Risk Appetite and Relationship Pricing -Part 2
Welcome to the continuation, where we explore the concepts of Risk Appetite and Relationship Pricing within the framework of risk-adjusted return on capital (RAROC). We introduce Relationship Pricing as a customer-centric approach where the overall business relationship informs pricing decisions.
Risk Appetite and Relationship Pricing -Part 1
Credit risk can be quantified using three variables: Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD). Together, they determine the Expected Loss (EL), which institutions provision for. However, actual outcomes vary, requiring equity to cover Unexpected Loss (UL).
Data Analytics
In earlier chapters, we identified customer-centricity and risk management as key components of a forward-looking business strategy. Data analytics is the engine that makes both possible, where it transforms raw data into a competitive advantage.
Risk Management
Let’s talk about Risk Management. Building on our discussion of customer centricity, we emphasize that a strong customer focus naturally leads to reduced risks. Local and regional banks, in particular, have a unique advantage in understanding and managing credit risk, thanks to their proprietary customer knowledge and relationships.
Customer Centricity
A customer-centric business model places clients at the center of strategy, creating long-term value for both customers and institutions. Benefits include higher satisfaction, loyalty, engagement, cross-selling opportunities, and reduced risk. Implementation requires understanding customer needs, offering personalized solutions, delivering seamless experiences, ensuring transparency, supporting financial literacy, and maintaining adaptability.
Let’s develop a Business Strategy
Digital transformation must begin with a clear business strategy, not a standalone “digital strategy.” Financial institutions must build on their three core functions, risk management, liquidity brokerage, and maturity transformation, while embracing customer-centricity and structured risk management as strategic pillars.
Are you Ready for Digital Transformation?
Digital transformation requires purpose, vision, and people, not just technology. Efforts that remain siloed or led by a single function risk failure. To guide institutions, we present a six-stage model: Business as Usual, Present and Active, Formalized, Strategic, Converged, and Innovative & Adaptive.
Steps to prepare for Digital Transformation
Digital transformation in financial services is most visible in six areas: omnichannel banking, personalization, automation, advanced security, data-driven decision-making, and fintech collaboration. While fintechs once seemed poised to replace banks, recent global shifts have reinforced the advantages of traditional financial institutions—stable funding, regulatory credibility, and established customer relationships.
Digital Transformation With Q-Lana
From our own experience in the banking world, we’ve seen how slow change leaves institutions struggling to keep up. Digital transformation is what helps them stay relevant, serve customers faster, and remain trusted in today’s fast-moving world.
Building Loyalty in SME Banking Beyond Points and Promises
True loyalty in SME banking comes from understanding clients, being flexible, and building trust—not from points or rigid programs. Banks that support their relationship managers, streamline processes, and use technology to enhance personal connections create lasting partnerships that help both the business and the client succeed.