In this hyper-regulated and politically correct world, banks will not admit that, for many, in their core they dislike banking small businesses. We would not include all banks in this group, but, with actions speaking louder than words, it seems apparent that despite all the hype and “We love small business” signs in the branch windows, many banks either dislike small businesses or are clueless about what it really means to work with them.
Why? First, small businesses are, well, small. You need a lot of them to make any significant dollars, to “move the needle” to repeat a phrase I often hear from bankers. Obviously, consumers are small too, but they are a core franchise for most banks and are both better understood and appreciated by senior bank management even though they pale in attractiveness to the potential small business offers.
Small businesses also suffer from a perception that they are inherently riskier than other bank customers. During the last downturn many banks proved this to themselves by poorly managing their small business credit scoring and risk management processes. However, instead of blaming themselves for their losses, many blamed the small businesses as if the businesses were responsible for the bank’s bad judgment.
Further, bank leadership usually emerges from areas other then small business. The small business segment lacks a champion or to use a New York phrase, a rabbi, at the top of the house. At many banks the segment perennially seems to be treated like Rodney Dangerfield, always fighting to get respect, even though this segment can provide strong returns and significant non-credit income as well as the depth of relationship many banks say they want.
Historically, banks have approached small businesses with the wrong product set. Most small businesses are non-borrowers, but at least until recent years small business bankers were loan focused, leaving deposit opportunities up to branch staff. And, those banks that do want to lend to them often view small businesses as if they were larger business with the reporting capabilities and infrastructure available to big players.
The best banks serving this segment appreciate that this group of more than 10 million is hardly homogeneous, and therefore, they need to be segmented. Some focus on gathering deposits from this often cash-rich segment and then lending to other types of targets; others focus on investments and cash management. In other words one of the reasons that some banks do not like banking small businesses is that they have failed to do the spadework required to understand the diverse needs of this group and how their own institution can best serve them. Basic stuff, but still an analysis that most banks fail to spend enough time on.
On the lending side, while saying they want to lend to small businesses, in reaction to the downturn (and after the loan loss horse has left the barn) banks have narrowed their focus to the extent that many credit worthy companies either do not fit or opt out of what they view as onerous bank credit hurdles. Community and regional banks should own this segment, but, instead, they appear to be opening up the door to allow more competitors to enter what should be their private preserve.
Some non-bank lenders such as OnDeck make credit decisions in part based upon account information that the banks themselves have access to, meaning banks hold the information in-house but do not know what to do with it. Others have defined themselves as a “bank” that only does bank-like activities. For example, many banks view the lending that a merchant advance company does and the high interest rates it generates as unbankerly despite (or in part because of) its high returns. So, banks stay away from this business even though their customers are willing to pay for those types of facilities. In working with one merchant advance company we saw that many of their customers had very acceptable credit scores and performance; they chose to pay higher rates because they appreciated the responsiveness that their non-bank lender provided.
What will change the apparent gap between the “talk” and the “walk” at many banks? Here are six first steps:
- Appoint an internal small business leader champion with authority to make the changes required to serve this segment. This has to be a person other internal groups respect.
- Complete strong analysis that results in selectivity in the sub-segments the bank targets and what they sell and do not sell various groups. Small businesses appreciate a quick no with an explanation rather than foot dragging that leads nowhere.
- Agree to a multiyear commitment to this segment. The leading small business banks have operated with a long-term view, understanding that they needed to both organize effectively and develop a brand with their targets. That takes time.
- Break internal silos. The customer sees his personal needs as closely related to his business needs; many banks still do not.
- Create a small business career track. Small business bankers should be able to develop client portfolios much like financial consultants. This approach both locks them in and encourages a transition from product pitchman to solutions provider.
- Determine how to partner with the non-bank players that can complement the bank’s offers. This can result both in additional fee income and further tying in a customer to the bank.
Why bother to pursue these and other steps? Banks need to be actively protecting and building one of the few franchises they have left. Alienating these customers not only loses revenues but also erodes much of a bank’s franchise value.