Managing relationships between wholesale banks and their clients requires more than financial logic. Simply retaining or rejecting clients based on profitability or time spent oversimplifies a crucial decision. Instead, banks must weigh multiple strategic, reputational, and relational factors — and explore compromise options.
According to my latest empirical study on the corporate reputations of wholesale banks, terminating client relationships is primarily driven by:
1. No, low, or declining profitability (48%), typically measured via metrics such as client lifetime value (CLV) and client referral value (CRV).
2. Major market shifts (14%).
3. Changes in the bank’s business strategy (18%).
4. Correction of past errors (8%) — often inherited from departed executives.
5. ‘Other’ reasons (12%), for example, some banks — particularly smaller boutique investment banks — drop clients due to reduced employee morale from dealing with challenging (‘difficult’) clients or less acceptable terms.
Client divestment carries significant risks. The three most important are:
1. Erosion of remaining client trust (27%). High-value clients might question their own security with the bank. ‘How predictable and trustworthy is our bank?’
2. Legal and reputational risks (25%). Terminating relationships can lead to disruptive, high-profile lawsuits or a reputation as a ‘difficult’ bank with ‘difficult’ bankers.
3. Competitor advantage (17%). Divested clients may take their business to competitors.
Before cutting ties with business clients, banks should first consider the following three related questions:
1. Why is the client less profitable or unprofitable? Profitability metrics alone don’t tell the full story. Unprofitable clients might lack awareness of relevant products and services. A thorough strategic assessment is crucial to understanding the root causes.
2. Can the bank still provide mutually beneficial products or services? Some clients may need more guidance on leveraging specific products or services. Educating (mentoring) clients improves relationships and eases transitions if the relationship ends. Exploring additional offerings tailored to clients’ needs can unlock hidden value.
3. Can the relationship be revitalized? Options include adjusting payment models, redefining and refining relationship management strategies, transitioning clients to peers (external partners), and so on. Peers or specialized partners may have cost structures better suited to serving certain clients. Such a client migration approach demonstrates extra effort on the bank’s part, mitigating client dissatisfaction and fostering goodwill, sometimes even beyond the industry.
However, termination might be necessary. Handle the exit with as much care as the onboarding.
For more details, see: www.pieterklaasjagersma.com/reports.