Relationship Marketing and Commercial Banking: A Critical Analysis

Jean Perrien, Pierre Filiatrault and Line Ricard

RELATIONSHIP MARKETING AND COMMERCIAL BANKING 25

A critical analysis of the major problems raised by implementation off an effective relationship approach.

International Journal of Bank Marketing, Vol. 10 No. 7, 1992, pp. 25-29 © MCB University Press, 0265-2323

For the past ten years, relationship marketing has been advocated as the most relevant strategy for banks to achieve some growth in a fast changing environment (Berry, 1979). One must recognize that nearly all financial institutions "bought" the idea of relationship marketing. Yet, even if former credit officers are now called relationship managers, banks are facing real difficulties in implementing an effective relationship strategy. Customers, as well as banks' front-line people, are

complaining about the fact that, regardless of what financial institutions declare, relationship marketing is not yet a reality (Day, 1985; Perrien et al. 1991). For instance, Day (1985) states that, "the business association which bankers euphemistically refer to as relationship is prompted by financial lust not customer trust".

The objective of this article is to provide some suggestions for improving the effectiveness of relationship marketing within the commercial banking industry. Our recommendations are based on interactions with several hundreds of commercial bankers who attended seminars, which we held during the past five years, for the Institute of Canadian Bankers. As such, they are not the outcome of a formal research, but the result of experience and information gained through the years. Although our analysis comes from the Canadian context, we argue that, within a global economy, it may be relevant to financial institutions regardless of their country of origin.

The Relationship Marketing Concept The relationship marketing concept is based on the premiss that "keeping a client is more desirable than attracting new business" (Congram, 1987, p. 177). From a theoretical point of view, it is the logical outcome of marketing defined as an exchange process (Hunt, 1983). From a practical point of view, relationship marketing centres on business-to-business exchanges.

When looking at the available literature, two metaphors have been suggested to understand the relationship concept. In the first metaphor, relationship marketing is viewed as a "marriage". Levitt (1983) argues that the buyer-seller interaction is similar to a marriage: both quality and duration depend upon the ability of partners to manage their interaction: "How good the marriage is depends on how well the relationship is managed by the seller" (p. 87). Therefore, it is an asymmetrical management. In the view of Dwyer et al. (1987), benefits and costs derived from a marriage (companionship, personal growth, expanded responsibility, care and nurture) are analogous to benefits and costs entailed by buyer-seller relations. Logically such a relationship may lead to a contractual agreement. McNeil (1980) suggests relying on concepts derived from modern contact law to frame the basic characteristics of both transactional and relational exchanges.

Using this metaphor of relationship as a marriage clearly emphasizes the complexity of a commercial relationship, its rational and irrational motivations, and, especially, the asymmetrical responsibility between partners.

Perhaps the most widely used metaphor to picture relationship marketing is as an interactive process. In industrial marketing, Ford (1980) suggests that:

The authors would like to thank the Institute of Canadian Bankers for providing the support to this research. A preliminary version of this paper has been presented at the 155th European Society for Opinion and Marketing Research (Esomar) Seminar on "Banking and Insurance, Pressures on Profits: Pressures on Research".

26 INTERNATIONAL JOURNAL OF BANK MARKETING 10,7

The complexity of buyer-seller relations and the importance of mutual adaptations means that the analysis of relationships must be separate between the overall relationship itself and the individual episodes which comprise it.

Ford identifies five episodes in the process of relationship building, from the pre-relational stage (the search for new suppliers) to the final stage (an institutionalization of the relationship).

Interestingly enough, Ford analyses each stage in the process on the following five criteria:

(1) the experience of the two firms; (2) the reduction in their uncertainty and the distance

between them; (3) the growth of both actual and perceived

commitment; (4) the formal and informal adaptation to each other;

and (5) the investments and savings involved.

Such criteria emphasize the managerial as well as the organizational issues of relational exchanges.

Relationship marketing is an interactive

process

The concept of relationship as an interactive process is also advocated in the service industries (Booms and Bitner, 1981), mainly in banking and especially commercial banking as opposed to retail banking (Day, 1985; Gibbs, 1987; Moriarty et al. 1983; Watson, 1986). The most exhaustive description of the process comes from Watson's article where he describes a ten-stage process: from "market research" to "nurturing the relationship", mainly conducted by account managers. Actually, the key role of front-line personnel is emphasized in all these articles to such as extent that Watson (1986, p. 32) defines the work of an account manager as "... a builder and manager of a relationship". Finally, Dwyer et al. (1987) propose a five-phase model: from awareness (phase 1) to the dissolution (phase 5). They advocate that their model is relevant to both consumer and industrial relationships.

By stressing both the importance of front-line people and the complexity of the process, these frameworks help to increase our understanding of historical mechanisms linking, in the long run, two economic partners.

On the basis of these two metaphors, relationship marketing may be viewed as:

(1) an ongoing marketing issue; (2) with asymmetrical responsibilities; (3) some organizational and managerial implications; (4) resulting in an interaction process; (5) in which the front-line people play a key role; (6) which is time-consuming.

To analyse relationship marketing within the banking industry, we must keep these six features in mind.

Relationship Marketing and the Banks Clearly, there are two main reasons why banks decided to emphasize relationship marketing. First, drastic changes in their environment forced financial institutions to revise their marketing strategies and to stress long-lasting relationships with customers. Second, the search for a new balance in banks' revenues resulted in an emphasis on relationship marketing. The following paragraphs try to clarify these two reasons.

Changes in the Environment In several countries, deregulation created a new environment for banks. In Canada, this deregulation process started in 1980, within a few years it resulted in a significant change in the competitive structure of the market: the market share of foreign-owned institutions, such as the Bank of Hong Kong, the City Bank of New York, the BNP..., increased significantly mainly in the commercial market. Moreover, other Canadian institutions, such as trust and insurance companies, gained access to an a priori lucrative market. When competition is keener, one basic strategy is to increase the retention rate among customers. As was pointed out earlier, this is one outcome of relationship marketing. Coupled with the economic recession, this keener competitive environment forced most of the financial institutions to focus on their existing clientele. By increasing customers' switching costs, a bank will improve its retention rate. Increased switching costs are a direct consequence of a real bank-customer relationship (Jackson, 1985).

The sophistication of technology is another explanation for the interest of banks in relationship marketing. By creating a wider offering, mainly in cash management products such as payroll and computerized cash management systems, banks widened their product portfolio. Yet, selling cash management products is mainly the outcome of a cross-selling strategy: such products are quite often sold to customers having a credit line with the bank. Knowledge of customers' needs and characteristics is a must for cross-selling cash management products. It is through the development of an effective relationship that a bank may get that information (e.g. knowledge of the buying centre...).

RELATIONSHIP MARKETING AND COMMERCIAL BANKING 27

Changes in Sources of Revenues Because of strong variations in the prime rate, and consequently in credit rates, many banks experienced fluctuations in both market behaviour and their revenues.

In order to reduce such fluctuations, one efficient solution was to increase the portion of revenues derived from fee-based incomes. As stated earlier, it was a feasible strategy, bearing in mind the "booming" technologically sophisticated new products which banks could launch, such as cash management products. Indeed, pricing of such products was unrelated to credit norms, a vast majority of them were fee-priced. Such a corporate strategy, once more requested the development and enhancement of strong relationships. Let us stress this was a global strategy which European as well as North American banks were achieving. For instance, French banks increased the percentage of revenues derived from fee-based incomes from 25 per cent in 1989 to 32 per cent in 1991.

Relationship marketing is an asymmetrical

process

This purely financial willingness backed up the notion of relationship marketing. All these reasons explain the bank focusing on relationship marketing. Yet, as already mentioned, there exist some obvious problems in the implementation of a real relationship orientation. Keep in mind that relationship marketing is an asymmetrical process, hence its effectiveness depends upon the ability of the selling organization (i.e. the bank) in implementing it.

Customers' and Account Managers' Perceptions Previous researches on both banks' commercial customers (Perrien et al., 1991) give us some insights on imple­mentation problems institutions are facing when dealing with relationship marketing. Customers are complaining about:

(1) Turnover among account managers. As stated earlier, relationship marketing requires a personalized interactive process between account managers and customers. Knowledge of the customer, his needs, characteristics are a prequisite to such an interaction. A high turnover among account managers conflicts with this.

(2) Limited span of authority of account managers. Even if account managers are responsible for the management of relationships, in many organizations they have no authority to assess a credit request.

Regarding such a crucial decision (credit approval), the account manager is not perceived as a decision maker. Consequently, many commercial customers do not perceive an account manager as a real relationship manager.

(3) Banks' credit norms. Many customers point out the existing gap between the relationship concept and credit norms. The latter are always based on a sectorial analysis: having to balance their portfolio, banks try to monitor their exposure (i.e. risk) on an aggregate basis. Such an aggregate process conflicts with customers' perception of what relationship banking should be.

(4) Bank organization. To meet changes in the environment, banks modified their organization. Many institutions split their commerical and retail activites. The account manager was no longer located in the branch and had no kind of authority over people delivering the service. This barrier between the person who is managing the relationship and people who are delivering the daily services causes some frustration among many customers.

(5) Inadequate human resources management. From the account manager's point of view, the existing gap between the relationship concept and its implementation comes from this. Account managers agree with customers and recognize that staff turnover is too high. They also challenge the training of account managers, which is credit-driven.

(6) Existing measures of performance. Banks are also advocating the development and enhancement of relational exchanges, most of an account manager's performance appraisal is based on purely transactional criteria, mainly the overall profitability of their portfolio.

(7) A credit-driven culture. The power of credit departments and credit norms may conflict with relationship banking. As we saw at (3), above credit norms tend to underestimate the individual value of a particular customer; moreover credit norms overemphasize short-term profitability, while relationship marketing is a long-term commitment. This situation is amplified by the fact that credit people tend to run the organization. Yet one must keep in mind that relationship banking must be a profitable strategy and consequently should satisfy some credit guidelines. The expectation is therefore that there will be a balance between credit and relationship values.

(8) Bank structure. Account managers complain about inadequate decentralized authority to match their responsibilities. Once more, this is consistent with the customers' point of view — see (2) above.

28 INTERNATIONAL JOURNAL OF BANK MARKETING 10,7

We argue that such problems derive from the management level at which banks decided to implement the relationship concept. Obviously, for many financial institutions, relationship marketing simply means a different way to sell, hence it is the sole responsibility of account managers. From the shortcomings, customers and account managers point out, it is clear that the overall organization, as well as the bank's, norms and policies, have not been affected by the relationship concept. To a certain extent, banks emphasize a relational approach — within a transactional organization.

Relationship banking is a strategic

issue

Yet, relationship marketing should not be viewed as a purely tactical issue. In the above analysis, relationship banking is a strategic issue: whether you consider the reasons why banks have focused on relationship marketing, or comments addressed by customers and front-line people, they all have a strategic status which is coherent with some of the six basic features of relationship marketing we delineated at the beginning of this article. Consequently, in the following paragraphs we intend to address relationship marketing from a strategic point of view and make some suggestions to improve its implementation.

Some Recommendations To define relationship marketing within a strategic framework is a corporate decision, therefore the following recommendations make sense if they are backed up by the senior staff of the institution. Indeed, most of the previous points clearly emphasize the fact that quality and effectiveness of a relationship are not and never will be only dependent on the people involved in the interaction. Issues like credit norms, human resources management and the overall bank organization entail that relationship banking is an interaction process between two organizations. Bearing in mind that this process is asymmetrical, it means that from the bank's point of view it must be managed as a corporate issue and, consequently, relationship banking holds a strategic status.

Recommendation 1: The Customer Should Be the Profit Centre The core of a relational approach is the customer, therefore it should be highly logical to define the customer as the profit centre. Profitability should be assessed on that basis. This would imply that account managers should have

profitability objectives assigned'per type of customer (for instance per segment), pricing of credit and non-credit product could easily be fixed bearing these profitability objectives in mind. This would have some major consequences which could solve some of the problems we identified. First, customers would be viewed on an individual basis instead of a sectorial one — see point (3). Second, it would definitely result in more decentralization — see points (2) and (8) — as the account manager would have profitability measures which would allow him to assess the consequences of a customer requirement. Finally, performance appraisal of account managers would incorporate a real relational view — see point (6).

Recommendation 2: Derisions on Customer Issues Should Be Decentralized to People Managing the Relationships It is obvious that relationship marketing conflicts with a centralized structure. As far as decisions impacting on a relationship are concerned, they should be monitored, at least in part, by account managers. Obviously, as far as credit decisions are concerned, this recommendation is a real challenge for many financial insitutions. There is no doubt that credit policies and balance in the loan portfolio must be incorporated in any credit assessment. Yet, it is hardly conceivable that the account manager has nothing to say in the process.

Recommendation 3: Human Resource Derisions Must Be Revised To reduce the turnover among account managers entails that new personnel policies must be put into practice. The main one should deal with how to ensure promotion and valourization within the same type of position. Regardless of the compensation issue, it becomes certain that the previously detailed recommendation interacts with this job valourization issue.

Recommendation 4: Internal Communication Programmes Should Be Institutionalized Because of the organizational complexity of any financal institution, the flow of information on both products and customers should be monitored as they are required by the relationship concept. Too often, account managers complain about the fact that marketing departments provide either irrelevant or poorly organized information. The challenge is to provide the relevant information which will improve the effectiveness of account managers when dealing with customers. Let us stress that the information should cover the competition issue. Based on our experience, bankers have a good knowledge of their products and of their customers but a very poor command of competitors' products and advantages. This competition issue should certainly become a major component of any communication plan.

RELATIONSHIP MARKETING AND COMMERCIAL BANKING 29

Recommendation 5: Performance Appraisal Should Include Relationship Criteria Too often an account manager's performance is assessed on "the bottom line", that is to say on purely transactional criteria. If the focus is really on relationship marketing, performance appraisal should also include relational criteria such as: retention rate, cross-selling rate, customer satisfaction...

When looking at these recommendations, one must recognize that they deal, for the most parts with strategic issues. Indeed, implementation of relationship marketing is a strategic issue. From the very beginning, the reasons presented here for adopting a relational approach have been strategic in nature (see previous recommendations), hence the implementation of an effective relationship approach must be viewed as a strategic issue.

Conclusions As an asymmetrical process, relationship marketing effectiveness rests on the supplier, in our case this is the bank. Current criticisms question the banks' ability to implement a successful relational approach. We argue that this situation comes from the fact that many financial institutions have viewed a relational approach as a purely tactical issue — another way to sell — when in effect it is a fundamentally strategic concern. Let us emphasize that defining relationship marketing as an interaction makes sense as long as this interaction is viewed as the interaction between two businesses, and not only between individuals.

As far as relationship banking is concerned, marketing and strategic issues are merging.

References Berry, L.L. (1979), "Service Strategies in the 1980s", Journal

of Retail Banking, Vol. 1, September, pp. 1-10.

Booms, B.H. and Bitner, M.J. (1981), "Marketing Strategies and Organization Structure for Service Firms", in Donnelly, J.H. and George, W.R. (Eds), Marketing of Services, AMA, Chicago, IL, pp. 47-51.

Congram, C.A. (1987), "Adding Value through Client Service Planning", in Surprenant, C. (Ed.), Add Value to Your Service, AMA, Chicago, IL, pp. 175-78.

Day, A. (1985), "Selling to the Corporate Customer", International Journal of Bank Marketing, Vol. 3 No. 4, pp. 60-70.

Dwyer, F.R., Schurr, P.H. and Oh, S. (1987), "Developing Buyer-Seller Relationships", Journal of Marketing, Vol. 51 No. 2, pp. 11-27.

Ford, D. (1980), "The Development of Buyer-Seller Relationships in Industrial Markets", European Journal of Marketing, Vol. 14, pp. 339-53.

Hunt, S. (1983), "General Theories and Fundamental Explanada of Marketing", Journal of Marketing, Vol. 47, Fall, pp. 9-17.

Jackson, B. (1985), "Build Customer Relationships that Last", Harvard Business Review, November/December, pp. 120-8.

Levitt, T. (1983), "After the Sale Is Over...", Harvard Business Review, September/October, pp. 87-93.

McNeil, I.R. (1980), The New Social Contract, An Inquiry into Modern Contractual Relations, Yale University Press, New Haven, CT.

Moriarty, R.T., Kimball, R.C. and Gay, J.H. (1983), "The Management of Corporate Banking Relationships", Sloan Management Review, Vol. 24, pp. 3-16.

Perrien, J., . Filiatrault, P. and Ricard, L. (1991), The Implementation of Relationship Marketing as an Entrepreneurial Strategic Process, Working Paper No. 03-91, UQAM, p. 29.

Perrien, J., Lalonde, M.F. and Filiatrault, P. (1992), "Divorce in the Relationship: A Case of Commercial Banking'', Journal of Professional Service Marketing, (forthcoming).

Watson, I. (1986), "Managing the Relationships with Corporate Customers", International Journal of Bank Marketing, Vol. 4 No. 1, pp. 19-34.

Jean Perrien and Pierre Filiatrault are Professors in Marketing at the University of Quebec. Line Ricard is a Lecturer in Marketing at HEC, Montreal, Canada.