In our last newsletter we outlined the surprisingly low share numbers for the largest banks in the small business segment and focused on the multiple challenges they face in succeeding with this segment, including:

 

• A large bank organization that borders on the dysfunctional in attracting small business

 

• The small business group’s internal status as a second-class citizen within a big bank

 

• Turnover in the small business executive ranks resulting in an inconsistent approach to the market

 

• A lack of understanding and trust between large banks and their small business customers

 

• Increased capabilities and “smarts” within smaller banks

 

 

While significant internal and external roadblocks to success exist, the economic attractiveness of small businesses and the growth they offer make the effort not just worthwhile but almost mandatory. Banks such as Bank of America now recognize this and cite small business as a major growth opportunity.

 

What should large banks do to improve current mediocre performance levels and exploit their market power?

 

* Convert senior management. Unless top management really buys in to small business, don’t bother trying to gain the support of key areas such as the branch, product management, investments, operations, and so forth. And without their (preferably enthusiastic) support, significant success remains unlikely.

 

But small business executives can win over the bank. Ten years ago we worked with the then-newly-appointed head of the small business group of a top five bank. We helped him construct a presentation that demonstrated the value of small business to his seniors and his colleagues in various lines of businesses and product and support areas. He wanted to demonstrate the importance of the small business effort both to the bank at large and to individual areas such as the branch, deposits and cash management, and credit cards, among others. His goal was to get toward the head of the queue in product development, sales, and technology priority. Over time, he proved to his colleagues that they would benefit both as a line of business and personally from helping small business to succeed.

 

While no one meeting or presentation ever changes anything at a large bank, it started the momentum rolling. When this executive retired as head of the business, the bank had clearly established itself as the top player in its market and a large earner for the bank.

 

I can contrast his experience with that of a small business head at another huge bank located near to this one. For various reasons, that executive never “connected” with the branch and other areas within the bank and occasionally complained about not being sufficiently respected à la Rodney Dangerfield. The net result: an underperforming franchise and an executive who has moved on to another player.

 

Small business management needs to provide internal constituencies with a fact-based case for supporting the small business effort. The executive at the bank that has become a small business leader knew that the objective numbers supported his view. He was also savvy enough to realize that he had to sell to his external customer before having a real chance to sell to the external one.

 

* Maintain the small business head. My experience is that the big banks have excellent people running their small business efforts, but they rotate out of the lead position much too quickly. Two years is too short in that role to create any substantial progress; a four- to five-year minimum should be the expectation. Ideally, both the individual’s performance and commitment would result in even a longer stay.

 

Small business success requires that a bank install both a strong process and a strong culture. Typically, the process needs to come first, whereby management introduces a process that results in consistency across the bank. Once the process has been established, it can seep into the bank’s culture and become self-perpetuating. The head of small business needs to oversee both process and culture transformation, and that takes time.

 

At the successful bank mentioned above, the small business head remained in place for about ten years. The other large bank cited has a history of moving execs very frequently. In that bank’s small business area, the exec never “connected” with others. In the middle market area at that bank the executive did connect and lead very effectively. However, after two years, the exec was promoted to another position and the middle market effort suffered for it.

 

* Focus on a holistic offer. Big banks possess terrific product depth and marketing power. Yet, many seem to compete with one hand tied behind their banks, offering one-off loans or deposits or investments rather than a unified and interlinked offer. Smaller banks such as Umpqua Bank, among many other community and regional players, have managed to work through their internal hurdles to create offers that present their fullest face to the customer, addressing personal and business needs and incenting the target to bring both sets of needs to one bank.

 

* Address organizational roadblocks. This probably should be the first topic listed. Silos dominate at many of the larger banks (and, of course, at many smaller banks as well). Some have existed for so long that managers believe they will never be destroyed. However, management willpower and a tougher operating environment can result in increased cross-border cooperation within banks. Big banks that fail to address this issue are at a distinct competitive disadvantage to banks that do. Unfortunately, this problem needs to be addressed regularly, as the destruction of silos at large banks appear to be temporary victories rather than permanent ones.

 

Concluding Thoughts

Many areas of banking have experienced dramatic consolidation in recent years. For example, the top ten providers now control 60 percent of share in home mortgages, 79 percent in credit cards, and 55 percent in C&I lending. Small business as a segment remains highly fragmented. While the next five years should see increased consolidation of share in this space, smaller banks are well positioned to fend off big bank invaders on their turf. The struggle over the next few years will feature a few big banks getting their small business act together while other big banks suffer from being out-maneuvered by more agile players.