Executive Summary: The small business area will continue to be unappreciated unless top management understands the importance of the business and “adopts” it.
In our last newsletter, we wrote about the poor state of the small business banking effort at many banks. Why? Among the reasons: a deteriorating loan portfolio, failure to focus on the entire “Small Business Household” (business, owner, and employees), and mediocre (at best) support from senior bank management.
Unfortunately, reader comments support the view that most banks continue to underappreciate this segment. One commented that despite senior management stating that they wanted to enter the small business space, very little was happening at that bank. In that case, management was unwilling to move resources from other areas to make small business a priority. In this banker’s view, management was giving lip service to small business rather than demonstrating a commitment. A columnist in the Financial Times referred to this as the peanut butter school of management, whereby, resources are spread evenly over multiple areas rather than based upon profit priorities.
Another reader who is now retired from banking asked: “So, how many times have you written this article? Every time I read something like this I’m reminded that I first started talking about small business and how best to serve small business in 1978. And still — and still — the industry just doesn’t get it. ‘BANK THE OWNER.’ It’s pretty simple really. These guys are rich, or soon to be rich, or at worst, they’re affluent. This isn’t rocket science.”
Frankly, the reader was right; I have written the same basic article about small business banking opportunities multiple times, and I have made the same speech more than once about why and how to focus on this area. Banks’ small business efforts often seem like children trying to climb up a steep icy hill; they make some progress but, inevitably, slide back down to the bottom, having made little-to-no progress.
The reader is also correct that this business is not rocket science. In saying that, he also gets at the core of the problem. Rather than unique strategic insights or proprietary technology, success with the small business segment requires strong execution day after day after day. Bankers need to meet with clients, listen to them, and be responsive rather than reactive. Nice words, but most banks simply are not very good at that. Typically, top management would rather buy a training program or purchase “gee whiz” technology rather than roll up its sleeves and fight for market and wallet share.
Further, while “bank the owner” makes terrific sense as an approach, at most banks it flies in the face of organizational reality. Many managers (not only bankers) are comfortable in their silos and fearful of what might happen to them and their customers if they venture outside. Every banker can regale you with stories of what went wrong when they introduced “their” client to another part of the bank. Bankers often see the downside for them as being much greater than any potential upside. And, in fact, that is sometimes the case. Further, the internal organizational structure in effect prohibits relationship banking.
It may be in our DNA that something small is always looked at as being less attractive than something big. I know very few heads of small business who view themselves as being on an equal par with the heads of corporate banking at their banks, despite the fact that small business generates higher returns. In addition, the compensation and perks (US Open tickets, anyone?) seem to flow to the large corporate banker, not the business banker.
Given that the above reader mentions these issues have been on the table since at least 1978, is there any reason to believe that small business banking will get the high priority it deserves? We answer that question with a qualified yes rather than a resounding one.
A relative handful of banks understand and will act on the potential offered by this segment. For example, one bank we know has decided to focus on the small business segment with a particular emphasis on deposit gathering. Not so incidentally, this change in approach occurred only after a change in management. But, for every one of those banks, there are dozens of others who will slough along, self-satisfied with their performance rather than trying to achieve a leadership position.
A year or so ago we were approached separately by two banks that inquired about our small business capabilities. No one at those banks knew that we had previously done work for them in the small business space. While a mean spirited person could say that this was a comment about our work, in fact each bank was suffering from a lack of corporate intelligence/memory. Senior staff had turned over, most going to other areas of the bank, taking with them all they knew. Sadly, this is not an atypical tale when it comes to small business.
Concluding Thought
Another reader commented that we seemed very negative about small business. We’re not. We are negative about the ability of most banks to respond to a significant long-term profit opportunity. The good news is, for that handful of banks that are able to respond, the profit and risk return opportunities are very attractive. Those that stick with the segment while adapting to market changes will prosper as this backbone segment of our economy grows.