The Personal Connection

By Elizabeth Judd

Banks serve small businesses in many ways, but the branch remains the best platform for building relationships.

Celebrities are the usual choices to toss the first pitch at major league baseball games, but Bank of America Corp., leveraging its sports banking contacts, went so far as to place small business owners in that role in a few instances last spring. It's but one of many examples of how banks are redoubling their focus on small businesses, an important market for deposits, loans and fee-based services.

Serving this market profitably remains a challenge, however, even after a decade of heightened effort. The problem is that small businesses, typically defined as companies with fewer than 100 employees and less than $10 million in annual revenues, constitute both a high-touch and a high-cost market, combining features of both commercial and consumer banking.

With 70% of them structured as sole proprietorships, small businesses require more than products and services; they also need personal contact and financial advice, both expensive to provide. Experiments with direct-mail and online outreach notwithstanding, a survey last year by Barlow Research Associates Inc. found that the branch and the account officer remain the two contact points with the highest incidence of use by small business customers (85% and 71% respectively).

Providers are responding in two main ways. Some employ specialized teams operating out of central locations, in essence treating this as a commercial banking business. Others, taking the retail approach, utilize their resources inside the branch system. Some combine elements of both. The one constant is a focus on building relationships.

This outreach has reaffirmed the importance of the branch.

Even institutions that utilize specialized teams depend on a client's local branch to provide the nexus for that relationship, which typically revolves around deposits. Likewise within the branch system, a key strategy is to cultivate relationships until the small business client grows large enough to be served by the commercial side of the house. By and large, that requires a network that is efficient, convenient and responsive to small businesses of all stripes — a difficult proposition.

The Efficiency Factor

The appeal of the small business market begins with its size. Meridien Research, based in Newton, Mass., counts 29 million U.S. companies with less than $10 million in annual sales and further calculates that this market represents a financial-services opportunity worth $140 billion in annual revenues.

Ostensibly, there should be a lot of lending opportunity in this market. After all, "The margins on a Microsoft Corp. credit are tenths of a penny on the dollar. With small businesses, banks may be making a few percentage points on the dollar," says Brad Ross, president of CreditSunrise, a Toronto-based small business consultant.

However, credit extension per se represents only a small portion of the service needs of small businesses. Only 63% of small businesses obtain any loans whatsoever during their life cycles, according to Meridien, a unit of Framingham, Mass.-based IDC. And of those that do borrow, 39% use personal credit cards, 28% favor business credit cards and 16.5% use personally-secured owner loans.

Thus, the emphasis is on ancillary, fee-based services — everything from cash management to payroll products. Since many entrepreneurs don't distinguish between personal and business finances, this emphasis extends to all of a small business owner's banking needs, whether they're directly related to the business or not. "With entrepreneurs, the left pocket is their business pocket and the right pocket is their personal pocket," says Thomas Fisher, senior vice president in charge of small business banking in Michigan for Detroit-based Comerica Inc. "You need to understand both their personal and business needs."

The challenge is providing this guidance in a cost-effective manner. While small business banking can provide significant aggregate profits, each individual account is not worth all that much. In fact, small businesses tend to take out modest-sized loans and carry an average balance of $17,000, according to Meridien.

This helps to explain all of the experiments with non-traditional delivery channels, such as direct mail and the Internet — and the frustration. While these channels are inexpensive, their productivity has failed to impress.

"Direct mail doesn't work terribly well for small businesses," says Karen Thor, executive vice president and manager of business banking for National Commerce Financial Corp., which is based in Memphis, Tenn. "Executives want personal contact. There are egos involved." Similarly, Comerica's Fisher cites "just okay" results with direct mail. "Small business people are very busy," he says. "I'd expect most of the direct mail goes in the circular file," Fisher says.

The same problem surfaces on the Internet, although this picture stands to improve. While estimating that only 20% of small businesses conducted online transactions in 2001, Meridien anticipates a proliferation of new online offerings and increased Web traffic. Already, Wells Fargo & Co. has enrolled approximately 300,000 of its 1.5 million small business customers in its online services for payroll, credit applications, accounting, and employee benefits administration.

It's likely that online services will remain an adjunct to the core relationship, however, which generally must be served on a personal basis. The fact is, small business customers, most of whom are sole proprietors, need help outside their own narrow specialties. In its internal surveys, Bank of America found that the ability to obtain advice is one of four main criteria that small business customers use for selecting a bank.

When entrepreneurs seek credit, for example, "they variously might need a home equity loan, or a Small Business Administration loan, or a credit card account or a lease," says Dana Drago, BofA's national small business segment executive. "Small business owners turn outside for advice on such matters."

The branch manager is the first choice for providing that advice. Half (52%) the monthly contacts a small business makes with its bank occurs in the branch, according to Barlow Research, which is based in Minneapolis, Minn.

Comerica, like many institutions, positions branch personnel as the first stop for questions on matters such as insurance or cash management and backs up the arrangement with specialists who can be brought in on a referral basis. "Branch officers play a generalist role, being the focal point that pulls everything together for the customer," Fisher says.

This applies to lending as well. Traditionally, small business loan applications were routed through a bank's commercial division, which did little beyond documentation and screening. As the emphasis on relationships has increased, more banks are managing lending relationships from within the branches, putting a more human face on centralized underwriting operations.

At ABN AMRO North America, for example, "We train our branch managers to be sales-oriented relationship managers," says Thomas Doherty, senior vice president and group manager for business banking based in Chicago. With centralized underwriting facilities in place, he says, branch representatives "don't have to be credit experts."

Training Upgrade

Regardless of whether the contact person is the branch manager or an off-site specialist, reps who deal with small businesses need specialized training, which is now being upgraded at many institutions.

Doherty recalls that institutions once banished their least talented staff to small business banking, an area viewed as the cellar of corporate banking. But the squeeze on middle-market margins has changed all that. ABN AMRO, a Netherlands-based institution that operates Chicago's LaSalle Bank and Standard Federal Bank, Troy, Mich., now considers small business to be one of its most profitable business lines and has staffed up accordingly.

FleetBoston Financial Corp. is another institution that has made small-business banking a priority. Since early 2000, the bank has added 450 business specialists within its branches, all of whom have received additional training on small-business products, services, and loans, according to Ralph Sillari, executive vice president and manager of regional banking in small business services.

Similarly, Bank of America says it has trained 1,000 small-business bankers who work in the branches but are not involved in regular branch operations. These individuals receive incentives for growing and retaining established small-business banking relationships, as well as for attracting new business.

Drago is convinced that the greater an employee's knowledge of small business needs and the array of banking products available, the more small-business loans that individual will sell. As part of a campaign to increase small-business loans in California early last year, Bank of America trained reps in a variety of related areas, including merchant services, payroll, checking accounts and other products. BofA boosted its loan originations by 40% as a result of this campaign, Drago says.

In another approach, National Commerce created a dedicated business banker position to support reps handling small-business customers in the $1 million to $10 million range, according to Thor. So far, each of its 24 dedicated business bankers mentors from eight to 10 branches in the field, helping employees better understand loan products and other services for small businesses. National Commerce plans to increase its overall number of dedicated business bankers to 32 in the near future.

A Question of Approach

Though executives seem to agree on the primacy of the branch in serving small business customers, they diverge widely on marketing strategy. Many large banks serve clusters of similar businesses, but others prefer a mass-market approach.

The simplest (and probably most common) way that banks segment the highly varied small-business market is by size. Fleet, which has more than 500,000 small business customers, places companies with up to $1 million in annual revenues in its mass-market segment, Sillari says, while those with up to $10 million are served from within its regional banking group.

As an example of a grassroots campaign, FleetBoston last March launched a "small-business value package" — a suite of products offered to the mass-market segment — for a flat monthly fee of $19.95. The package provides a business checking account, online banking, a business credit card with a credit line, and discounts on payroll and merchant credit-card services. By mid-June, this offering had helped boost small business accounts by 15%, the company says.

Some institutions have created teams of small-business professionals who focus on a single specialty. FleetBoston, for example, markets to specific types of small businesses, such as law firms and dental and medical practices. One Web site operated by CIT Group Inc. is designed purely for gas station owners interested in SBA loans; another is targeted at female entrepreneurs.

Comerica, meanwhile, has created the position of "business development officer" for individuals who drum up new small-business accounts and loans on a full-time basis. The officers formerly worked geographic territories, but now they're organized into small teams variously dedicated to groups such as Arab-Americans, African-Americans and businesses owed by women. These officers generate 25% of Comerica's new small business clients, who are then handed off within the bank, according to Fisher.

By contrast, others are retreating from this approach. Chicago-based Bank One Corp., for example, has disbanded some of its specialty teams and also has stopped pigeonholing small businesses by revenue volume, according to David Widdel, senior vice president, business banking. Such categorization, he says, make small businesses feel as though they need "a secret handshake" to gain admittance to the bank and also hinders marketing. "Focusing on narrow groups is like chasing the market with an eyedropper; you can't touch all the businesses in the community," Widdel says.

There is general agreement, however, that relationships are the key to small business banking and the local branch is the most flexible and cost-effective nexus for those relationships. The question is how best to fine-tune the personal connection.

Ms. Judd is a freelance writer based in Washington, D.C.

Copyright © 2003 by Banking Strategies, published by BAI.

back to top