An arms-length Transactional contract banking is at the other extreme and gives rise to transactional banking – where many banks compete for the customer’s business and the customer shops around between several banks to find the best deal.
Little in the way of a relationship exists between the two parties – both sides stick to the terms of the contract. A Transactional contract deters opportunistic behavior and because each contract is negotiated, both parties can bargain over terms.
On the other hand, information flows will be significantly curtailed and the detailed nature of the contract reduces the scope for flexibility. It is important to treat the definitions given above as two extremes, at either end of a spectrum.
In reality, most banks will offer a version of relationship banking to some customers or apply it to some products, while contract-like banking is more appropriate for other clients and/or services. For example, virtually all customers who enter into a loan agreement with a bank will sign a legally binding contract, but if the customer has a good relationship with the manager and a good credit history, the manager is likely to allow a certain degree of flexibility when it comes to enforcing the terms of the contracts For new clients, the manager will be more rigid.