Back to the Future of Relationship Banking

What does the future of the banking industry look like?

Ari Lehavi by Ari Lehavi
...Heard in the boardroom of DT Bank (formerly Digital Transformation Bank) sometime in the not-too-distant-future...
CEO: We are planning to go ahead and launch our Physical Transformation Initiative. We will begin erecting a new on-site network and staff it with live advisors.
Board: It’s a bold plan...
CEO: Indeed. But we’re losing customers daily. Facebank is the only game in town now. The only other players that are still doing well are those defiant local banks.
Board: And what’s their secret?
CEO: Turns out the millennials still value the personal connection, and the younger generation doesn’t trust holograms.
futuristic holographic financing

By the time this hypothetical board discussion takes place, the banking industry has undergone sweeping change. Only one financial platform—the ubiquitous Facebank—has managed to achieve sufficient digital scale to consistently match its solutions to the expectations, needs and risk profile of each customer. Human-like, on-demand advisors have largely replaced actual humans. Branches are few and far between. Pressured to compete in this cutthroat, winner-take-all contest, most banks have seen their margins evaporate. Their last hope lies in emulating the success of the hyper-local, relationship-driven banks that have centered their strategy on their customer-facing staff, arming them with the skills and tools to dispense the full range of personal and business advice from the comfort of a face-to-face interaction.

Far-fetched? Maybe. But many banks are already culling branches and reducing headcount as they expand their digital capabilities. A Deloitte report on the value of branches in a digital world shows meaningful declines in branch density in multiple countries. PwC’s Retail Banking 2020 report notes that average branch staff in the U.S. has declined from 13 FTE in 2004 to less than six now. While these trends alone do not necessarily signify a reduced focus on relationship management, a recent survey on expected training spend does seem to strengthen the possibility. Last year, Accenture interviewed 1,200 bank CEOs and found that only 3% plan to increase employee training budgets, suggesting modest ambitions around elevating their staff’s ability to deliver enhanced advisory services. How these trends play out is anyone’s guess. But the boardroom scenario is one plausible trajectory that ought to be averted by banks that are beginning to de-emphasize the human side of their operations.

It stands to reason that the banking industry’s ultimate winners will be those platforms that can access the greatest amount of data to feed their self-learning algorithms. Banks are therefore justified in their urgency to invest scarce capital in these capabilities. But it is equally reasonable to expect that personal relationships will endure as the strongest alternative means to retain clients. After all, no amount of algorithms, AI or trust-free constructs can supplant our innate desire to connect with other human beings. For that reason—and despite the general thrust of the industry—banks would be wise to invest in nurturing those personal relationships by raising their standard of high-touch advice at the point of presence.

The in-person banking experienceToday, we know that point of presence as the branch. But the prevailing thinking suggests that the point of presence of the future (whether it’s called a branch or something else) will leverage technology to create a superior, omni-channel experience equipped with personalized tools that help the banker drive sales. While such change is necessary and important, it may not be sufficient to retain customers absent a stronger personal connection. With nimble and voracious digital powerhouses picking away at an ever-receptive market, it is doubtful that even the best-designed points of presence will be able to hang on to their clients over the long term.

To build lasting relationships, banks must better balance their digital offerings with an elevated level of personal and business advice.

The Canadian banking model serves as an instructive example. Historically, the branch system in Canada was oriented toward transactional services and product sales. When the Institute of Canadian Bankers—now part of Moody’s Analytics—first introduced the idea of banker as financial planner in the late ‘80s, most banks were unreceptive. But as middle-class discretionary income grew, banks took note and began placing relationship managers on the Institute’s Personal Financial Planner (PFP) multi-year training path. Fast-forward to today, and thousands of relationship managers across Canada have received the full designation.

Armed with refined consultative skills—and now turbo-charged with data-driven insights—Canada’s bankers provide middle-income customers with tech-enabled, end-to-end personal and business guidance from the branch. As the client’s assets accumulate and the banking relationship expands, private banking and wealth management teams step in to handle the increasingly complex requirements. This finely balanced business model has contributed to the well-documented growth and stability of Canada’s banks, and the industry has noticed: Several banks around the world are now pursuing a similar path. As Reuters recently pointed out, “humans are making an unexpected comeback.” Bank of America, for example, has moved further in “blending digital with personalized financial planning,” the agency notes.

The in-person banking experience But relationship banking has the potential to extend even beyond the Canadian model. At the outer reaches of the spectrum are those aforementioned ‘defiant local banks’, loosely modeled after the current-day community banks in the U.S. In the suppositional boardroom scenario, these hyper-local institutions emerge intact from the digital upheaval by embedding themselves in their communities and becoming indispensable stakeholders in their clients’ financial success. They’ve pinned their fortunes on the strength of their front-line staff and dug a moat around their relationships. Commonly perceived by the industry to be vulnerable due to their limited scale and heavy reliance on branches (as noted in PwC’s Retail Banking 2020 survey), they may stand a good chance of prevailing after all. Of course, they still need to continue to modernize the point-of-presence experience while selectively merging with complementary institutions, but as long as they retain their core strength—the personal relationship—they will have a unique advantage that will continue to shield them from the competition.

The community banking approach completes the continuum of choices facing today’s financial institutions. The closer banks can move to the hyper-local, tech-powered advisory model, the more protection they will have from digital platform incursions. But pivoting toward this model is no small task. It requires time, planning and investment. Banks that are contemplating this strategy can lay the groundwork by dimensioning the competencies required of advisory bankers and assessing their readiness. Fortunately, the competencies of a trusted advisor are not at all elusive. They are in fact decidedly familiar, if only because of their absence from our own experiences as bank customers.

At the heart of the trusted advisor’s role is genuine care for our interests. Neither learned nor coachable, the innate desire to understand our needs and support our goals is a necessary (if insufficient) condition to a lasting relationship. If the banker’s concern is evident and authentic, it establishes trust. If it seems rehearsed and hollow, it sends us away. At its essence, the banker’s sense of duty to the client is also the foundation of ethical and responsible conduct. Banks would therefore be wise to tighten the alignment between staff and customer by linking the success of the former to the well-being of the latter. To that end, they must develop the means to measure the goal. While personal integrity may be hard to assess, observed judgment and behavior can serve as a reliable proxy. Carefully crafted, scenario-based diagnostic and coaching tools, coupled with job-related performance indicators, can help banks separate the wheat from the chaff and focus their training and rewards on those who exhibit customer-centric behaviors.

bank tellerBut, as noted, integrity alone is insufficient. Relationship bankers need the right knowledge and decision-making skills in order to be effective, and it starts with being able to anticipate our needs. At each stage of our lives, we have dreams and aspirations, set against immediate priorities and practical constraints. We may be grounded in our thinking yet blinded by our biases. Data-driven insights can help map our path, but the trusted Sherpa will guide us safely on our route and warn us of the hazards. To do that, advisors must learn the intricacies and applications of the various financial solutions at their disposal. A strong relationship manager will be fluent in the core and conversant with the periphery. In the Canadian model, the advisor’s expertise is centered on planning for life-event needs of customers who may require help with borrowing, investing, saving or insurance decisions. At the periphery of their knowledge are business banking needs and more-complex trust and estate planning questions. Fortunately, many bankers are already familiar with the core concepts and need to fill just a few remaining gaps. Others may require deeper intervention. Modern diagnostic tools can reliably identify shortfalls in both knowledge and judgment to help pinpoint the individualized training each banker needs. In markets like Canada’s, proficiency is further benchmarked against a nationally recognized standard to acknowledge the banker’s advisor status and provide critical assurance to the customer that they are in safe hands.

Finally, the glue that binds the banker’s integrity with their financial expertise, and enables the banker to form a lasting bond with the client, is the effective conversation. As is commonly recognized, skillful delivery can be as important as the content itself. Logic, transparency, clarity and consistency are the operative principles of constructive communication. Whether discussing the mundane or the uncomfortable, bankers must always be direct and empathetic to instill trust. Recall the last piece of advice that struck home. It was likely delivered by someone you trusted, who laid bare your predicament with empathy and frankness. Would that message have been as well received had it been handled by an artificial agent? When it comes to competing with AI, an aptitude for refined delivery, effectively complemented by AI, is perhaps the finest weapon in an advisor’s arsenal. Here too, modern, innovative learning solutions can help prepare bankers to handle even the most nuanced of interactions with confidence and competence.

Thus unveiled, the timeless qualities of our future advisor ought to ring true in their prudence, yet perhaps also raise nagging doubts as to their practicality. But even if the full range of skills described are not in fact attainable, they ought to frame the aspiration. Most organizations that set their sights on the summit will focus the bulk of their efforts on the next elevation. Along the journey, they will build important capabilities and arm themselves with the flexibility to respond to the changing landscape. Some may continue steady on the climb; others may take their sturdiest team up the fastest route; still others may stay put or change direction. In other words, evolving the point of presence from the branch of today into the high-touch advisory hub of tomorrow need not be an all-or-nothing decision. The flagship operations can serve as the prototype. The senior-most bankers can be the initial cohort. The top customers can be the target audience. At a minimum, the bank will know that it has taken the right steps to retain both its best people and its best relationships.


Ari Lehavi

Ari LehaviAri Lehavi is an Executive Director at Moody’s Analytics and head of the Learning Solutions Division. Prior to joining Moody’s, Ari spent several years as a strategy consultant, helping corporate executives define and execute strategies to drive profitable growth. Before consulting, Ari worked as an investment banker, focusing on financial services and technology. He has authored studies and is a frequent speaker on the subject of financial education and professional standards. Ari received an MBA in finance from the University of Chicago, and a joint Master’s and Bachelor’s degrees with Honors from Stanford University.