Banks and non-bank financial services companies seem to have finally gotten the message about small business. More senior bankers truly understand that small business represents a highly attractive segment that can provide out-sized revenue and profit growth.
Since FIC largely focuses on developing strategies and approaches related to the small business segment, the high level of senior management interest in small business is good news for us. It also provides good news for a banking industry struggling for growth and eager to find new profit pathways.
Nonetheless, while the level of current interest is high, many managers are destined to become frustrated and disenchanted with small business if the business fails to live up to expectations. As management enters or reenergizes its small business effort, six “rules” should guide the initiative.
1. Simplify the product set. Our extensive client experience points to a handful of products driving profitability. Concentrate on four: business deposits, business loans, owner deposits, and owner loans.
2. Don’t make a loan without obtaining the deposit relationship. As fundamental as this is to small business success, we still see situations in which bankers offer rationales for doing the loan today in the hope and expectation of gaining the deposit later. From Day One the best bank lenders have instituted a policy of requiring an operating account with the granting of a loan.
3. Get the branch onboard. Banks cannot succeed in small business without a strong branch-based effort. Even with the rapidly increasing importance of the Internet and other “alternative” channels, for most small businesses the branch (its availability and service quality) remain factor number one in choosing and remaining with a bank
In years past many banks neutered their branch managers, increasing centralized decision-making and relegating branch managers to little more than field administrators. Conversely, many small-business-oriented banks have emphasized the role and importance of the branch manager (BM). The BM is the chief sales officer in the local catchment area; they spend most of their time out from behind their desks and, frequently, outside their branch office calling on customers and prospects.
The branch and the BM can provide tremendous leverage to your small business effort; too often the opportunity they provide is underexploited. For example, increasingly bank management is placing primary responsibility with the branch for certain sub-segments of the small business group. In some cases all companies below one, two million dollars or more might be handled by the branch. Similarly, all loan requests below a certain hurdle, say $50k-100k, are branch-based. In most cases, information is collected by the branch with decisions made centrally.
4. Use auto-decisioning. While most small business players apply a score to small business loans, they fail to rely solely on scoring for decision making, even for the smallest loans. Credit scoring works; it has been tested for years and several industry vendors offer great expertise in this functional area. Still, tradition and an overly conservative approach to credit decisions continue to exist at many banks. The cost advantage offered by auto-decisioning as well as the quality of the decisions themselves should point banks to get over their reluctance and become comfortable with this powerful tool, particularly for loans below $100k.
5. Put someone in charge of small business. We have seen instances in which more than one person or group has been given responsibility for small business. In other cases, banks define small business as lending — in our view a limited and fundamentally incorrect way to look at this segment. One individual needs to assume responsibility for this effort bank-wide, including both loans and deposits. He/she also needs to be able to work with peers to develop approaches to capture both the owner’s business as well as that of economically-attractive employees. This leader needs to report to a senior executive who is also a champion of the small business effort. Too often, small business operates as an orphan, rather than being highlighted (as we believe it should be) as the favored child.
6. Don’t let arbitrary incentive rules get in the way of success. For the bank’s small business group to be successful, banks need the active involvement of the branch, commercial banking (to release the small business customers inappropriately housed in their portfolios), deposits and cash management, and private banking, among other groups. However, in many cases internal cooperation does not occur because of poor incentives. As every banker knows, incentives can encourage internal competition rather than cooperation. But not at the best banks. Shadow accounting and double counting of incentives can result in increased cooperation and higher profits for a bank. Compensation policies at many banks seem set in stone even though they have a negative impact on sales activity and, ultimately, growth. Senior management needs to address compensation challenges head on. If there are caps on incentive payments, eliminate them. If incentives create roadblocks to internal cooperation, remove them.
Concluding Thoughts
Our experience suggests that some senior managers might review each of the above six points and believe that their bank is on-target in some, if not all, areas. Unfortunately, top management often suffers from a corporate culture in which the emperor may have no clothes but employees are reticent to point out that fact. A frank and independent assessment of the current state of small business provides a strong foundation for addressing the critical issues for success and building a foundation for growth.