RETAIL DELIVERY SPECIAL REPORT
Welcoming Small Business at the Branch
BY LAURI GIESEN
As
the industry concludes that deposits
and not loans
drive profitability — where else
would small business belong? Experts can
provide a lifeline.
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SYNOPSIS | Banks
have long been uncertain where to place
their small business units, whether
with their commercial lending or retail
branch operations. The importance of
small business deposits is convincing
some banks that this activity belongs
in the branches. Training, cross-selling
incentives and hand-offs are among
the policy and procedure issues that
need to be sorted through.
Small business banking
has always been a kind of orphan in the
industry — too small to be handled
by the commercial banking unit but likewise
a poor fit for retail consumer operations.
Institutions have experimented with a variety
of structures for serving small business,
from specialized teams operating out of
centralized locations to running it out
of the branch network as a part-time activity.
This diversity of approaches continues.
But, an increasing number of institutions
now believe that the branch should be small
business’ home. That’s because
small business owners patronize branches
heavily, particularly to make deposits.
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“The branch employees
are the ones who interact with the business
owners in the community. They often see
these people every day when they bring
in their deposits. Branches are an important
point of contact,” says Brien Leahy,
senior vice president for retail branch
banking of Chicago-based MB Financial.
The challenge for banks like MB Financial
is to handle small business from the branches
in an optimal manner, but not interfere
with the bank’s consumer operations.
Branch employees can’t become so
absorbed in dealing with small business
customers that they give short shrift to
the consumers lined up to make a deposit
or inquire about their accounts.
One strategy gaining
ground in the industry is to link the efforts
of branch employees with small business
experts located elsewhere. Branch employees
take the responsibility for selling and
servicing small business products, but
the experts step in under certain circumstances,
such as when a loan request exceeds a specified
limit, like over $100,000. Specialists
at commercial lending centers can better
handle such requests, although branch managers
may be allowed to remain involved in the
process to contribute their better knowledge
of the customer and local conditions.
“There is no doubt
that branch managers are critical to the
success of banks’ small
business operations,” says Gordon
Goetzmann, managing vice president for
New York-based First Manhattan Consulting
Group (FMCG). “Banks that do well
with small businesses know how to utilize
their branch personnel.”
At the same time, however, specialists
are often better prepared than branch
employees to market complex lending,
cash management
and financial reporting products to small
business owners. “You also often
need people who fully understand the products
and the lending criteria involved,” Goetzmann
says.
As a result, many banks have found it
helpful to make these “house calls” in
conjunction with the branch employees responsible
for the customer relationship. The caveat
is that these branch employees need to
be properly trained and provided incentives
to effectively deal with small business
customers.
DEPOSITS, NOT LOANS
Although the branch may seem the logical
nexus for serving the small business
owner, banks have had reasons for not
doing so.
Historically, they tended to view small
business in terms of lending relationships,
which meant lots of volume but credits
that were expensive to solicit and underwrite
compared to larger ones. Financially,
it made more sense for banks (and bank
employees)
to devote their efforts to the larger
commercial loans, which is why small
business was
often second in importance to the commercial
lending unit.
That perspective has changed in recent
years as awareness took hold that the
real value of small business accounts
was on
the deposit side, says Michael Poulos,
managing director and head of North American
retail and business banking practices
for Mercer Oliver Wyman. Small business
owners
generally have a greater need for deposit
and cash management products than they
do for loans, and their deposits (particularly
when personal and business-related deposits
are combined) can be quite large.
Research by New York-based Mercer Oliver
Wyman shows that the deposit side of
small business banking has been and is
expected
to continue to be more profitable for
banks than small business lending. For
example,
the consulting company’s studies
show that small business deposits provided
$20 billion in net revenue to the industry
in 2002 and a $6 billion net income after
paying taxes and providing a return to
equity shareholders (see chart, p. 38).
By comparison, small business lending provided
$10 billion in net revenue to banks in
2002, but industry-wide showed zero net
income after taxes and shareholder return.
“Historically,
when banks looked at their commercial accounts,
they focused on large
commercial customers with significant
lending needs,” says Poulos. “But they’ve
come to realize that with small businesses,
deposit-gathering is highly profitable
while small business lending is frequently
no better than break-even on a risk-adjusted
basis.”
This emphasis on deposit-taking as
opposed to lending puts the branch
in a whole
new light. Not only do business owners
come
into branches to drop off their business
deposits, but they often visit these
same branches for their personal financial
needs.
One of the important aspects of servicing
small business, experts say, is making
sure there is a strong cross-sell between
the owners’ personal and business
accounts.
“I’ve seen numbers indicating that
only 60% to 70% of small business owners
have both their personal and business relationships
with the same bank,” says Richard
Carey, executive vice president of Portland,
Ore.-based Umpqua Bank. “That means
there is still a lot of cross-sales potential.
But if you ask business owners why they
don’t keep both accounts in the same
bank, they are likely to reply ‘because
nobody ever asked me to.’’’
Umpqua itself handles most of this
cross-selling in the branches. Only
large commercial
loans and some sophisticated cash
management products require small
businesses to
deal with bank personnel outside
the branches.
MB Financial is an institution that
previously focused more on lending
products, and
it used specialized lending officers
to handle
most small businesses’ needs. Then,
approximately three years ago, it started
to emphasize deposit-taking more. Branch
officers were trained to be able to identify
potential small business customers and
sell them both deposit-related and lending
services.
“Before, when lending officers were our
primary form of contact for small
businesses, there was little attention given to the
deposit side of the relationship,” says
MB Financial’s Leahy. “Today,
we find that 50% of our small business
customers don’t have a need to borrow
from us. But we still need to gather as
many deposit relationships from them as
possible.”
TAG TEAM APPROACH
Despite the new emphasis on deposit-taking,
there is strong sentiment in the industry
that handling all aspects of small business
from the branches is not the answer.
Many experts say the best approach is
to combine the strengths of traditional
branch personnel with the knowledge that
can be gained from small business experts
who may be located elsewhere.
For example, Richard Speer, president
of Speer & Associates, an Atlanta-based
bank consulting firm, points out that many
larger banks today are keeping the sales
or relationship management functions in
the branch while putting the credit underwriting
authority in central locations.
“Your typical branch
personnel do not have the authority to
underwrite commercial
loans, especially for amounts over $100,000.
Most banks realize this and have commercial
lending centers that evaluate lending
applications and approve the loans for
small businesses,” Speer
says.
The fact that underwriting is handled
outside the local branch does not have
to be made
obvious to the business owners, Speers
adds. He says that branch personnel still
often record the information for the
loan applications — at least for loans
less than $1 million — and then transmit
that information to a small business lending
office, where specialized personnel can
review the application and approve or reject
the loan.
A form of the model Speer describes is
used at MB Financial, where each branch
officer has a small business lending
goal. While loan applications are solicited
and
taken at the branch, the approval is
handled at a central location, Leahy
says.
Some banks find it helpful for branch
managers to be available for consultation
in case
these loans are rejected. If a customer
at Union Bank of California, for example,
doesn’t meet the bank’s credit
criteria for a traditional business loan,
the branch manager can often work with
that customer and show them what they need
to do to get their credit history in order
to resubmit the request, says executive
vice president Barbara Hoose. That branch
manager might then be able to suggest other
financing options, such as a personal home
equity loan, where funds from the personal
loan could be used to support the business.
A loan specialist who is not as intimately
familiar with the customer’s business
and personal finances might not be as effective
in working with the customer, she adds.
One way or another, banks such as ABN
Amro’s
LaSalle Bank subsidiary in Chicago make
sure their branch personnel work closely
with the small business specialists. “Our
approach is to offer extensive training
in small business products to the branch
staff and then surround those branches
with specialists who can assist customers
with the more sophisticated needs,” says
Thomas Doherty, group senior vice president
of Midwest banking, explaining that those
more sophisticated needs might include
large loans and more complicated cash management
and lock box services.
To accomplish this goal, LaSalle has
taken a two-pronged approach. First,
it has increased
the number of small business specialists
who are actually located in branches.
Then it has set up additional small business
centers that may be located in a branch
or may be at an independent site, but
in
either case are responsible for handling
the more sophisticated small business
banking needs of customers located near
a dozen
or so branches. Relationship managers,
whose names were recently changed from “lending
officers” to reflect their growing
responsibilities, are responsible for both
identifying potential small business customers
on their own as well as taking referrals
from the branches.
A similar approach is taken by Union
Bank in San Francisco, which breaks its
small
businesses into two tiers: those with
sales of less than $2 million and those
with
between $2 million and $5 million in
sales. Businesses in the first group
are almost
entirely served by the branches while
the slightly larger small businesses
receive
much of their products and services from
small business specialists. These specialists
are typically located in a branch, but
not every branch has its own representative,
as each specialist typically covers a
territory of four to six branches.
“We struggle every
day with the issue of how to keep our branch
support staff up
to date on business segments where
there might be 60 different products to
choose
from,” Hoose says. “We find
our branch staff can handle the needs of
most of the very small businesses, but
the bigger businesses need the support
of specialists who are more specifically
trained in their issues.”
TRAINING AND INCENTIVES
In addition to loans, banks are also looking
at the small business segment for non-credit
products, such as business debit and
credit cards, lockbox services, sweep
accounts, online bill payment and payroll
services. “A lot of banks are finding
they can make more money on non-credit
products today,” says Speer, noting
that the narrowing gap between long-term
and short-term interest rates in today’s
economy has reduced the net interest
margin banks earn on loans.
Here again, banks are re-discovering
the importance of the branch, but with
important
caveats. Getting branch personnel to sell
these non-credit products may require changes
in the way banks hire, train and provide
incentives to such employees. Hiring personnel
who can effectively communicate with and
then sell small businesses, for example,
may require different qualities than what
banks have looked for in branch personnel
in the past.
“Banks used to
hire control-oriented, detailed bankers,
but now technology can do all
that for you. It is better to hire people
who have the personalities and skill
sets to be able to sell products to small
business.
You need people who like to join the
Kiwanis Club or other local organizations
where
small business owners gather rather than
people who are good at math,” Speer
says.
Once these sales-oriented, business-knowledgeable
people have been hired, they need additional
training. Even if branch personnel are
not approving commercial loans, they
need to understand in detail the loan
criteria
used by their institutions so they can
suggest loan products that their customers
are likely to be approved for, says FMCG’s
Goetzmann.
“Large banks in
particular have fallen short in training
branch personnel to serve small
businesses. Despite all their talk
to the contrary, most large banks still
treat
small business as an orphaned child
segment,” Goetzmann
says.
In addition to increasing its training,
LaSalle Bank has “simplified” its
small business products to make it easier
for branch employees to understand and
then sell them. “We have taken away
a lot of the tiers and fees that were previously
associated with our small business products
so that it is easier for our branch personnel
to understand what they’re selling,” says
Doherty. As part of that effort, LaSalle
has added an express line of credit for
business loans up to $100,000 so that companies
do not have to provide a full set of financial
information to get a loan approved.
At Umpqua Bank, branch employees are
trained on all small business products
that the
bank offers, even those that require
that the business owners deal with
relationship managers located outside
the local branch. “If
a small business owner walks up to one
of our tellers and asks about business
products, the teller should be well enough
informed to be able to outline every product
that might fit that business’s needs,” Carey
says.
The value of branch training in selling
small business products was recently
studied by MasterCard Advisors, a consulting
unit
owned by the credit card association.
The researchers worked with an unidentified
mid-sized bank to test the effectiveness
of offering product incentives in conjunction
with a strong product training program
when promoting a commercial credit
card to small business.
Those branches where the staff were
trained in the product and were made
aware of
the benefits and value of the card
showed a
40% increase in the issuance of new
cards after 90 days, according to Michael
Carbone,
global solutions leader with MasterCard
Advisors. Meanwhile, those branches
that did not receive the training and
did
not offer customer incentives actually
showed
a decline in the number of new cards
issued compared to a year earlier.
While it might be assumed that the
incentives offered to customers who
applied for
the card was the key factor, Carbone
says the
training program was actually more
important. Branches that offered customer
incentives
showed only slightly better results
than branches with no incentives when
both
groups had training programs. “Clearly,
employee training and product awareness
was the real issue,” Carbone says. “Equipping
your personnel with the right tools is
the most important factor in promoting
the product.”
But while customer incentives might
not be as important as many have believed,
incentives offered to branch personnel
to sell products are vital. “Those
banks that ‘get it’ in terms
of serving small business make sure there
is a significant upside in the variable
compensation portion of branch employees’ salaries
for selling additional services to small
businesses,” FMCG’s Goetzmann
says. Umpqua’s Carey says banks need to
develop incentive plans that specifically
reward branch employees who cross-sell
consumers and small businesses. “We
point out to branch employees that when
they sell both consumer and small business
products to the same person, they can accumulate
more points toward their bonus plan. For
example, if a branch employee sells a checking
account, a savings account and a debit
or credit card to a consumer and then the
same three products for that customer’s
business, that employee automatically collects
six points toward a bonus. That is a huge
inducement to cross-sell consumer and small
business products,” Carey says.
And branch incentives should cover
referral bonuses for situations where
the branch
staff needs to refer the customer to
a central office for help in applying
for
a larger loan or receiving a more sophisticated
cash management service, Carey adds.
In such cases, both the branch employee
and
the small business relationship manager
who closes the deal should get bonus
points if a small business takes out
one or more
new products.
“You have to
give referral incentives or you risk
not getting the business at all,” Carey
says.
What could go wrong employing the
branch infrastructure to support
small business?
Goetzmann cautions banks to guard
against waiting for businesses to
come into
their branches. It’s still important to
have an outbound program in place, he says.
“You have to go out and ask for the business.
You can’t sit and wait for them to
come to you,” he says. The ideal
solution often is to create a “team” that
includes a branch employee, whom the business
owner is already familiar with, along with
a small business specialist from a central
office. The team would then periodically
visit small business prospects to discuss
their financial needs, Goetzmann says.
But whether the sale takes place
in the branch or outside, the
key is relying
on the existing branch relationships
to help
close the deal.
Questions
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