Over recent weeks, clients, prospects, and friends have approached FIC, all expressing a need for insights about the “basics” of some of the areas in which we specialize. Reasons range from companies entering new markets to seasoned executives switching to new responsibilities.

 

 

Therefore, this week we launch a series of newsletters that present our summary views concerning the key elements of success in our areas of greatest expertise. Each will focus on highlighting some major themes and providing tactics that can improve a line of businesses’ performance.

 

Small Business Basics

What do banks and other players most need to understand about the small business opportunity?

 

Small business is highly attractive. This segment continues to grow in number and importance. At some client banks, combined revenues to the bank from the commercial and personal business approach 40% + of total retail banking revenue. Quite literally, most banks cannot afford to fail with this group.

 

Small companies are just that…small. The nature of the small business is that per-customer bank revenues are limited. Two implications emerge from this: first, providers must operate with a low-cost, factory mentality; second, they have to get as much wallet share as possible from each target.

 

A factory approach means that banks need to emphasize a “one size fits all” approach to products offered and processes followed; policy or process exceptions have to be highly discouraged. That is particularly true if a bank focuses on the low end of small business (the microbusiness). It also means that roles and responsibilities are distinct and clear. For example, business bankers are salespeople generating opportunities; they do not act as underwriters or service personnel. Instead, credit staffs handle underwriting and decisioning, and servicing needs are shepherded to a specialist group.

 

Increased wallet share per customer requires that an institution offer a package of products that captures not only business needs but also personal requirements. Many (not all but many) small business owners view their personal and business needs as intertwined. However, few banks have made this natural connection, instead requiring different parts of the bank, rather than one banker, to handle these related needs. Top players are now developing or providing linked offers.

 

Customers want branch access. Companies like American Express have been highly successful without a branch infrastructure. However, many small business owners expect to be able to access a branch as part of establishing a broad-based financial services relationship. This is less true than it was ten years ago, but a physical location still remains very important.

 

Business bankers need the branch to provide them with leverage. We know banks at which the small business banking specialists manage all business customers, from $1 in revenue and up. At other banks, smaller accounts, up to $3 million or more in revenue, are the province of the branch.

 

Being able to rely on the branch to sell and service the very smallest accounts allows  business bankers to concentrate on those customers that offer the greatest revenue potential to the bank. Too often, however, branches either provide limited leverage or are in actual competition with their bank’s own business bankers for commercial opportunities.

 

Business bankers are salespeople. The best small business performers operate with a business banker whose primary job is to sell; service is usually handled centrally and by phone-based personnel. Underwriting is also performed centrally, ideally using credit scoring. Business bankers cannot operate like the tradition relationship managers of the past; doing so will kill small business economics.

 

Business bankers also need to be paid like salespeople with a high incentive component based upon factors such as new accounts opened, portfolio deposit and loan volumes, and cross-sell ratios.

 

24/7 and multi-channel delivery is not an option. While the branch is important, the small business customer, like the consumer, expects multi-channel access. The good news is that many banks can piggy-back their retail phone banks and online banking to serve this customer set. Just as business banking should try to leverage the branch, so too should its technology leverage other areas, in particular, retail.

 

Pick your small business segment(s). The broadest definition of small business includes over 30 million U.S. companies. Yet, many banks in this market fail to determine which type of companies they wish to focus on and which they wish to avoid or discourage as customers. Segmentation schemes do not have to be (and in fact should not be) complex. We have seen companies select segments based on one or more of the following: revenue size (microbusinesses versus the upper end small business), industry, gender, product, minority group, etc. The critical elements of any scheme is that the segment is:

 

• Recognizable – Bank staff should be able to easily identify to which segment a customer belongs

 

• Actionable – The bank must be able to act against the segment; easily identifying the product or service most appropriate for that customer based on its segment

 

Some examples of segmentation schemes:

 

• Professional and service firms that are microbusinesses: Amex

 

• Women-owned businesses: Wells Fargo and Zions Bank

 

• SBA loans: CIT

 

• Law firms with specialized demand deposit requirements: Citibank

 

Segmentation brings focus and can provide points of differentiation for the banking provider. Those players without a segmented approaches will suffer sub-par returns over the long haul.

 

Avoid a credit-only focus. Until five years ago, a small business banker was a lender first and foremost. Deposits were handled by the branch and not given significant emphasis. Banks now understand the economic power of deposits. Even in today’s low rate environment, deposits drive the profitability of the small business segment for most banks.

 

Those that are achieving high credit-only returns do so because of the efficiency of their underwriting process (credit scoring reliance and low-to-no “touch”) as well as risk-based pricing policies. Most banks have yet to show this level of discipline.

 

Conclusions. For most banks, small business should be a cornerstone focus. Banks can provide value added information to the customer as well as a full product. Small business remains a “natural” branch franchise, one that needs to be protected and grown.