In the last week, the headlines of two articles appear to tell very different stories about prospects for small business borrowers and their lenders. One article states “Banks Ready to Jump Back into Business Lending” while the other features the results of a study by the National Federation of Independent Small Businesses (NFIB) and reports “More Small Businesses Shut Out of Credit Markets.” While the texts of the articles do not suggest as much difference as the headlines, the two articles indicate a potentially dire situation that banks need to address immediately.

Disconnect between the banks and their customers.

Many banks, including virtually all of our clients, are touting their enthusiasm for the small business segment. (In some cases this is the third or fourth time they have done so over the past ten-fifteen years.) The first article noted above quotes an Omega Performance study that finds that “77% of respondents said they were likely to increase their small business lending activity. For those banks that don’t offer small business products and services, 78% said they were planning to actively pursue offering them.”

Across the industry, small businesses are once again in the spotlight. This survey also states that small business activity is the “top area” that banks plan to pursue in 2012. However, it also finds that “57.1% said they don’t plan to make any change to their credit standards for both commercial and consumer loans this year despite the same percentage saying they expect to do more commercial banking.” I will come back to this comment later, but let me say now that this response is either delusional or disingenuous.

The second article, based on an NFIB report, tells a different story. “The report notes that in 2011, the number of small employers obtaining credit from financial institutions was approximately the same as the two years prior. However, demand for credit increased in 2011, meaning more small employers were shut out of the credit market than in prior years.” Two other survey findings are very important to note:

– “A disconnect appears between lenders and small-business owners. Lenders think credit standards have not changed or have eased over the year. Small-business owners think that the credit market tightened in 2011.” Note the clear gap between the customer and the banks.

– “Almost half of small-business owners now consider one of the largest 18 banks their primary financial institution. Twenty percent principally patronize a local or community bank, a sharp decline over the past three years.”

Implications are severe for banks.

The two NFIB findings just above should be very disturbing to banks. They serve as additional indications that a bank’s inability or unwillingness to operate with any sense of urgency (and sometimes market reality) will inevitably result in them becoming increasingly irrelevant to businesses.

First, regarding the credit issue. Of course, banks lending to small businesses must change their credit standards from 12-24 months ago, at least to some degree. During that period, many banks were in lock-down mode in their approach to lending to small businesses. Businesses that survived the downturn have come out of it with financials that may not be as robust as when they went in, but many remain credit worthy and very attractive bank targets. This is an area in which regional and community banks need to show that their local knowledge allows them to make safe loans that the big boys operating out of distant cities cannot do.

In addition, many of the 78% of those banks not yet in small business but planning to do so probably have no idea of the skills and approaches required to be a sustainable winner with this segment. Most will stick their toes in, fail or generate mediocre results, and exit again, blaming the segment rather than themselves.

The second report suggests that many regional and community banks have a BIG problem; the share loss number is very bad. Small business banking should be a core franchise at these banks. Instead, they appear to be losing share to the largest banks that have already taken share in areas such as deposits, credit cards, mortgages, etc.

Is another customer franchise being snatched away from 7,000+ banks by a few big ones?

Unless banks take action now and do so with speed, focus, and determination, the big banks will once again eat the lunch of the 7,000+ banks. Those banks will be left to fight over crumbs. The loss of the small business franchise totally results from a self-inflicted wound caused by banks that have failed to make strategic choices and have operated with too many managers and too few leaders. Banks that want to become meaningful players with this important segment need to diagnose where they are today, determine their product, distribution, people and related gaps, and then adhere to an aggressive timeframe for establishing/reestablishing themselves as the value added solutions provider to this segment.