Opportunities to Improve Relationship Banking at Al Rajhi Bank
In an increasingly globalized and competitive marketplace, many banking professionals today are faced with the need to develop informed and timely responses to changes in consumer demand, as well as fluctuations in the global economy that can have a positive or negative effect on investments. In affluent nations, this need has become especially pronounced as billion-dollar deals are routinely involved, and bankers working relationship banking operations stand to assist banks in attracting and retaining wealthy private and highly fluid commercial enterprises as long-term clientele. The enormous amounts of money that are involved make it important to formulate such responses in ways that add value to the banking operation including providing a competitive advantage. In some banks, relationship banking at this level is termed "privilege banking" or "prime account management," but the common feature of these business units is targeting high net worth clients, and the bank of interest to this study, the Al Rajhi Bank, calls the process "private" or "privilege banking." Irrespective of the precise term that is used, though, these high net worth customers stand to generate significant fees and provide valuable networks for banks seeking access to this capital and discussed further below.
Purpose of the Study
The purpose of this study was four-fold as follows:
1. To investigate productivity within the relationship banking department of Al Rajhi Bank in order to identify opportunities for improvement.
2. To generate, research and evaluate possible ways to improve productivity within the relationship banking department.
3. To draw conclusions from the findings and make recommendations taking account of the overall financial, legal, environmental and human resource implications for this banking organisation.
4. To prepare proper plans for implementing the recommendations for management approval
Review and Analysis
Background and Overview
Although there is no universal definition for privilege banking, these banking divisions typically provide high net worth customers with a broad array of products and services that are designed to make their lives easier and eliminate the worry and hassle that are associated with financial services in the 21st century. According to Smith and Walter (1999), "The effective management of wealth is exceedingly time consuming. Individuals in the wealth-building phase of their lives, in particular, typically work under severe time constraints. They therefore expect a prompt response to their banking needs, and will want to deal with someone with the authority and ability to make quick decisions" (p. 89). Because privilege banking clients tend to have limited time for financial decision making, they also tend to be less sensitive to banking fees and charges (Smith & Walter, 1999). Some of the more salient factors that are involved in the provision of privilege banking services include those set forth in Table 1 below.
Factors Involved in the Provision of Privilege Banking Services
These clients demand the utmost in discretion from their private bankers, with whom they maintained lifelong relationships initiated by personal recommendations. Such high net worth clients have given way to more active and sophisticated customers. Aware of opportunity costs and often exposed to high marginal tax rates, they consider net after-tax yield to be far more relevant than the security traditionally sought by high net worth clients. They may prefer gains to accrue in capital appreciation rather than interest or dividend income, and can be expected to have a much more active response to changes in total rate of return.
The world today is arguably a more stable place than it has ever been. The probability of revolution, war, and gross confiscatory taxation has dropped in many regions of the world. Nevertheless, a large segment of the privilege banking market remains highly security conscious. Such clients are generally prepared to trade off yield for stability and safety.
Secrecy is a major factor differentiating international from domestic private banking. Clearly, with every government in the world subject to international pressure, "secure" funds against which another country makes legal claim can rapidly become insecure if their presence is advertised to those who have leverage over the authority regulating the custodian banker.
While some of the tales of personal services provided for privileged banking clients are undoubtedly apocryphal, the "fringe benefits" offered to a high net worth client may well influence his or her choice of and loyalty to a particular financial institution. Such benefits may save time, reduce anxiety, increase efficiency, and make the whole wealth management process more convenient. Personal service is a way for banks to show full commitment to clients accustomed to high levels of personal services in their daily lives. The essence of privilege banking is to have the flexibility and expertise to satisfy each client's unique objectives as fully as possible in a highly competitive marketplace.
Source: Adapted from Smith & Walter, 1999, p. 90
The benefits that can accrue to a well-operated privilege banking division are therefore significant, but these benefits are generated primarily from long-term and permanent contacts with privilege banking customers (Gardner & Versluijs, 2001). In this context, relationship banking has two important aspects: (a) the relationship between the parties (customer and bank) is mutually beneficial and (b) the relationship is long-term. (Gardner & Versluijs, 2001, p. 53) Banks benefit because current satisfied customers tend to reward the benefits of a close relationship with the bank with long-term loyalty (Gardner & Versluijs, 2001, p. 58). In reality, though, there are some significant differences between the types of strategic approaches that are used by banks seeking to be competitive based on the prices of their products and services and banks that seek to forge long-term privilege banking relationships based on high quality services (Gardner & Versluijs, 2001). The introduction of mobile banking technologies has expanded the types of services that privilege banking divisions provide rather than supplementing or replacing the personal services that are involved. In this regard, Gardner and Versluijs advise that, "In relationship banking, new information technologies are going to play a subordinate and supporting role; they are not going to become the key to the company's competitive advantage" (2001, p. 58).
Although the banking industry has been confronted with increasing competition from other types of financial services organizations, banks enjoy a competitive advantage in the privilege banking sector because they possess the infrastructure and resources that are needed to deliver these types of products and services to high net worth customers. According to Gardner and Versluijs, "Among the different suppliers of financial services, banks are the only ones with an extensive distribution network which allows them to maintain a close relationship with customers, benefiting at the same time from the economies of scope obtained by offering a wide range of products and financial services and from several synergies that can be obtained by combining these products according to the specific needs of each customer" (2001, p. 58). This level of specialized and individualized banking products and services represents the essential elements of successful privilege banking organizations (Gardner & Versluis, 2001). Here again, banks enjoy a competitive advantage over other types of financial services organizations. In this regard, Gardner and Versluis advise, "This constitutes one of the sources of competitive advantage in relationship banking. It is necessary to maintain an extensive network of small offices and branches in towns of diverse size in order to get to the final customer" (Gardner & Versluijs, 2001, p. 58).
The emergence of privilege banking is part of a larger concept that stresses the unique nature of the business relationship that exists between banks and their privilege banking customers. For instance, Constantinides, Harris & Stulz emphasize that, "Relationship banking, broadly defined is the connection between a bank and customer that goes beyond the execution of simple, anonymous, financial transactions" (2003, p. 66). Banks that employ a privilege banking strategy typically target high net worth clients and provide an informational advantage or product differentiation for their clientele to distinguish themselves from their competitors (Ogura & Nobuyoshi, 2010). This strategy is not without its downsides, though, and the time and costs associated with delivering high quality banking products and services to high net worth clientele can be substantial. Nevertheless, Kasper, Van Helsdingen & De Vries (1999) emphasize that, "In this strategy, relationship banking is the core theme. It means that the bank wants to meet all of the customer's financial needs in order to increase customer satisfaction and profitability" (p. 378). Moreover, by promoting long-term customer loyalty among high net worth clients, privilege banking divisions contribute to the profitability of their organizations (Kasper, Van Helsdingen & De Vries, 1999).
Developing and sustaining a competitive advantage based on privilege banking products and services, though, is becoming increasingly challenging because of innovations in technology that may not replace privilege banking services, but which are introducing new opportunities for other actors to gain market share in this area. In this regard, Divanna (2002) reports that, "Financial services companies have a unique opportunity to lead the market because many services sought by consumers…