Managing relationships between banks and their business clients requires a thoughtful, strategic approach. Simply retaining or rejecting clients based on profitability oversimplifies a complex and crucial decision. Instead, banks must weigh various factors and explore compromise options.

Terminating client relationships may be driven by declining profitability (using metrics like ‘client lifetime value’ — CLV — and ‘client referral value’ — CRV), reduced employee morale from dealing with challenging clients, or shifts in markets — including their potential — or business strategies. Some banks drop certain clients to correct past strategic errors, usually errors made by senior executives who have left the bank.

Having said that, client divestment carries significant risks, including:

1. Competitor advantage. Divested clients may take their business to rivals.

2. Legal and reputational risks. Terminating relationships can lead to disruptive ‘high-profile’ lawsuits or a reputation as a ‘difficult’ bank with ‘difficult’ bankers.

3. Erosion of remaining client trust. High-value, important clients might question their own security with the bank. ‘How predictable and trustworthy is X?’

Before cutting ties, banks should ask:

1. Why is the client unprofitable? Profitability metrics alone don’t tell the full story. Unprofitable clients might simply lack awareness of available products and services. A strategic assessment is crucial to understanding the root causes.

2. Can the bank still provide mutually beneficial products/services? Some clients may need guidance on leveraging bank products effectively. ‘Educating’ clients not only improves relationships but can also ease transitions if the relationship ends. Exploring additional offerings tailored to their needs can also unlock hidden value.

3. Can the relationship be revitalized? Options include adjusting payment models, altering relationship management strategies, or transitioning clients to peers (external partners). Peers or specialized partners may have cost structures better suited to serving specific clients. Alternatively, larger peers may take on clients beyond a smaller bank’s capacity, creating mutually beneficial partnerships. Such a ‘client migration strategy’ demonstrates extra effort on the bank’s part, mitigating client dissatisfaction and (even) fostering goodwill (in the industry).

If efforts to restructure or add value prove futile, termination might be necessary. Banks should frame the decision as mutually beneficial, helping clients see the potential advantages. However, the process must be handled with great care — the potential risks are real — to avoid reputational harm or client backlash.

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