Executive Summary: The key factors in making banks successful in the business space are relatively easy to determine. Executing on them is the hard part.

 

 

Here are five characteristics of banks that are successful in business banking:

 

1. Quality bankers.

Unfortunately, business banking is too often the dumping ground for commercial bankers who failed to make it as middle market lenders. The best banks view small business banking as a career rather than a way station to a better department. Their model resembles that of an investment broker or accountant who develops, serves, maintains, and builds his client base.

 

2. Compensation based on performance.

Banks need to abandon their salary-centric approaches to compensation. To attract and retain the quality bankers mentioned above, you need to pay them for their success. To this day, at many banks the difference in compensation between a strong and mediocre player is paper thin. It should be a wide gulf.

 

Some banks also need to leave their traditional comfort zone related to compensation. We have seen banks clamp down on compensation that management thought was too high, even though it was part of a previously agreed-to scheme. This drives strong bankers away.

 

3. Focus beyond loans.

On an all-in cost basis, many small business loans are either minimally profitable or, in effect, as Dick Kovacevich called them more than 20 years ago, loss leaders.

 

In recent months, the cost of loan origination and maintenance has risen in light of increased risk management and regulatory requirements. At the same time, quality borrowers are fewer in number and harder to find. Banks that focus only on the loan or gain only a small portion of additional business will generate poor risk returns.

 

Small business is not only business lending. It includes: business lending, business deposits, business cash management, business trade services, owner lending, owner deposits, owner investments, and, when profitable, employee loans, employee deposits, and employee investments. It requires that multiple areas of the bank work together to achieve success. When that happens, everyone wins, including the customer.

 

4. Senior management commitment and investment.

Neither Rome nor a business banking franchise was built in a day. Success requires that banks diagnose and address gaps in their products, market positioning, risk and operating processes, line and support personnel, credit culture, among other areas.

 

This takes time to accomplish and requires a time horizon that goes beyond six or nine months. Several of the top business leaders we know have benefited greatly from senior management that “gets it” as well as consistent leadership at the top. To go to the other extreme, two of the top five (in assets) U.S. banks have suffered in part from a revolving door approach to small business management. Over the 20 years or so that I have been consulting in this space, one of these banks has had at least a dozen heads of business banking. That is a certain recipe for failure.

 

5. The branch is closely involved.

Years ago, I remember one business banking leader at a top 15 (in assets) bank saying that his group had spent too much time in trying to work with the branch system. He intended a more go-it-alone approach, as a result of his frustration. Neither he nor his bank remains.

 

While it may not be easy to co-opt the branch into the small business effort, at most banks it is a non-option. Branches generate leads, manage customer service, and uncover cross-sell opportunities. Further, many customers are naive enough to believe that they are dealing with one institution when they go into a branch with a business banking question. This often leads to customer frustration.

 

The more leverage that a branch can offer its bank’s business banking effort, the more successful that bank will be. It is often unrealistic to expect branch managers to be small business sales leaders as well as everything else (for example, operation and admin head, customer service lead, compliance and audit specialist, etc). However, with increased organizational support, some training, and targeted compensation, the branch manager will be pivotal to this effort.

 

Concluding thought.

Of course, business banking success involves other factors as well. However, if you have addressed the ones above you are way ahead of most competitors. This is a business of excellence and rigor in execution, rather than developing the perfect strategy, and it is a business in which “passion” (an overused word) plays an important role.