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Commercial account analysis in banking : a comparison of the procedures of selected United States and Canadian banks Thomson, James Robertson

Abstract

Banks offer a wide range and variety of services to their commercial customers. Periodically, they analyse the services being utilized by a customer and subsequently enter into negotiations with that customer on the compensation to be provided for services rendered. As a preliminary to the major objective of this study, an argument is presented on the analysis approach that should be utilized by banks to determine compensation requirements and to negotiate these with the customer. The major, study objective is to determine, assess and compare the commercial account analysis procedures of selected United States and Canadian banks. While banks provide a wide range and variety of services to their commercial customers, this study argues that these services are linked by various quantitative and qualitative factors. As such, an all-inclusive analysis or valuation approach should be utilized to determine compensation requirements (a total customer relationship analysis), rather than one which separates the customer into a number of service categories or areas with compensation requirements being determined for each service area separately (a service area analysis). It is also argued that an integral part of the analysis process is profit computation over the total customer relationship. Based upon a literature search, it was determined that certain United States banks utilize an analysis procedure that computes profit over the total customer relationship. Their procedures (profitability analysis) are outlined and the strengths and weaknesses of the procedures are discussed. As only minimal published information was located on the analysis procedures of Canadian banks, research took the form of personal interviews with senior officers of six banks. It was determined that the Canadian banks utilize separate service area analyses and that in no instance is customer profitability computed, either by service area or over the total customer relationship. Rather, the analysis procedures focus attention on the revenues received vis-à-vis the revenues that should have been collected. While a service area approach is utilized, subjective valuations of total customer relationship profitability do occur, under certain circumstances, which may decrease the compensation requirements for that service area by virtue of the value of the total customer, relationship. Canadian bank analysis procedures are extensively outlined as, to the best of the writer's knowledge, this is the first study and documentation of them outside of the Canadian banking system. The procedures are compared to those of the United States banks and the possible reasons for the differences are discussed. Strengths and weaknesses of Canadian procedures are outlined in. relation to those of the United States banks. The study concludes that the Canadian banks could benefit from adoption of a total customer relationship approach to the analysis of their commercial customers.

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