Both Small Business and Middle Market customers can generate strong revenues for banks, albeit in different ways. However, in reality most banks operate with natural preferences that favor one segment over the other. We see many banks that struggle to focus on both areas simultaneously, as they try to manage different credit processes, product sets, and, even more, fundamentally, different cultures. Many banks would serve themselves well by admitting their preference, investing more in the segment with which they are most comfortable, and minimizing their exposure elsewhere.

Contrasting Small Business and the Middle Market.

Let’s consider the differences between these two segments across a number of attributes:

* Products: Small business products are usually standardized, largely cookie cutter, and relatively few in number; middle market products, whether loan, cash management, or insurance often involve significant complexity and frequently require customization and close customer interaction.

* Processes: The best middle market banks will design specific processes that meet the specific needs of their most important customers; to the extent possible small business processes need to be one-size fits all.

* Service: While all customers are tending more to self-service, banks need to strongly encourage (that is, push) small businesses to do so to reduce operational costs. Call centers and telephone based RMs need to become the norm ASAP for banks serving small businesses.

* Profitability: Small business revenues require a volume approach with any one customer providing a relatively small income stream, even when banks capture a significant percentage of a small company’s wallet share. Middle Market companies (certainly those over $100mm in revenues) offer banks numerous larger-dollar revenue opportunities. In some cases an individual middle market company equals the revenue potential of dozens if not hundreds of small businesses.

* Credit: Small Business lending requires a portfolio-oriented approach, much as with credit cards or consumer lending. In contrast, Middle Market lenders should underwrite each individual deal with the focus of a jeweler’s eye. Credit scoring drives much of the small loan approval process, and banks focusing on this segment need to develop expertise in monitoring an approval system that third parties often develop and provide for the banks.

* Personnel: Small Business bankers need to be heavily sales oriented and rigorous in adopting a sales management process. Despite all the analytics that exist today, success with Small Businesses remains largely a numbers game in which the more leads that go into the “funnel,” the more proposals and closings will result. Middle Market bankers also need to be sales-focused (many are not). However, they must be detail oriented problem solvers with a strong credit sense (even if they are not making the credit decision), and possess a high level of creativity that they can apply to structuring distinctive offers. Both types of bankers need to be high energy, but in one case the energy needs to be aimed primarily at sales while in the other the energy centers more on structuring.

Different Roads for Different Banks.

In recent years we have worked with a community bank that actively moved out of Middle Market lending to focus exclusively on Small Businesses. Management’s view was that its Middle Market share was minimal and that it could differentiate itself from larger competitors in the small business space. This bank realized that it did not have the product depth or the pricing flexibility to compete against the Middle Market banking experts and came to view its natural franchise as smaller businesses.

In contrast we have also worked with other banks that decided to downplay their small business involvement. These banks (and there seem to be an increasing number of them today) found that they lacked the mind set, culture, and risk tolerance required for small business lending. However, they did not totally abandon that segment. Instead, some have limited their small business focus to deposit generation. In those cases the banks collect deposits from small players and lend them to middle market and larger companies, taking advantage of the low funding costs these companies provide. These banks are, in the best sense of the word, exploiting small businesses while operating within their credit comfort zone. They tried to be a more full service player to small businesses, but the necessary commitment level simple did not exist.

Too often, we see banks that operate in both the small business and middle market space but do so half-heartedly and typically, it is usually the small business effort that suffers. At many banks Corporate Bankers are the kings, a caste system that has only been reinforced by mediocre results from small business groups in recent years and what some senior managers see as the “hassles” of serving smaller customers.

Those banks that succeed at both segments operate with top quality managers in each group. Neither group is the “red-headed stepchild” nor is one group the stepping-stone to the other. Rather, senior management understands the significant differences between the segments, has put the appropriate people in place running those segments (they are VERY different types of people), and has established the right set of expectations related to risk performance, profitability, and other areas. However, most banks cannot effectively manage and support these two diverse businesses … and it shows.