Pub 18 2021 Issue 1

16 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S — H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S RELATIONSHIP VALUE PRICING AND CUSTOMER PROFITABILITY By Jay Kenney, SVP and Southwest Regional Manager for PCBB R elationship value pricing can be an effective strategy for improving a community bank’s fee income and determining the worth of the overall customer relationship. This is especially important in the current interest-rate environment. However, for relationship value pricing to work, your institution must carefully analyze the costs and profitability of each customer relationship, have systems that monitor the relationship, and think creatively about what it can offer preferred customers. Defining relationship pricing In relationship pricing, a community bank adjusts fees and rates for a deal based on the overall relationship it has with the customer and their related parties. This links the value of the deal to the profits of the institution. Typically, this means you can structure deals for products and services that make sense for the institution and the customer. For instance, by adding an operating account that generates transactional fee income, the lender can offer a more competitive rate and still meet the same ROA/ROE or lifetime income. Sometimes bankers are asked to increase the rate they’re paying on a money market account, CD, or a credit product for a client. But a client relationship is more than a single rate — it’s the total value that the relationship brings to the table. Provide creative customer offerings. Rather than negotiate solely over rates, talk to your customers about what they value. Are they willing to move their operating account or excess deposits? Would they consider trading fees for interest rates? Or