Finding Growth in Small Business Banking

BAI Banking Strategies, January 31, 2011, by Mary Beth Sullivan

Often ignored and underserved during the recession, small business owners are looking for providers who can meet their needs.

While there are signs that the worst of the economic storm has passed, those banks still left standing are confronted with limited avenues for growth. The housing market is moribund and the commercial real estate market remains soft. Although preliminary figures indicate commercial loan demand increased in the fourth quarter, it remains to be seen if this trend is sustainable. In addition to the economic challenges, new regulations have added compliance costs and crimped profits in many consumer banking businesses.

That leaves revenue-hungry banks across the country looking at the small business sector with renewed interest. Small businesses have long been considered underserved (or perhaps, more appropriately, ignored) by much of the banking industry. During the recession, many banks that did serve this market pulled back, unwilling to extend credit and, as a result, not interested in additional deposits. As economic conditions across the country improve, big and small banks alike would be well advised to reconsider this potentially lucrative segment of the marketplace.

Consider the potentially pent-up demand for credit among small businesses. During the recession, banks dramatically curtailed the extension of credit to small business owners. According to a January 21, 2010 Bloomberg Businessweek report, banks originated $73 billion in loans to small businesses in 2009, a 47% decline from 2007. While SBA-backed lending increased 37% in the fourth quarter of 2010 relative to 2009 levels – largely in response to government inducements – it remains a small part of the credit market for small businesses across the country, and many small business owners still worry about their ability to access credit to finance their operations.

Historically, a significant portion of small businesses relied on credit cards to meet their cash flow requirements. However, the strictures of the Credit Card Reform Act of 2009 do not apply to small business cards, so the typical card offer entails steep interest rates and high fees. Consequently, card usage is down among small businesses, according to preliminary results from the National Small Business Association’s 2010 economic report. Given the recent signs of stabilization in the economy and the steep pricing on cards, we think it’s a propitious time for banks willing to lend to creditworthy small business borrowers – especially those borrowers who found their primary bank unwilling to do so when they needed it most or whose credit card provider jacked up fees and interest rates.

We suggest four key strategies for accomplishing this:

View the branch as the distribution focal point. Train branch managers to identify different types of business customer needs and upgrade the skill sets of branch personnel to enable them to feel confident when talking to business owners. Augment branch-based expertise with dedicated small business credit specialists and, where appropriate, business development officers out in the marketplace who work closely with branch managers. Empower branches with information about the businesses in their local market and invest to position branch managers (or other designated individuals) in leadership positions with local chambers of commerce and influential business organizations.

Capture the client’s entire relationship – both deposits and credit. For most small businesses, this means offering a simple suite of products such as basic checking, savings and bill pay with pre-packaged options. Product bundles will simplify the process of communicating the advantages of multiple product purchase. And there are real advantages for small businesses in terms of ease of doing business and savings of both time and money when they “link” deposit, cash management, and credit accounts with the same provider.

It is important for institutions to remember that while some businesses may be small in terms of annual sales, they are not necessarily small in terms of annual transaction volume or the complexity of their treasury management needs. Doctors’ offices of all sizes, for example, demand complex and specialized lockbox services. Bankers should also require that new business credit customers bring their entire deposit relationship to the bank in order to better monitor their credit and to improve the overall profitability of the relationship.

Use the credit process to identify cross-sell/up-sell opportunities. A lot of great information about business finances and operating results are shared with banks as part of the credit underwriting process. Few banks, however, really leverage this wealth of information to advise their business clients on strategies to improve the health of their businesses. Loan officers can develop recommendations for strategies, products and partners (such as trust and wealth management) that enable customers to improve business performance and manage life cycle events. Tools can be developed that use data captured in the credit process to help loan officers provide advice, analyses, checklists to help customers fund growth, better manage cash flow, lower financing costs, plan for succession, and identify personal wealth management needs.

Provide robust online (and get ready for mobile) information and transaction capabilities. Online banking platforms should be designed to minimize the time spent performing basic banking transactions and enable business owners and financial managers to conduct a variety of more sophisticated transactions, access detailed account histories, manage payments and move funds across accounts and to other financial providers. Recent surveys show that small business customers are increasing their rate of online banking logins and decreasing the number of visits to their local branches.

With limited opportunities for growth and profitability in consumer banking and commercial real estate lending, small business banking could be a real battlefield in coming years. Winning the battle will take more than just resolve; bankers need to arm themselves with better products, customer management protocols and online banking capabilities.