Relationship managers are measured on revenue: net interest income, fees, balances. Revenue is easy to see. The cost of covering, servicing and processing for each relationship is spread across shared departments, so it is not. A relationship can look healthy on revenue and still lose money once that cost is counted.
This article follows a small commercial banking example from the ledger to a contribution line for each relationship.
The cost to be allocated
The bank's ledger holds 2,000,000 of cost across three cost centers:
| Cost center | Amount |
|---|---|
| Relationship coverage | 900,000 |
| Treasury | 500,000 |
| Operations | 600,000 |
| Total | 2,000,000 |
From departments to activities
Cost centers describe who spends money, not what the money is for. The first step moves each department's cost into the activities it performs:
| Activity | Source | Amount |
|---|---|---|
| Relationship management | Coverage, all of it | 900,000 |
| Cash management | Treasury, all of it | 500,000 |
| Payment processing | Operations, 70% | 420,000 |
| Account servicing | Operations, the remaining 30% | 180,000 |
From activities to relationships
Each activity is then charged to relationships by the driver that reflects its effort:
| Activity | Driver | Rate |
|---|---|---|
| Relationship management | RM hours | 100 per hour |
| Cash management | Treasury units | 1,000 per unit |
| Payment processing | Transactions | 10 per transaction |
| Account servicing | Accounts | 1,000 per account |
The rates follow from the totals. For example, 900,000 of relationship management cost over 9,000 recorded RM hours is 100 per hour.
The result
Revenue sits beside the allocated cost: net interest income after funds transfer pricing, plus fee income.
| Relationship | RM | Cash mgmt | Payments | Servicing | Cost to serve | Revenue | Contribution |
|---|---|---|---|---|---|---|---|
| REL-A | 90,000 | 40,000 | 18,000 | 6,000 | 154,000 | 310,000 | 156,000 |
| REL-B | 150,000 | 110,000 | 64,000 | 15,000 | 339,000 | 360,000 | 21,000 |
| REL-C | 60,000 | 0 | 12,000 | 4,000 | 76,000 | 120,000 | 44,000 |
| REL-D | 120,000 | 70,000 | 46,000 | 9,000 | 245,000 | 240,000 | -5,000 |
Across all twenty relationships in the example, revenue is 2,756,000, cost to serve is 2,000,000 and contribution is 756,000. Every cent of the 2,000,000 lands on a relationship, and the totals reconcile to the ledger.
What the table shows
- REL-B has the highest revenue in this group but a thin contribution, because it uses the most coverage time and cash management.
- REL-D brings in 240,000 of revenue and costs 245,000 to serve. On a revenue report it looks like a solid client; with cost to serve it is loss-making.
- REL-C uses no cash management at all, so it carries none of that cost. Allocating by revenue instead of by driver would have charged it anyway.
Acting on it
A contribution line per relationship changes the conversation. Pricing reviews can start from what a client actually costs. Relationship managers can see which clients in their book fund the others. Teams can be compared on contribution, not just on revenue. And because each figure can be traced back through the activity to the ledger balance, the numbers hold up when a banker challenges them.
A note on scope: this example treats funds transfer pricing as an input. The FTP-adjusted interest margin comes from the bank's existing FTP process; the allocation works on the cost side and presents it beside that revenue.