The Conversation by Laura Doering 12 June 2019
The rise of online and mobile banking has changed the financial service industry as we know it.
Customers have long been able to trade the onetime weekly trip to their local branch for a few easy clicks from the convenience of their home or workplace. Instead of having a cup of free coffee at the bank, customers are online in a cafe across the street.
As a result, physical bank branches play a less vital role in our financial experiences.
In 2017, the increasing use of online and mobile banking prompted TD, CIBC and RBC to close a total of 20 branches in Saskatchewan alone, and additional closures in northern Ontario were announced in 2018. In rural areas particularly, bank branches — once a Main Street staple — are disappearing from many communities.
As banking services have moved online, customers no longer need to interact with bankers in branch offices to pay bills, deposit savings or renew mortgages. Tech-savvy customers welcome online banking for its convenience, and banks view it as a way of increasing efficiency.
But my research suggests that there are hidden costs to abandoning personalized banking relationships.
Past research shows some lenders and borrowers develop personal relationships. For example, small business owners establish personal relationships with bankers in an effort to secure loans, and lenders build personal relationships with borrowers as a way of gaining access to private information that may affect loan repayment.
These relationships can shape the nature of financial transactions — with important consequences.
In a study I conducted on borrowers and lenders, I found that personal relationships between them benefit both parties. My research shows that when borrowers have personal relationships with lenders, they are more likely to repay their loans on time, whereas those with distant relationships miss more payments.
Timely loan repayment is a win-win: it helps borrowers develop strong credit scores and allows banks to earn money on interest.
Bankers more lenient
I also found that bankers are more lenient when borrowers hit a rough patch and fall behind on payments if they have a personal relationship. By comparison, bankers are more likely to write off delinquent borrowers when they have only formal, distant ties.
Of course, it’s unlikely that we’ll revert back to the days of It’s a Wonderful Life, with banker George Bailey greeting each customer by name. But maintaining some form of personal connection is a wise choice for customers and bankers alike.
Those of us who do most banking online should develop a relationship with someone at our primary bank. And this relationship should consist of more than just email or texting — it should start with an in-person meeting. Even the most devout online banks like Tangerine have brick-and-mortar branches in major cities where you can meet with real, human bankers.
My research suggests that, if you and your banker retain this relationship, the banker will cut you some slack when you need it, and you’ll be a more reliable customer.
Benefits for banks and customers alike
Building and maintaining personal relationships generates benefits on both sides.
A colleague’s recent experience demonstrates this: when there was fraudulent activity on his account, he described how his bank’s call centre provided immediate assistance by cancelling his bank card and securing the account. However, when his bank continued to reissue and cancel new cards in advance of a trip, it was the familiar face at his local branch who finally resolved the issue before his impending departure.
To many, the machine-like inner workings of financial institutions may appear too formal to be swayed by personal attachments and obligations. My study suggests otherwise.
Personal relationships can have important implications, even within the seemingly cold, impersonal realm of finance. Perhaps it’s time for you to drop into your bank branch for that free cup of coffee.
Laura Doering is an Assistant Professor of Strategic Management at the University of Toronto.