The relationship between the financial institutions and the clientele base it covers is essential when dealing with the financial industry. In the recent past, the relationship has been emphasized because it is the cornerstone of making efficient financial planning to achieve sustainable growth in the industry. However, some concerns are raised, especially regarding the change in focus paid to profitability over the industry players nurturing the relationships. Therefore, this research discusses and critically analyzes various issues arising from the perspective of customer relationships and offers several approaches that relationship managers should utilize.
Emphasizing achieving profitability versus building a relationship
Relationship managers must understand that financial institutions operate in a highly competitive marketplace, and making huge profits is a significant concern. Because of the increase in pressure to attain robust financial results, there may be some temptations to prioritize short-term profits over the long-term building of relationships (Acharya, 2020). The scenario can manifest when managers use aggressive tactics when selling products, when managers push products and when one neglect personal customer service.
Implications on Customers’ Loyalty
When managers of various financial institutions excessively emphasize making profits instead of building customer relationships, the institutions are likely to undermine customer loyalty. It is worth noting that customers place significant value on transparency, reliability, and attention (Acharya, 2020). When customers realize that financial institutions are primarily interested in attaining huge profits and fail to consider customers’ personal needs, they will seek alternatives, damaging the institutions’ reputation.
Ethical considerations and expectations of the regulations
Regulating bodies like ‘The Basel Committee on Banking Supervision emphasize the essence of having strong customer relationships so that financial institutions survive competitively in the marketplace. Moreover, ethical considerations denote that institutions should act in their client’s best interests, a practice that goes beyond generating profits.
Importance of attaining long-term growth and sustainability
Sustainable growth and the huge profits of financial institutions are closely associated with the quality of client relationships. Ideally, short-term profits may offer immediate benefits, but when financial institutions pay attention to customer relationships, there will be a hindrance to achieving long-term growth (Acharya, 2020). Building robust customer relationships will translate to financial institutions experiencing repeat business, getting the most referrals, and becoming more resilient, especially during economic downturns.
Therefore, by considering the considerations discussed above, the financial institutions’ relationship managers need to prioritize several approaches that include:
Client-centred approach
By using this approach, relationship managers need to focus on understanding customers’ unique needs, their customers’ tastes and preferences of the customers and the financial objectives of their clients (Acharya, 2020). For managers to effectively utilize the approach, they should involve themselves in active listening, carry out a thorough assessment of the needs of their customers, and give customers tailored solutions that align with their goals.
Approach to building long-term customer relationships
Managers should emphasize attaining long-term customer relationships to build trust and gain transparency, translating to mutual respect. Therefore, relationship managers are supposed to be trusted advisors as they offer guidance to clients through several financial decisions and financial stages.
Creating customer value
Focusing on financial transactions and making immediate profits is essential, but managers should prioritize creating valued customers. The approach entails offering financial plans to customers, giving educational resources, and proactively communicating with customers so they are empowered to make informed decisions.
Relationship managers should ethically conduct themselves as they comply with clients.
It is fundamental for financial managers to practice ethical standards and follow regulatory requirements when dealing with customers. The approach includes the relationship managers of financial institutions disclosing total financial fees to clients, providing any instances involving conflicting interests, and ensuring that the recommendations they offer to customers fit the clients’ best interests.
Attaining a balance between making profits and building relationships
Notably, realizing maximum profits is crucial because it makes the financial institutions sustainable, although profits should act less at the expense of building robust customer relationships. Thus, managers of the institutions are supposed to balance attaining financial institutions with creating effective and sustainable relationships with their clientele (Barth & Caprio,2018). Therefore, the approach requires that managers align incentives, have performance metrics like performance appraisal, and create an organizational culture that caters to the periodical interests of the clients and the financial institutions. Relationship managers of various financial institutions must understand and align themselves with ‘The Basel Committee On Banking Supervision ‘because the body plays a vital role in shaping bank regulations. Although the regulating body mainly focuses on ensuring that financial institutions are safe and sound, it also influences how they build customer relationships. Thus, by understanding the role played by Basel committee managers will manage their clients’ relationships by:
Managing risks
The committee develops standards that aim to enhance and manage risks. When financial institutions manage risks effectively, they will realize robust relationships with their customers because they will ensure that customer commitments are fulfilled without experiencing financial challenges. Therefore, when banks adhere to Basel’s standards, especially in managing risks, customers will have confidence regarding the safety of their investments.
Ensuring that adequate capital is offered to customers
The standards of Basel prescribe that financial institutions should maintain minimum capital so that various risks, such as market and operational risks, are covered. The requirements are predominantly aimed at ensuring that banks are stable, have solvency and that all financial institutions indirectly impact the relationships of customers relationships (Min, 2018). Notably, when there is an adequate supply of capital, customers are provided with the assurance concerning the capability of the bank to deal with instances of huge losses and maintain liquidity as they proceed to serve the numerous needs of their customers at any point in time, especially during vast and adverse economic conditions.
Alignment of Incentives
BCBS guidelines encourage banks to align their incentive structures with long-term customer relationships and prudent risk-taking. For instance, regulations may discourage excessive risk-taking or short-term profit maximization strategies that could harm customers’ interests in the long run (Min, 2018). By promoting responsible behaviour and fair treatment of customers, BCBS standards contribute to building trust and loyalty among customers
Trust and loyaltyrency Requirements
Openness and adequacy are indispensable elements in building trust with the clientele. The BCBS standards usually contain mandates, such as transparency, communication, and providing complete information about the products a bank offers, its fees and the risks it entails (Min, 2018). Increased transparency builds the credibility of the customers in making the proper decision-making, which helps avoid confusion; therefore, it secures the long-term relationship between the provider and the customer.
Stress Testing and Scenario Analysis
BCBS calls on banks to participate in stress tests and scenario analyses to assess their resilience to adverse cycles or economic recessions. Through the knowledge of potential threats and areas of vulnerability, banks can skillfully maintain their balance sheet and capital adequacy prior to any crisis that may subsequently escalate without compromising their customers’ relations (Min, 2018). Customers are more secure, and their banks can respond well to many scenarios.
Principles for Effective Risk Data Aggregation and Risk Reporting
Some basic standards, such as risk data aggregation and risk reporting principles, aim to improve banks´ understanding of the risks they expose themselves to. Robust data management strategies empower financial institutions better to understand their customers’ biases, habits and attitudes, enabling personalized and specialized solutions (Orgeldinger, 2018). Through this, the customer relationship is reinforced, and the chances of expanding profitably are brightened.
Short-term Profit Maximization vs. Long-term Relationship Building
A key issue is that a delicate balance must be sought between making immediate profits and building long-term relationships. Financial institutions could act ruthlessly in their quest to close more deals and focus on transactions that cause immediate returns. This may passively erode the confidence and loyalty of clients.
Customer Trust and Loyalty
Putting all the stress on profits without caring about the customers can alienate them from the business, which results in a loss or reduction in the number of customers. If consumers start thinking that the purpose of the institutions is to collect money instead, this could lead to churn, and consequently, reputation will be affected adversely.
Emphasis
The clients’ trust is the most critical value for the agents to approach and retain, achieved through impartiality and complete truth in every meeting and by showing responsiveness, compassion and integrity in all conversations.
Regulatory Expectations and Ethical Considerations
Regulators, such as the BCBS, duly recognize the necessity of customer-facing practices and ethical behaviour to run operations in the financial industry. Organizations that establish their business on profits rather than relationships risk violating legal requirements and ethical standards, which could see them shut down.
Long-term Sustainability and Competitive Advantage
No matter how competitive the financial industry is, it will always have the quality of its customer relationships as a base. What is striking is the growth of institutions with short-term profit interest, overshadowing the value of long-term relationships that will leave these enterprises without customers in the long run, especially in a competitive marketplace.
Alignment of Incentives and Organizational Culture
Dialogue between people features mostly when there is mutual interest, or others have different values. RMs could be influenced by external factors, such as a need to hit sales numbers or targets, which delays positive interaction with their clients. In dealing with this situation, RMs should Invest in a balanced model that sees through the clients’ interests, not the profits as the business guiding objective. More than responding to customers’ issues is required; interacting with them proactively to know their needs and wishes (Barth &Caprio,2018). By doing that, you can adjust how you develop the solutions to maximize the customer experience factors. Instruct the customers about the positive role of financial institutions in their long-term financing and the merits of creating a relationship with this bank as a part of their core partners.
The core principles of the BCBS reflect its commitment to promoting financial stability, enhancing risk management practices, and safeguarding the integrity of the banking system. Here are the fundamental principles:
Capital Adequacy
The bank’s capital adequacy is a crucial focus of the BCBS, with the introduction of minimum capital requirements to cover risks (such as credit, market, and operational risks) (Barth & Caprio,2018). A sufficient capitalization allows banks to have enough buffer against losses and maintain normal operations even in adverse economic times.
Supervisory Review Process
The BCBS considers the supervisory review process as a relevant tool for banking authorities to land the risks entailed by bank portfolios, capital adequacy, and compliance (Barth & Caprio,2018). Bank risk managers are supervised and must certify that the bank has in place sound internal systems to identify, measure and control risks.
Market Discipline
Market conditions are expected to be manageable through the imposed transparency and disclosure requirements of the Basel Committee on Banking Supervision. By this, banks are believed to issue precise and complete reports concerning their financial situation, market risk exposure and performance to the relevant market stakeholders like the investors, creditors and clients.
Risk Management Practices
The toughest norm that the BCBS promotes is the risk management practices within banks concerning the identification, measurement, monitoring and control of different risks. This covers “credit risk,” “market risk,” “liquidity risk,” “operational risk,” and “compliance risk.” The stability and ability to withstand shocks of the banking system are due to efficient risk management.
Capital Supervisory Review and Evaluation Process (SREP)
The SREP model developed by the BCSS allows supervisors to assess banks’ overall risk appetite and establish the appropriate regulatory capital. The SREP assesses, on the one hand, qualitative aspects, including governance, risk culture, compliance, and quantitative measures of capital adequacy.
Liquidity Risk Management
BCBS suggests liquidity risk management, which will help banks sustain the levels of liquidity necessary to fulfil obligations as they become due, at least under stressed conditions (Barth & Caprio,2018). This includes liquidity risk measurement prescriptions, stress testing, and contingency fund arrangements.
Cross-border Banking Supervision
Due to the widespread character of banking activities, the BCBS stresses the significance of collaboration and harmonization between supervisory authorities on national levels. Transboundary supervision of banking involves information exchange, joint regulatory compliance, and addressing market arbitration and jurisdiction issues.
Corporate Governance
The FSBC recognizes the importance of sound corporate governance for the banking sector as a blocking mechanism against misconduct. This ought to be backed by transparent authorities, a simple chain of command, independent supervision and an effective risk management system (Barth & Caprio,2018). Solid corporate governance promotes the fairness and safety of banks’ operations.
Consistency and Coordination
The BCBS is dedicated to recognizing identical regulatory requirements across jurisdictions that will apply to all banks irrespective of the countries where they operate (Barth & Caprio,2018). Aligned standards, in turn, eliminate regulatory arbitrage possibilities and raise the efficiency of supervision and risk management practices.
References:
Acharya, S. (2020). Regulation and Supervision of Banks and Financial Institutions. Available at SSRN 3563986.https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3563986
Barth, J. R., & Caprio Jr, G. (2018). Regulation and supervision in financial development. In Handbook of Finance and Development (pp. 393-418). Edward Elgar Publishing.https://www.elgaronline.com/abstract/edcoll/9781785360503/9781785360503.00023.xml
Min, J. (2018). Basel revisited: An Assessment of the Legitimacy and Effectiveness of the Basel Framework. Peking University Law Journal, 6(2), 323-369.
https://www.tandfonline.com/doi/abs/10.1080/20517483.2018.1603649
Orgeldinger, J. (2018). The Implementation of Basel Committee BCBS 239: Short analysis of the new rules for Data Management. Journal of Central Banking Theory and Practice, 7(3), 57-72https://sciendo.com/article/10.2478/jcbtp-2018-0023?content-tab=abstract
Yaacob, H., Markom, R., & Hakimah, A. (2018). Coping with the international standards of Basel Committee on Core Principles on Effective Banking Supervision (BCBS): Analysis and reform for Islamic banking. International Journal of Business and Society, 19(S3), 385-399.https://www.ijbs.unimas.my/images/repository/pdf/Vol19-S3-paper4.pdf
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