Consultants and other industry experts frequently offer their solutions for success in small business banking. Whether focusing on social media or payments or segmentation or some other recommended approach, each perspective offers some valuable insights into how to best serve the small business market. However, before any of these tactics can be successfully implemented, banks need to resolve some fundamental internal questions.
More than ever, a significant portion of our consulting work centers on issues related to these internal bank conflicts and barriers to change. It appears that a slow-growth environment tends to heighten the tendency for bankers to look inward as managers act to protect their businesses and, not so incidentally, their jobs.
While it would be nice if these internal structural issues did not exist, it is far better to recognize that this is where the rubber meets the road and resolve these issues rather than ignore them, which is the practice at many underperforming banks. Many of these issues occur with topics related to organization and reporting lines – in other words, “turf”-related topics:
- Where should small business report, retail or commercial?
- How is small business defined? And who is responsible for the microbusiness segment?
- How is the middle market defined and how firm is the line separating that segment and small business?
- Where does geographical responsibility begin and end? How should the bank balance geographic and functional responsibilities?
- How should the credit organization align versus the various businesses and where should credit groups report?
Again, the first step to resolution is to admit that a problem exists. Rather than wasting time and energy by trying to tap dance around areas of disagreement, bankers are better off in the long term by giving each irritant/conflict the spotlight it deserves. But then, how can they be resolved?
Begin with a fact base, by assessing the pros and cons of the current situation and reaching out to the various constituencies across the bank. Compile the various viewpoints and the reasoning behind each; that list can be addressed as part of resolving each open issue. To the extent possible, quantify the potential revenue and cost impact of various options. For example, what will be the cost reduction impact of aligning small businesses within a small business segment group rather than allowing many to remain in the middle market?
Look at competitors to assess if they provide any practices that your bank should emulate. That is not to suggest that you should do something just because another bank does but this assessment usually provides worthwhile insights. Community banks need to look beyond their geography if they are to benefit from this analysis.
Agree on a process for resolution. Banks are great at holding meeting after meeting, sometimes with little justification for doing so. Instead, try to begin the process by having the various parties agree on the information and analysis they require in order to make a decision and then deliver it to them. Also, establish a timeframe in which the group or a leader will make a decision. Too often, decisions drag on for months when weeks would suffice to resolve them.
While no one approach is appropriate for all banks, we have views about each of the issues outlined above. Exceptions exist, but our perspective provides a good foundation for further bank discussion and analysis.
Small business should report to retail. Applying a commercial banking mentality to what is largely a retail business can add unnecessary complications and increase expenses. Moving forward, more banks will be trying to apply retail approaches to commercial banking rather than the reverse. Cost drives much of this shift, that is, the more processes can be standardized and streamlined (a retail hallmark) the lower the operating expense. Banks that manage small businesses as if they are middle market clients will suffer poor returns.
The definition of small business continues to depend on revenue and credit requirements. Based on the bank’s size and focus, the revenue cutoff can range from $5 million up to $25 million. The current tendency is to expand the definition to include larger companies, but the problem with that approach is that it results in bankers going after the “big game” and ignoring smaller companies.
Microbusinesses need to be handled within the branch because many smaller businesses expect this and the low per-customer revenue they generate cannot justify a relationship manager’s time. However, most branches are ill prepared to sell and service these customers, which necessitates some type of cooperative arrangement between the branch system and the small business group, another reason it is often best for them to report to the same bank head. One recommended approach involves a hub-and-spoke system whereby one business banker works with four to six branches, in effect leading their business banking effort.
While the middle market segment begins where the small business segment ends, overlap exists between these two groups based upon client need and potential. Faster growing and more sophisticated small businesses should be moved to the middle market, if a strong upside exists. In addition, middle market bank groups need to continually shed themselves of small business customers that remain in their portfolios.
Decades ago, my first involvement in the small business space began as an analysis of the middle market group of a major regional. We found that a very high percentage of the customers handled by that segment merited transfer to the small business world. Not surprisingly, only a small number of that high percentage was ever transferred, as bankers worked hard to explain why they needed to maintain their relationships with those customers rather than free up time for new sales.
Bankers will not be surprised to read that 20 years later, the surviving bank that this regional was merged into has the same unresolved and expensive problem. Senior bank management across the country has long been unwilling to address this weakness, which increases operating expenses, dampens revenues and likely results in poor customer service, as smaller customers are underserved despite having a relationship manager.
Banks emphasizing their geographic focus do so in part in order to establish themselves as community-oriented, even if part of a large bank. They want to distinguish themselves from the centrally-controlled institutions where decisions are made far away from the customers. However, a geographic focus often results in a lack of consistency and coordination across the bank. Where a balanced geographic/functional approach works, bank leadership sets clear expectations within a culture of cooperation. Often, the functional group sets the rules and the field executes them, in effect serving as the sales force for the small business group operating with a dotted line to that unit.
However, for every one bank that manages to operate successfully with a geographic emphasis, we see ten banks that fail at doing so usually because of the unwillingness of the geographic heads to execute the central small business group’s initiatives. In those cases the bank’s president allows insubordination to win over business sense.
Largely depending upon a bank’s size, the support organization (including operations and credit) may be centralized or segmented based upon the bank’s business line. In general, as much administration as possible should be centralized with the bankers shielded from having their time swallowed up by non-customer matters. In one unfortunate case that I’m aware of, a bank’s credit group asked individual bankers for information that a central group could have provided with greater consistency and less disruption.
As for the credit area itself, more banks are moving to a credit utility that limits a banker’s involvement in the decision process. However, having a small business credit group as part of a commercial credit area usually results in the business customer being burdened with unrealistic information requests and a cumbersome process, given the size of the loan request. As with all of the issues outlined above, there is no one answer for every bank, but there is a best approach for each bank based upon its size, sophistication, operating philosophy and aspirations.
We have seen banks emerge stronger after resolving these and similar internal controversies. Once the various stakeholders agree on the path forward, backbiting ceases and the organization can move ahead to concentrate on achieving higher profits and growth.
Mr. Wendel is president of New York City-based Financial Institutions Consulting, Inc. He can be reached at firstname.lastname@example.org.
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