At a recent dinner, Tom Brown, the hedge fund manager and former banking analyst, commented that within most banks, the small business segment fails to receive the attention or priority it deserves. Unfortunately, his view is on target. Bank managements need to consider why this is the case and determine the steps they should take to reverse under-investment in a growth area.

Small Business Continues to Fight for Attention

Some banks operate with a strong focus on and corporate commitment to small business; among these are big banks such as Bank of America, Chase, Wachovia, and Wells Fargo. Management understands the returns available from this segment, likes the strong year-to-year growth, and has made this segment one of its key priorities.

However, at many more banks small business struggles for internal bank recognition and focus.

Why Does the Small Business Segment Fail to Receive the Attention and Respect It Deserves?

Our long experience with clients in the small business arena indicates that there are four reasons why small business must continue to fight for internal attention and resources:

1. The background of senior management. No banks that we know have a senior leader who has come out of the small business area. To this day, at many regional and smaller banks the corporate banking area often generates top leadership. Traditional middle market banking and small business banking are different in many fundamental ways, often resulting in dissonance between the two groups. Among the differences: reliance on in-person marketing versus increased focus on the use of alternative channels; bespoke credit underwriting versus credit scoring; extensive hand holding of the customer versus an emphasis on self-serviceThe experience and biases of senior management can also encourage a caste system within the bank, whereby commercial lenders are viewed as having a higher status than small business bankers. One irony is that, in general, middle market returns may be undergoing a systemic decline while small business returns remain strong.

2. Neither fish nor fowl. Is small business primarily a retail or commercial business?  In many cases, the customer requires elements of each. As for retail, small business owners approach their banking decisions much as consumers do; the products they require are often very similar to consumer products; and, like most consumers, their needs are relatively simple and limited in number. However, those that borrow are doing so to support their business, and their cash management and retirement needs require varied degrees of complexity depending upon the type and size of business they are operating.

3. The fact that the small business customer is a hybrid makes that customer more difficult to categorize and serve within many banks. Retail bankers may see small business customers as daunting in their complexity and not worth the effort required to serve them; middle market bankers may interpret the relatively small size of each customer as meaning they are of less economic interest to the bank and, therefore, not worth significant attention.

4. Organizational conflicts. Where should small business report? Basically, it belongs in the retail organization. To serve this customer in a cost effective manner, banks need to emulate the approach already being exploited in consumer banking, including: standardized products and pricing, centralized/regionalized decision making, and increased reliance on telephone and/or Internet-based servicing.To this day, many banks place the small business group or the lending-related activities of small business in the commercial banking unit. This is a mistake for at least three reasons: the commercial bank operates with a slower, more cumbersome, and more expensive decision making process; commercial bankers place too great an emphasis on credit over non-credit sales; and the culture of a small business banking unit tends to be more entrepreneurial and flexible versus a traditional commercial banking group.

   We have seen small business within retail, commercial, or separate from both and on an equal footing with those groups. A separate organization only makes sense if small business generates large numbers and has limited dependence on the branch channel. However, the branch and small business are often co-dependent for success and should best be linked organizationally under one head.

5. Staffing inadequacies. Until the recent past, small business did not attract the best bankers. Too often, we have seen “failed” middle market bankers placed into small business. Those days are over at the best small business players, although this hangover from the past remains. Small business and retail are becoming the areas of choice for ambitious bankers rather than a career way station. Ultimately, this is one trend that will improve both the internal visibility and performance of the small business group.

What Should Bank Management Do to Place Greater Emphasis on This Attractive Segment?

Banks succeeding with small businesses operate with a senior management that appreciates the economics generated by the small business customer and understands the opportunity offered by capturing both business and owner sales.

One step that small business heads can take to get their message across involves presenting the case for their group. Years ago, we worked for a newly-appointed small business head of a major commercial bank. In part, our engagement involved developing a presentation that this manager could use to sell the value of small business to his internal constituency. He took that presentation and “sold” small business to people in the branches, product management, operations, and other areas, all with a focus on building knowledge of small business and heightening the bank’s internal focus on the opportunities it offered.

Many small business heads may need to do missionary work for their business. While time consuming, delivering a consistent and fact-based message within the bank should result in a new level of internal awareness and respect for small business initiatives. Over time, it can also result in senior bank management becoming active advocates for the group. Small business management should continue to push until internal resistance become internal support.