Opportunities to Improve Relationship Banking at Al

¶ … 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.

Table 1

Factors Involved in the Provision of Privilege Banking Services

Factor

Description/Implications

Yield

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.

Security

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.

Confidentiality

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.

Service level

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 (for instance wealth management for the newly affluent) are predictable and can be anticipated" (p. 72). Financial services firms, including banks, though, have a number of opportunities at every stage of the process to promote their products and services. For example:

1. The inception phase offers opportunities for partnering, experimentation, definition of an operating model, exploration of new channels of customer acquisition, branding, portal establishment, product definition and bill presentment, to mention only a few.

2. The second phase of maturation, called growth, offers an array of prospects, such as refinement of the operating model, introduction of core banking services, rebranding of products and services with maturing partnerships, revenue/profit sharing model with channel partners, consolidation of retail services, wealth management and anticipatory payments, among others.

3. The last phase, maturity, offers opportunities in driving down cost, optimization of processes, CRM, customer order fulfillment, and several comprehensive wealth-generating strategies (Divanna, 2002, p. 72).

Finally, a report from Matthew (2008) writing in the Middle East Economic Digest highlights the enormous amounts of money that are involved in the short-term in forging long-term relationships with private and commercial customers that are engaged in high-dollar enterprises. In some cases, banks in Saudi Arabia waive certain fees as part of their privilege banking services. According to Matthew, "Currently, the work that banks do for the bids of engineering, procurement and construction (EPC) contractors is done on the basis that they will earn a fee on the financing if the bid is successful. They earn nothing for their work on construction bids that prove to be unsuccessful" (2008, p. 12). Other financial services organizations and professional services providers, including attorneys and financial advisers, receive fees for services irrespective of the outcome of the negotiations. According to one senior project banker at a Saudi bank, "Lawyers and financial advisers still get fees for all the work they do, but banking groups often end up with less than nothing because we have put time and effort into supporting bids that either fail or do not even materialize" (quoted in Matthew, 2008 at p. 12). Although some banks are considered charging a fee for these types of failed negotiations, those that seek to forge long-term relationships with high net worth clients accept this type of service as part of the cost of doing business (Matthew, 2008). For example, Matthew notes that, "There is a downside to joining deals at a later stage, as the more lucrative relationship banking work has often already been taken by the initial lead arranger group that has been there since the beginning" (2008, p. 12). Taken together, these trends suggest that privilege banking can help banks achieve and sustain a competitive advantage and these issues are discussed further below with respect to Al Rajhi Bank.

Privilege Banking at Al Rajhi Bank

Today, Al Rajhi Bank network covers include more than 570 bank branches, 2,750 automatic teller machines (ATMs) and 21,000 point-of-sale devices installed across the Kingdom of Saudi Arabia. In addition, with the support of its established operations in the Middle East, Al Rajhi Bank established its first overseas operations in Malaysia in October 2006 as Al Rajhi Banking & Investment Corporation (Malaysia) Berhad (About Us, 2012). Beginning with the first main branch at Jalan Ampang which opened in October 2006, Al Rajhi Bank currently has 24 branches across the country, including 15 in the Klang Valley, and one each in Johor Bahru, Melaka, Penang, Ipoh, Kota Bharu, Kuantan, Kuching, Sg. Petani, and Kota Kinabalu (About Us, 2012). The bank is currently expanding its suite of products and services to meet its growing customer base including the representative ones shown in Table 2 below.

Table 2

Aj Rajhi Bank's Representative Suite of Products and Services

Service(s)

Description

Internet Banking

Al Rajhi Internet Banking lets customers perform secure banking transactions from the comfort of their home. It's secure, free and available 24/7.

Mobile Banking

Say bye-bye to long queus [sic], subscriptions fees and incompatible phones. With Al Rajhi SMS banking, you can keep track of your finances, top up your prepaid and transfer funds on the go. No Internet access required. Just strong thumbs to work those SMS buttons!

Phone Banking

These days, a lot of transactions are taking place over the phone. Secure banking, for one, with Al Rajhi Bank. In addition to general and balance enquiries, you can pay bills and conduct fund transfers via phone banking. We're just a call away.

Zakah

Now you can fulfill your personal tithing obligations with Al Rajhi Bank. In collaboration with Lembaga Zakat Selangor (LZS), we accept payments for Zakat Al-Mah at all our branch counters throughout Klang Valley. This service is specially designed for all Muslims who seek to fulfill their obligations as per Quran Surah At Taubah: 103 - "Take alms from their wealth to purify them and sanctify them with it."

Wealth Creation

Unit Price: Our Unit Trust Plan is a large umbrella that holds within it several unit trust funds that create a mutually beneficial network profiting all participants. Relying on the wisdom of the Shariah, our Unit Trust products give you leverage over the pitfalls of the current global economic climate.

Gold: All investment into physical Gold will allow you to create and preserve your wealth from time to time. Gold has been proven to be able to protect the real value of monies for centuries.

Wealth protection: The fruits of your life-long labour should be appreciated by the ones you love most. To preserve your inheritance for future generations and ensure a fair distribution of your family fortunes, Al Rajhi Bank offers professional and experienced Estate Planning services.

Safety Deposit

The days of tucking away one's valuables under the mattress are gone. In times like these, you need a Safe Deposit Box for round-the-clock security and total confidentiality.

Beyond the foregoing banking products and services shown in Table 2 above, Al Rajhi Bank's suite of products and services also includes a privilege banking division. The main responsibility of this division is to manage high net worth customers, including sales of the bank's products and services. At present, this division has nine staff members with the assigned numerical totals shown at Appendix A. The head of the department is responsible for the overall operations of the privilege banking division and the chief manager is tasked with overseeing the sales and operations issues. A senior sales manager is also responsible for two assistant sales managers, and a receptionist and driver round out the division's personnel complement.

Nevertheless, this department is not working in an optimally coordinated and organized fashion and it lacks a clear overall vision and mission. It is reasonable to suggest that one of the overarching reasons why Al Rajhi Bank is lagging behind its local and regional competitors is this lack of coordinated effort, especially in the privilege banking. A number of constraints add to this problem, including a dearth of monitors and software applications that provide the ability to control the activities of high net worth customers on a daily basis. The privilege banking division's Web page does not include information concerning relationship banking and assigned personnel lack the requisite investment experience and expertise. Finally, the products offered by Aj Rajhi Bank's privilege banking division are limited.

It is possible to discern the respective strengths as well as the weaknesses of this bank division, though, using a SWOT analysis. According to Cravens (2003), the purpose of SWOT analysis is to identify key issues that will allow an informed strategic approach. A SWOT analysis seeks to identify the strengths, weaknesses, opportunities, and threats related to the environment; strengths are comprised of positive aspects that are internal to the entity and weaknesses are regarded as being those negative aspects that are internal to the entity. Opportunities are positive aspects that are external to the entity and threats are considered to be negative aspects that are external to the entity (Cravens, 2003). The analytical components of the SWOT analysis are applied to Aj Rajhi Bank's privilege banking division in Figure 1 below.

Strengths

Weaknesses

Reputation as leading bank focusing on HNI

Location

Products "credit card" and "Loans"

Contacts

Links

Enthusiasm, self-motivated

Door to door service

Diverse/dynamic staff

Product knowledge

System Support (swipe, cheque, O.D)

No unique products for P.B

Sole I.D for P.B

Sector Code for P.B

P.B member support and recognition in Branches

Communication gap between departments

Lack of work flow for products

Media/Marketing

Turnover time on loans

Accounts not linked to R.M

Target based

Opportunities

Threats

Niche Market (Untouched)

Customization of products

Presence of P.B in Branches

Lack of Media coverage leaves opportunity to build image

Lead P.B concept in Omani market

Priority for P.B

R.M notification (link of accounts)

Direct transfer of customers with salaries of 1500+ to P.B

Direct transfer of 25k+ deposit to P.B

Service-based rather than target based.

No copyright on products

I.R fluctuation

Product launch with lack of work flow

Ratio monitor

Lack of P.B presence in Branches

Money laundering

Small Team (A surge in business could be impeded by size of team)

Adequate space required for office. (Premises of P.B should reflect the status of members)

Figure 1. SWOT Analysis of Privilege Banking at Aj Rajhi Bank

The strengths, weaknesses, opportunities and threats identified in Figure 1 above indicate Al Rajhi Bank is well situated to take advantage of the burgeoning privilege banking sector if it can leverage its strengths to overcome its weaknesses to develop and sustain a competitive advantage. In this regard, there are some similarities as well as differences between the banking products and services offered by Al Rajhi Bank and other banks in the region catering to high net worth clientele as shown in Table 3 below.

Table 3

Representative Privilege Banking Services

Bank

Description

ICICI Bank at http://www.icicibank.com / privilege-banking/personal / about-privilege-banking.html

At ICICI Bank, the staff understands that privilege banking customers deserve special attention. Privilege Banking products and services are designed to meet all banking and financial needs of select customers. As our valued Privilege Banking customer, privilege banking customers enjoy Dedicated Service Area, Priority Service and Special Privileges making their banking experience truly special.

As a Privilege Banking customer, all requests and applications made are processed on priority. Faster access to Privilege Bankers at our branches and Customer Care makes banking effortless.

1. Preferential Access - Reduction in waiting time.

2. Enjoy priority service at our branches and at Customer Care.

3. Over the Counter Servicing (OTC) - Prompt resolutions

4. A range of service requests are processed over the counter.

5. Priority Processing - Fast-tracked through dedicated teams.

6. All account opening requests and loan/credit card applications processed on priority.

7. Priority Updates - Be updated even while on the move. Updates through SMS on the status of service requests.

The priority services are provided on a best effort basis. The services are at the sole discretion of ICICI Bank and can be modified, withdrawn at its discretion.

http://www.uob.com.sg/privilege banking/index_pv.html

At UOB Bank, the world of Privilege Banking [means] the measure of true wealth goes beyond mere numbers. It's a world where privilege banking customers' dreams are celebrated and relationships treasured. A world where preferential treatment becomes an affirmation.

With over 70 years of experience in Asia, UOB is committed to helping privilege banking customers manage their financial health, preserve their lifestyle and maintain their priorities wherever life takes them.

Welcome to the privileged life. Privilege is having access to a regional network. A regional strength privilege banking customers can leverage to their advantage whenever they want to.

Wealth advisory: UOB Privilege Banking clients can rest assured knowing that their money is in the hands of an experienced team of Client Advisors and Product Specialists. Committed to building a long-term relationship with privilege banking customers, they'll be continuously engaging these customers to address their evolving needs.

Wealth products: At UOB Privilege Banking, we understand that every individual has a different risk profile and financial need. That's why we offer a wide array of wealth products to cater to privilege banking customers' needs and preferences including: short- and long-term investments, liquid assets, protection and legacy planning, financial solutions and various leverage products.

NDB Bank at http://www.ndbbank.com/prsnl _serv/privilege_banking.jsp

The NDB Bank emphasizes that it realizes that privilege banking customers' time is precious, and that when it comes to their banking, service is key. That's why NDB has designed Privilege Banking as an exclusive service for our most valued clients.

Privilege Banking clients receive the personal attention and carefully individualized services that fit perfectly with their lifestyle and expectations. Our relationships are developed over time, founded on trust and mutual understanding.

All privilege banking clients are assigned a dedicated Relationship Manager, who will take the time to get to know them and their needs, and find out exactly how they want things done. Ensuring value addition to privilege banking customers. The Relationship Manager will become a trusted financial adviser. Using their understanding of financial markets, and drawing on a pool of product specialists, they will help privilege banking customers manage their finances, letting them know what their options are, offering advice, and thereby helping them fulfill their aspirations. An exclusive Privilege Floor presents an environment of comfort and calm, with private meeting rooms, priority processing and the necessary business facilities ensuring that everything resolves around privilege banking customers and meeting their needs. Privilege banking clients find most bank services charges are waived and preferential rates offered. Additionaly [sic], a pre-approved overdraft facility is available, with preferential rates.