stop shop for their customers.

The strategy is called “relationship banking,” a way of doing business that can both reduce risk and increase it, Cleveland Fed banking supervisors say.

For many firms, it’s meeting a customer’s needs across multiple financial products, for example, having a business owner’s commercial checking account plus his or her mortgage, investment account, and more.

The desire for multiple‑touch‑point customer relationships isn’t new, but Federal Reserve Bank of Cleveland examiners say an increasing number of institutions are spending more resources and hiring relationship‑focused personnel to achieve it. Heightened competition is one reason. The low interest rate operating environment is another.

“Many banks are trying to grow to realize operating efficiencies,” says Jenni M. Frazer, a Cleveland Fed vice president. “There’s more competition, but still a relatively finite pool of customers.

Jenni M. Frazer

Banks are spending money in ways that they hadn’t before to get a greater share of the customers’ relationship.

“It used to be that customers just came to banks,” she adds. “But now, banks have had to get better at sales and marketing. More recently, the low interest rate environment has certainly made that more important. Banks are spending money in ways that they hadn’t before to get a greater share of the customers’ relationship.”

And that investment is unlikely to slow in the near term: Frazer and other supervisors say relationship banking is a strategy they expect will have staying power based on what they glean in the course of their regulatory work.

Making 1 call instead of 7

The Cleveland Fed supervises 270 financial institutions headquartered in the Fourth Federal Reserve District, which covers Ohio, western Pennsylvania, the northern panhandle of West Virginia, and eastern Kentucky.

Banks in the District are among those deploying relationship banking strategies.

Cleveland‑based KeyCorp describes the practice in its 2015 annual report: “Our 2015–2016 strategic focus is to grow by building enduring relationships through client‑focused solutions and service. We intend to pursue this strategy by growing profitably; acquiring and expanding targeted client relationships; [and] effectively managing risk and rewards.”

Columbus‑based Huntington Bancshares Inc. discloses in its 2015 report that a key strategic emphasis is “for our business segments to operate in cooperation to provide products and services to our customers and to build stronger and more profitable relationships.” A specific objective? To target prospective customers who may want multiple products and services with the bank.

Pittsburgh‑based PNC Financial Services Group Inc., too, identifies in its most recent annual report that it seeks revenue growth by “deepening our share of our customers’ financial assets, such as savings and liquidity deposits, loans and investable assets, including retirement assets.”

When customers have multiple touch points with one institution, “they tend to stay with you longer,” says Kip Clarke, executive vice president and Cleveland market president for KeyBank.

Kurt Kappa, senior vice president and market leader for the Northeast Ohio region for Westfield Bank, agrees that a many‑pronged relationship leads to likelier client longevity. Following 2 recent acquisitions, Westfield Center‑based Westfield Bank has hatched and is deploying plans to expand the relationships it has with its broadened customer base.

Kurt Kappa

Everybody’s fighting for the same customer. Keeping those customers is easier if they have multiple products with you.

“Everybody’s flush with capital,” Kappa says of banks. “Everybody’s fighting for the same customer. Keeping those customers is easier if they have multiple products with you. If you have your checking account [with one bank] and your direct deposits, your car loan, your mortgage loan, it’s a lot harder to switch overnight. It’s more of a hassle to go to the other bank.”

And, Kappa asserts, relationship banking strategies can save marketing dollars, too.

“You already know that current customers are qualified or not qualified, so you’re not wasting your time going out to the masses,” he explains. “You have specific knowledge of their creditworthiness, their income. You can see what kinds of accounts they have at your bank. It’s more profitable all around.”

Increased profitability is a definite advantage in doing more business with existing customers, Clarke notes.

“Instead of calling on 7 different clients, if we’re working with that 1 client in 7 different ways, it’s fewer meetings, it’s deeper relationships,” Clarke says. “It’s geometrically more profitable. If you do 2 or 3 more products for 1 client, your profitability is more than just 2 or 3 times greater.”

For the small‑business owner, consultation on various products and services is a real value‑add delivered through the relationship banking strategy, according to Glenn D. Leveridge , market president for the Winchester market of Central Bank, headquartered in Lexington. He cites the example of a new commercial client for whom Central Bank is now handling credit card processing, direct payroll, and more, freeing up the businessman to focus on his core business.

Glenn D. Leveridge

For the small‑business owner, consultation on various products and services is a real value‑add.

“‘Now I can do what I do best,’” Leveridge quoted the businessman as saying. “‘I don’t have to worry about this stuff.’”

Two sides to the coin

While bank examiners note that bankers’ having multiple eggs in a single customer basket can increase risk, they say it can improve risk management, too.

“The focus on relationship banking can reduce risks for particular institutions because with relationship banking, the bank focuses on really knowing the customer, knowing their needs, knowing their profiles,” Frazer notes. “So the banks know things like deposit activity, cash flow transactions. It should allow for a more accurate customer profile, risk assessment, and better pricing for what the risk of that customer is.”

The assumption therein, however, is that the institutions deploying relationship banking strategies have the capability to connect all of those dots and are doing it, Frazer says. That’s particularly important in the current landscape of increased bank mergers and acquisitions because those doing deals are at risk for acquiring new customers they don’t know.

“From a supervisory perspective, if you’re going to focus on relationship banking, we expect you to have the infrastructure to really know the customer, to have information to aggregate the exposure and aggregate the risk, to have the right tools to price that risk, and, if you don’t like what that risk profile is telling you, to move that customer out of the bank,” she explains. “One big risk is if a bank isn’t able to quantify and aggregate its total exposure to a customer, then the bank is at risk of having a greater exposure to a customer than what it wants or should have.”

Banking supervisors also are watchful that banks maintain the appropriate tolerances and limits, adds Anulekha Mohanty, a Cleveland Fed supervisory examiner.

“Sometimes through relationship banking where you have more information around a client there can be a tendency to think, ‘Hey, I understand the client,’ and there can be the willingness to take exceptions [when it comes to underwriting],” Mohanty says. “We are keeping the pulse of whether there is loosening of underwriting practices.”

Cross‑functional conversations and expertise are important as banks deepen relationships with single customers, be they individuals or businesses, sources say.

Cross‑functional conversations and expertise are important as banks deepen relationships with single customers, be they individuals or businesses.

“No longer is risk going to be siloed in 1 portfolio,” Mohanty explains. “To do a good job of understanding the global risk of that particular customer, let’s say a retail customer with private banking needs, both sides need to talk through the risks presented. The risk that the client brings forth from a private banking perspective may be different than [that from] a mortgage perspective. It is important to ensure risk is evaluated holistically and for any correlations.”

KeyBank’s Clarke is among those who say relationship banking can mean a financial institution better manages risk.

“I would argue that if you have deeper relationships with your clients that you understand your risks better,” he says.

Central Bank’s Leveridge agrees.

“If I’m a good personal banker, I’m going to have access and see every product and service that you have with me,” he explains. “Wouldn’t that be better if I’ve got them and can monitor them rather than you having other products elsewhere?”

There are other risks to mitigate beyond client concentrations.

A sharpened focus on relationship banking poses cultural and operational risks, too, Clarke adds. For one, transitioning a banking team from product‑focused to relationship‑focused, a switch which can entail directing “product people” not to call on clients because relationship managers will, can cause friction between bank employees. Plus, when one person or one team is tasked with delivering varied solutions to one customer, the setup can require additional cross‑product and cross‑services training.

Another matter that banks need to address is how people are compensated, he says.

“Suddenly, you have a bunch of people who are used to selling in one way, and they’re thinking, ‘How do I get paid here?’” Clarke explains. “You’ve got to work through that.”

Sum and Substance: As relationship banking strategies gain popularity, bank examiners expect bankers to use appropriate measures to monitor how their relationships with individual customers are growing and to address the risks that growth may pose.

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