Relational vs. Transactional Banking Strategy in Over-Banking Era: an Exmination of Banking Industry in Taiwan with a Strategic Perspective

Abstract

For over two decades, researchers in financial and economic field have been preoccupied with finding the unsettled issues of relational or transactional banking oriented through economic modeling with different assumptions. However, there are still left lots of puzzles unanswered. For instance, which banking orientation will let bank’s performance better off? Whether the relationship bank system survive competitive pressures in this highly competitive environment or not? Lots past researches predominately conceptualized lender-borrower relationship from a narrow view of economic angle; the lending-borrowing relationships should be investigate from a boarder lens. In this study, we adopt a strategic perspective to analyze the banking strategic choices and incorporate the environmental factor to enrich the relationship between different strategic choices and bank’s performance.
According to the financial panel data of individual bank in Taiwan 1992-2002, we found several conclusions of this study:
1. Generally Speaking, adopting relational banking strategy can enjoy better performance, specifically, the intensity of effects on performance are following the sequence of different banking strategy, that is strong-form relational banking, middle-form relational banking, weak-form relational banking, and on the contrary, if a bank adopting transactional banking strategy, then it will get relative poor performance.
2. Adopting relational banking strategy have another effects on restraining the default risks of borrowers, since relational banking take lots of time and cost to monitoring their customers. The empirical results support these arguments with negative relation between NPL and relational banking strategy adoption.


3. The moderate effects of industry competition significantly enhance the relationship between relational banking strategy and banks’ performance. This implies that under more competitive environment, in order to get higher profitability, banks should invest more resources to sustain close relationships with customers.
4. There is a unique finding in this study, there exist a negative relation between age and performance, and it seems to imply the strategic inertia phenomena exist in Taiwan’s banking industry.