Chpater 4

Relationship Banking in
Juta will insert the book

South Africa
cover here CHAPTER 4
Dr Johan Coetzee
©Juta & Co (Pty) Ltd 2016 Bank Management in South Africa ISBN: 9781485117575
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
• Explain the difference between personal and remote interaction distribution channels
• Identify the different types of personal and remote interaction distribution channels
• Differentiate between transactional and relationship banking
• Explain why relationship banking places more strain on the branch resources than
transactional banking does
• Explain why it is important to migrate relationship banking client to electronic banking
facilities
• Define the relationship banking paradox
• Discuss the impact of the life-cycle of relationship banking on the revenue of a bank
• Discuss and illustrate the relationship banking model
• Discuss the relevance of the two dimensions of relationship banking
• Discuss the four drivers of relationship banking
• Discuss the seven relationships found in the relationship banking model
• Identify the main features of a formal lending policy
• Explain the steps in the lending process
• Discuss client-centricity and relationship banking as two relationship-based strategies
used by banks
• Discuss the main characteristics of the South African distribution channel and slogan
strategies respectively
DISTRIBUTION CHANNELS IN BANKING
• Relationship banking deals primarily with how a bank interacts with its clients
• The departure point for these interactions is the distribution channels
because these provide the means to distribute the products and services of
the bank and in so doing, contribute to building mutually beneficial
relationships
• Convenience is a major driver of service proliferation and has resulted in
banks establishing a diverse network of distribution channels ranging from
personal face-to-face options such as branches to remote interfaces such as
internet banking
• Convenience is therefore associated both with what the products are able to
do and with what facilities are available from which to access the products
Personal interaction distribution channels
• Full-service branches
– offer the entire spectrum of facilities ranging from sales consultants to tellers and ATMs
– These branches are normally situated in areas where the number of walk-in clients is substantial and given
their size, they are operationally expensive to run
• Banks can also use limited-service branches
– that do not include all the facilities of a full-service branch
– Rather, the facilities are a function of the demographic characteristics of the area where the branch is situated
• In-store branches
– offer very limited facilities and are normally situated within a supermarket store
– Their primary purpose is to address the needs (especially those that are deposit-related) of clients who are
unable to visit a branch during normal working hours
– For this reason, in-store branches operate during similar hours to the supermarket.
• Loan kiosks
– in stores such as furniture stores, where a client can apply for a loan on the spot to purchase the product
Personal interaction distribution channels
• Banks also offer mobile branches (or mobile banks)
– These are branches that are literally mobile and are often used to test the viability of remote
areas without committing to the construction of a brick-and-mortar branch
– In South Africa this has been particularly popular on the back of the drive to focus on banking
the unbanked market in often very remote areas
– These branches offer limited services, but are sufficient to address basic banking needs
• National head offices
– usually include a full-service branch, but primarily employ the administrative, credit, treasury,
IT, retail, commercial and corporate staff along with their respective senior line management
– Furthermore, they are the decision-making hub from which all national strategy is disseminate
• Regional (or provincial) head offices
– provide similar structures, but are more aligned to the services offered in the region (or
province)
Remote interaction distribution channels
• Automated teller machines (ATMs)
– are electronic terminals that dispense cash to clients at any time of the day. Clients access the ATM with a bank card and use a personal
identification number (PIN) to access their account from which the cash is withdrawn
– ATMs normally offer basic transactional functionality and in some cases allow deposit-taking
– The benefit for the client is that ATMs are situated all over the country, especially in shopping centres, petrol stations and near supermarkets.
• Banks also offer mobile ATMs that are vehicles with an ATM on board
– These can often be seen at sporting events or festivals
• Some banks have self-service terminals (SSTs)
– that offer additional transactional functionality such as transfers and account statements
• Electronic banking refers to the use of the internet to conduct banking transactions
– Clients use the internet to log in to their accounts and then conduct the transactions at a much cheaper cost than would be the case had they done
the same transaction in a branch
– Besides being the cheapest way of doing transactions, this has the added benefit of convenience because the only requirement is an internet
connection to an electronic device such as a computer, tablet or cellphone
• Banks make extensive use of call centres
– centralised offices that receive large volumes of telephone calls dealing with queries or requests from clients regarding the bank’s products. A
client phones a call centre number where they are electronically prompted to make keypad selections to direct them to a call centre operator
who deals specifically with the product that the client is enquiring about.
Remote interaction distribution channels
• Telephone banking
– enables clients to use their phones to conduct banking transactions via a dedicated telephone banking call
centre
– Given the likelihood of fraud, the authentication process is rigorous and the functionality offered is usually
quite limited
– This facility does, however, offer convenience to the client as transactions are merely a phone call away
• Mobile apps via iOS or Android platforms
– can be downloaded and used to conduct banking transactions
– All the major banks provide these apps that usually allow additional services such as share trading and ATM locators
• Banks also provide merchants (such as supermarkets and department stores) with point-of-
sale (POS) devices
– which enable them to accept immediate payment from their clients
– The client is asked to present their (debit or credit) card and key in a PIN, and thereafter the transaction is either
approved or declined instantaneously based on the amount of available funds in the client’s account
Points of interaction by South African banks
TRANSACTIONAL VERSUS RELATIONSHIP BANKING
Transactional vs Relationship banking
Modes of interaction in Relationship Banking
A MODEL FOR RELATIONSHIP BANKING
The life-cycle phases of relationship banking
• Dependency continues through school and university, it is characterised by
dissaving, as there is no job, but, spending still occurs
• The growth phase is characterised by increasing household income and wealth
accumulation, and thus saving
• The maturity phase is pre-retirement and is characterised by moderating
consumption patterns for the intention of temporal consumption during
retirement
• Upon age 65, the retirement phase occurs and exits the job market, thereby
not earning a salary anymore. There is now sole dependence on accumulated
wealth and consumption peters off compared to pre-retirement
Model for relationship banking
Model for relationship banking: drivers
1. Sales driver
– The sales driver refers to both the sales and marketing approaches of the bank and the banking needs of clients
– This driver specifically includes the extent to which the bank focuses on selling the products it offers, and
simultaneously, the extent to which clients want to purchase the bank’s products
– An aggressive sales approach would be at A, whereas a conservative approach would be at C
2. Contractual driver
– The contractual driver refers to the amount of contractual (legal) documentation the bank requires to conclude
the sale of a product. Although the contractual burden may be large, it improves the quality of contracts and
reduces organisational risk through the potential losses that may occur due to a failure to comply with the
contracts
– Conversely, the smaller the burden, the easier it is to provide clients with products, but at the risk of losses
given the poorer quality of the underlying contracts
– Therefore, a burdensome but risk-mitigating degree of contracting can be found at B and less burdensome but
risk-enhancing contracts at A
Model for relationship banking: drivers
3. Governance driver
– The governance driver refers to the policies and procedures that drive the operations of a bank
– The higher the degree of governance, the less leeway staff have to manipulate internal policies and
procedures
• This can be found at B
– Conversely, the lower the level of governance, the more able staff are to manipulate policies and
procedures, which may result in fraudulent and corrupt internal structures
• This can be found at D
4. Innovation driver
– The innovation driver refers to the extent to which bank staff are allowed and encouraged to innovate in
their immediate working environment
– The higher the degree of innovation, the more likely the bank will develop new and innovative ways to
offer their products
– This may be with regards to new products or new processes
– Encouraged innovation is at C and discouraged innovation at D
The seven relationships of relationship banking
1. The client–contact staff relationship
2. The contact staff–administrative staff relationship
3. The institutional relationship
4. The sales relationship
5. The credit relationship
6. The profit relationship
7. The external relationship
Relationship-based strategies: Client-centricity
• Client-centricity refers to ‘what products and services must be offered,
how they are delivered, and to what extent the needs of clients are
consistently being met by doing this’
• A client-centric approach has several benefits: 2
– It encourages banks to be sensitive to the banking needs of clients.

– It provides a holistic approach to client needs.
– It creates cross-selling opportunities.
– It offers customised banking solutions.
– It creates value for the client through superior levels of service, which in turn
promotes loyalty to the bank.
Relationship-based strategies: Client-centricity
Relationship-based strategies: Bancassurance
• In order to offer a broader spectrum of products and generate additional revenue,
banks have expanded their business operations into non-traditional banking activities
• This expansion into complementary financial services industries such as insurance is
the endeavour of banks, and financial institutions in general, to become more
integrated and client-centric
• The heart of the bancassurance model is to become a one-stop financial services
provider that caters not only to specific banking needs, but to the larger more general
financial services needs which include insurance-related products
• Such an approach provides a bank with the opportunity to offer a wider range of
financial solutions, which in turn addresses the client-centric and relationship-based
approach adopted by banks
• The benefits of a bancassurance model include:
– Increased revenue (specifically non-interest revenue) for the bank that is generated from
both traditional banking (such as lending) and non-traditional banking (insurance)
activities
– Increased product diversification as the bank offers products that have different cash flow
characteristics, product features and revenue correlations
– Economies of scale as the bank is able to offer more products at a lower cost
– Economies of scope due to more products being offered at one contact point
• This in turn generates cross-selling opportunities
– Clients receive customised financial solutions that incorporate insurance products
– There is a greater degree of geographical diversification if the subsidiaries originate or do
their business in different markets or countries
• The challenges facing a bancassurance model include:
– Regulatory discrepancies given the different regulators for banking
and insurance respectively
– Increased agency costs due to either a lack of synergy or strategic
incompatibility between the bank and insurance company
– Added pressure to train and upskill staff to be competent in both
banking- and insurance-related products
CONCLUSION
This [bank–client] relationship is not simply a one-way process.
An effective banking relationship requires a positive contribution
from both parties. The ability of the bank to meet client needs
requires that the owner/manager provides the bank with
appropriate and timely information and is receptive to
suggestions and advice provided by the bank

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Relationship Banking in

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– It encourages banks to be sensitive to the banking needs of clients.

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