Financial Lending Notes
November 21, 2008

Golden Handcuffs
Once You Get Customers, You Gotta Keep 'Em

There’s no question that community banks face unique challenges in today’s tough credit environment. In times like these, it often pays to go back to the basics and refocus on what gives community banks a competitive advantage: specifically, adding value to relationships with small business borrowers.

Doing so will likely allow you to broaden and deepen your relationships with borrowers by recommending additional products and services that can help them at the appropriate stages of development. But here’s the best news: The more entrenched a customer is with your bank, the less like it is that they will leave.

Slipping such “golden handcuffs” onto your customers is the best way to engender their loyalty and increase customer retention.

It's All About the Relationship

When considering the value of the overall relationship with each of your small business customers, it’s important to think in terms of income, not rate. As our feature article in this issue details, the profitability of each customer is determined by a combination of interest rate, fees and balances across the entire relationship, not just a single loan.

Therefore, the key to maximizing the value of each small business relationship is cross-selling and up-selling customers so that they are using as many of your bank’s products and services as possible. If customers are using five or more products or services, the chances of them leaving your bank for a quarter-point lower rate decrease drastically.

You can go a long way toward achieving the dual goals of adding value and cross-selling/up-selling by making strategic recommendations that will help customers move from one stage of development to the next. Many business owners don’t have experience in navigating the potential minefields that exist here, so you can play a valuable consultative role.

For example, there are a number of different products and services that can help companies in a fast-growth stage. These include treasury management services to help improve cash management, capital markets services to provide a capital boost to sustain growth, and asset-based loans to purchase additional materials and equipment.

Also, don’t forget about cross-selling personal banking services to your small business customers. Personal checking accounts and loans, IRAs, auto and student loans, and online banking are all products that can help further entrench customers with your bank.

Online banking and bill-pay are especially valuable when it comes to holding onto customer relationships. Once customers have established these services (on both the business and personal sides), they are more likely to remain with you, even if it’s just out of convenience.

But How Profitable Are They?

Of course, the degree to which you will want to suggest additional services depends primarily on how profitable customers are to the bank. To determine this, you should gauge each customer’s current and lifetime profit potential. The chart on this page illustrates strategies for retaining, cross-selling, up-selling or divesting customers based on their profit potential.

For example, if a business is highly profitable now and has the potential to remain so over its lifetime, you would want to pull out all the stops to retain this customer and cross-sell them as many products and services as possible. However, if a customer is marginally profitable or unprofitable now and will likely remain so in the future, you should try to re-price the loan and/or move the business out of the bank.