Large banks are failing to increase their penetration of the small business segment. A recent American Banker article estimates that in 2006, banks with assets greater than $100 billion captured the same share of small business loans (35.5%) that they did in 2001. Banks with assets of $25-100 billion performed even worse, losing share (13.7% to 11.3%). Smaller banks, those with assets below $25 billion, gained share, moving to 53.2% from 50.8%.

Our experience supports these numbers. In the last year I have had conversations with executives at several of the very largest U.S. banks in which they bemoaned the status of small business at their banks and expressed skepticism that internal feet dragging would ever be replaced by fleet-footedness in attacking the small business market.

 

Why, despite their huge resources and marketing reach, have the largest banks as a group been unable to gain share? (Please note that extensive share shift has occurred within the two larger bank groups as a few players out-execute the majority.)

 

Five interrelated factors contribute to the stagnant performance of the biggest banks. And, while virtually all of these factors have existed for a long time, only a handful of the largest banks have addressed them effectively:

 

1. The organizational reality overwhelms a huge opportunity. The small business segment offers banks a strong source of deposits, a stable borrowing base, and a fertile ground for cross sell both to the employer and employee. This segment shows reliable growth and an enviable track record of credit performance. By any metric, small business outperforms most others and has done so consistently for years. It is a great business!

So, with this type of performance, why do larger banks fail to understand and execute on the opportunity? First, the real value related to this segment requires capturing not only the loan and the deposit but also the related personal business, oftentimes tied to retirement and wealth management opportunities. At big banks, these opportunities cross over organizational lines, involving multiple sales and service channels. In many cases, executives running a particular business or functional area in effect care only about their one area, since compensation and careers are tied primarily to that area’s performance. Geography also gets in the way, with regional heads operating with varied levels of knowledge and interest in small business.

 

In short, at many of the larger banks, small business raises “messy” organizational issues. Few managers seem to possess the motivation or the courage to tackle them.

 

2. Internally, small business continues to be viewed as a second-class citizen versus commercial banking. This unfortunate phenomenon exists at some smaller banks as well as large ones and indicates the uphill battle the small business effort faces. The small business group may generate higher returns but the middle market group generates higher prestige and compensation.

 

Typically, the small business group has to fight internally to get strong resources and enforce high standards. It must not be a dumping group for failed bankers or, for that matter, a place of graduation for branch managers.

 

3. The small business area is a way station in a career rather than an ultimate goal; turnover is excessive. We could name far too many large banks where the senior management of the small business group has changed every 12-18 months for the past five-ten years. Permitting executive turnover sends a bad message to the internal staff and decreases the likelihood of the group achieving market traction.

 

Having a bank technocrat who is looking at his/her career watch rather than focusing on the long-term market opportunity that small business affords leads to suboptimal results. Conversely, we know business leaders at many community banks who have a real passion (an overused but particularly appropriate word in this instance) for the small business segment and live and breathe its intricacies and requirements.

 

The two-year job rotation that frequently exists at big banks does not provide the minimum time required for a bank to go through the process and cultural transformation required to succeed with small businesses or, by the way, the middle market.

 

4. Big banks do not really and truly understand or like small businesses; small businesses know that. Many big banks are more comfortable with bigger numbers from customer groups such as the high net worth segment or commercial banking. Small business can clog up branches and require significant operational support.

 

All banks say they love small businesses, but customers often doubt the reality behind the enthusiasm. Business owners judge banks by the treatment they provide: how difficult is it to open an account; whether their bank “fees” them to death; do they have an account officer or consistent contact for questions, among other factors. The alternative delivery and self-service that many larger banks promote alienates some customers who prize personal recognition and service. For a variety of reasons, most of them legitimate, larger banks (with a few exceptions) cannot and do not want to provide the level of personal service offered by smaller banks.

 

5. Smaller banks are smarter than big banks think. Many smaller banks outthink, outmaneuver, and outperform larger banks when it comes to small business. The quality of personnel at many smaller banks has improved dramatically as former big bank employees join and help to enhance internal expertise and performance standards. We have spoken with many ex-big bankers who appear to be flourishing in a smaller bank environment that allows them to focus more directly on customer sales and service.

 

Increasingly, small banks are tough competitors, disciplined in their market focus, and centered on communicating and delivering their value proposition. Big banks fail to intimidate small competitors; unfortunately, they do sometimes intimidate their small business customers.
 
Next Newsletter

This week we outlined some of the impediments that larger banks face in pursuing small businesses. Our next newsletter discusses how some big banks succeed (either despite or because of their size) as well as approaches larger banks should consider to break through internal constraints and establish themselves as small business leaders. If larger banks can develop a consistent and disciplined approach, this segment offers extraordinary upside. For many of the largest banks, the IF is large as well.