Our last two newsletters discussed the challenges that banks face in promoting innovative thinking and approaches. In short, at most banks, multiple internal factors conspire to limit innovation. Nonetheless, despite organizational and cultural challenges, innovation does occur, in particular, in the small business space.

Note that these and other innovations focus on different areas; some are product-oriented while others focus on delivery channels or segmentation. Further, while U.S. banks continue to lead the world in their focus on small businesses, non-U.S. banks are generating many, if not most, of the innovations. U.S. bankers now need to evaluate international best practices in small business banking, if they are to gain the extensive insights available to them from evaluating the activities of other players.

Let’s look at six examples of innovation aimed at this segment. We are not suggesting that these concepts are flawless in their execution or perfect in their design. However, each shows bank leadership trying new approaches and, oftentimes, rejecting the “established wisdom” that limits experimentation in banking.

Channel Focus: Telephone-Based Relationship Managers.  Wachovia, along with a handful of other banks, has emphasized a phone-based RM in order manage a large number of smaller customers in a cost-effective manner. The phone-based RM can handle hundreds of accounts; technology allows communication and transparency between this banker and the branch or an RM who can make in-person visits, when and if required. Banks following this approach are able to maintain and strengthen relationships with customers that other players largely ignore.

Market Positioning: Barclays Business Club.  In Kenya, Barclays Bank has established a Business Club that customers pay to join. Club membership offers small business owners seminars on topics such as cash flow management, provides them with relevant economic information, and generates best-practice profiles of successful businesses. In addition, the club sponsors reduced-cost trips to areas of the world in which Kenyan trade flows are increasing, such as China and the Middle East.

Many U.S. bankers might doubt the willingness of their customers to pay for this type of access but Barclays Club has thousands of paying members due to its focus and the value-added it has been able to provide.

Product Emphasis: Sell Products Not Relationships. One international bank client, who would not want to be named, focuses on selling individual high-yielding products that meet specific customers needs (cash flow and trade) rather than emphasizing a relationship approach. To quote one of the top executives of the bank: “I hate multi-product approaches. It leads to pricing down. The corporate bank does this all the time, and they give away a lot.” This bank has developed specific products aimed at its target markets. It then sets its sales force against this product-specific emphasis and develops a sales effort aimed at the sale of a specific one-off product to customers and targets. Of course, going forward, the bank will attempt to deepen its penetration but maintains a discipline against eroding returns.

A product-specific sales force particularly merits consideration. Whether in the U.S. or markets around the world, the majority of small businesses do not borrow. Despite the attractiveness of these customers to the banks (and despite the denial of bankers), they are frequently ignored by RMs more focused on building loan volume. Aiming a targeted sales effort at deposits (a mass market approach for smaller customers and a dedicated sales force for larger accounts) is worth considering.

Segmentation: Aiming at the Low End. Human nature seems to drive bankers to focus on larger accounts. If a bank’s definition of small business ranges from zero dollars to two million, the banker naturally heads for the two million dollar names. One U.S. bank we know takes a different approach, highlighting truly small businesses, those with revenues of approximately $250,000 and below. This bank centers its sales effort on enlisting branch personnel to reach out to these “moms and pops,” none of which is large by itself but which as a group generate significant profitability and highly attractive returns. To do so cost-effectively, the bank leverages its consumer processes and cultural mindset.

Redefining the Opportunity: Supplier Financing. Major banks, such as Citibank, operating around the world, have developed lending programs that leverage their strong corporate relationships to allow them to lend to small and mid-sized companies (SME), particularly in countries lacking credit information transparency. Assuming the suppliers are operating effectively, the bank can develop a level of comfort with suppliers to their major corporate clients. Loans to support cash flow needs can be structured so that payments from the corporations directly pay off the loans, minimizing risk. The lender is able to expand its market to include SMEs and provide a service supporting its corporate clients.

Linking with the Owner: Product Packages. Banks are increasingly cognizant of the opportunity and need to bank the business owner as well as the business itself. All the client data we have evaluated shows that banks handling both accounts have higher retention and per account returns. However, organizational barriers often get in the way of making a combined offer. Umqua Bank in Oregon as well as others have created product packages that make a combined personal-business banking offer to small business owners. Banks with this emphasis need to ensure that a meaningful value proposition exists for the owner, tied to rates, preferred levels of customer service, recognition, or other elements.

Concluding Thoughts
Innovation is occurring in the SME space and the above examples provide several examples of the effort that banks are making in this area. Further assessing these and other “different” approaches will provide bank management with insights that they can leverage within their bank and customize to bank specific growth opportunities tied to key segments, channels, and products.