Executive Summary: At many banks, an increasing disparity exists between what senior bankers say their enthusiasm is for small businesses and reality. Unfortunately, the small business segment risks becoming an outlier rather than a major business initiative.

Here’s what we see happening at many banks: the small business segment, once an important and well-respected segment, at many players appears to be in the doghouse, being viewed with increasing suspicion and reticence. Why? In large part, concerns center around a loan portfolio that is declining in quality; virtually all the banks we know are experiencing higher losses and delinquencies, hardly a surprise given the economy.

In particular, card-based offers to small business made by banks (particularly Bank of America) and non-banks alike have shown significant deterioration in quality. These credit score-dependent products were offered with a mass-market approach; many card portfolios suffer from loans to what turned out to be sub-prime business segments. Advanta provides the most notable example of a failed approach to small business; in effect, totally dependent upon making loans, that company has stopped lending and is in liquidation.

 

Fundamentally, banks that lead with lending to small business without demanding a fuller relationship are making a mistake. Yet, even though banks proclaim their “relationship focus” and their “solutions-orientation”, the reality is that many small business bankers are loan jockeys, period.

 

Given the downturn in the economy, now is the right time to rethink your bank’s approach to this segment, eliminate bad practices and strategies, and implement a disciplined approach for the future. Nice words, which most banks will agree to in concept but not follow-up on. However, some banks are already building a more coherent and, frankly, smarter approach to business banking; those will be the winners.

 

Don’t Lead with Credit
For 20 years, we have been pointing out the value of the small business deposit relationship. Amazingly, many banks still do not build their sales/marketing focus on attracting the 60% of small businesses that never or seldom borrow. To be clear, lending still has to occur, but only when you capture the deposit relationship. American Express remains successful with a loans-only approach, but they have spent years and millions developing models to underwrite and monitor portfolios. Also, during this crisis, they have acted quickly to mitigate losses.

 

Bank the Owner not the Business
By this we mean that the main focus of sales and service should be on the principals of the business not the business itself. That is a major difference between small business and larger middle market or large corporate banking. A small business represents the owner’s income, net worth and, yes, ego. One of the right things that Merrill Lynch did in its foray into business banking was to build off the relationships that already existed between the broker and an investor/business owner. They often started with knowledge of the owner and moved to the business. Bankers usually start with the business…and end there.

Organize Around the Customer Not Your Silos
Bankers love to construct and defend silos. Banks in which a true cross-sell culture exists are the rare exception; we have also found that banks from the smallest to the largest share this problem. Think “Small Business Household” (SBH) not small business. The SBH consists of the company (loans, deposits, retirement planning, etc), the owner, the owner’s family, and the owner’s employees. We have met with many banks that say they approach the segment with this type of focus, but in almost all cases they are deluding themselves. They may have the right intentions, but execution is missing.

Emphasizing this approach requires a more sophisticated banker versus the loan BDOs that have predominated in recent years. In addition, the product set needs to be reviewed and streamlined. Many banks are great at developing new products that are of marginal value. Now is the right time to eliminate the 30%+ of products that are of little value to the customer and destroy value for the bank.

Banks Can Become Trusted Advisors
Given the extent to which the industry has turned the screws on small business, many banks have given up on achieving trusted advisor status and fallen back to humbler goals such as surviving. In fact, as a whole, the banking industry has served its customers badly during the present downturn, reducing lines of credit, tightening lending requirements, charging higher rates, and hiking fees. Every survey we have seen points to the substantial estrangement between banks and their customers.

However, a SBH focus will increase the importance of the banker and could (no guarantees) go a long way to rehabilitating banks with their customers while increasing the comfort level of the banks with the small business segment. We know that, to some degree, community banks already follow this model, but even their execution is spotty.

Too often, the heads of small business at regional and larger players turn over with alarming frequency. At one major bank, there have been at least 12 heads of small business over the past 15 years. In that situation, the likelihood of corporate understanding of and commitment to the segment is low. If organized correctly, small business itself can be he “bigger and better thing” rather than a rite of passage to another division.

Concluding Thought
Many, if not most, banks continue to underexploit a great financial opportunity for their companies and a way to differentiate themselves from their peers. The Small Business Household can serve as a strong profit and growth engine as the economy stabilizes and improves; however, only a handful of banks will possess the leadership and vision to harvest this opportunity.