It is accepted wisdom throughout the industry that small businesses represent banks’ best opportunity for higher spreads, improved fee income and superior relationship profitability. Yet, we find that few banks are actually succeeding in doing what it takes to effectively penetrate this segment and unlock the profit potential.
It’s not for lack of trying. Many banks put serious money behind their commitment to small business – primarily by staffing up on lenders and increasing marketing support.
And it is an exciting time to focus on the small business banking segment. Our research that probed deep into the sub-segments of small businesses reveals that banks can provide huge value. Thanks to new channel advances and advanced analytics, banks have more to offer than ever and small businesses have urgent banking needs that go unmet.
But to do so, bankers must re-think old assumptions about customer needs, channel preferences and marketing tactics.
Plumb the opportunity in different segments, different needs. In the U.S., about a third of the approximately 30 million small businesses are part-time pursuits. Another third have fewer than three employees; many of these are one-person operations. Think independent bookkeeper, consultant, appraiser, trainer, engineer, etc. These two customer segments, which represent nearly two thirds of all business, are consumer-like in their banking needs and distribution utilization.
Over 60% of businesses in this segment want the simplicity of a combined business and personal banking relationship. Despite the size of this segment, and the preference to do all of their business with one institution, few banks provide those services in a way that truly meets the needs of the small business owner. These smaller customers are too small to be effectively served by an expensive dedicated business banker, whose highest value is focusing on more complex credit needs. As a result, small businesses that are not borrowers, or which only have limited borrowing needs, tend to fall into a black hole somewhere between the branch, which serves consumers, and business bankers, who are focused up-market.
The disconnect between customer needs and bank services is further complicated by the fact that very few institutions have the data to consistently understand which personal customers are business owners and which business customers have personal accounts. Banks that have implemented improved strategies have achieved more than an 85% improvement in relationship profitability. But it takes more focused strategies and targeted implementation.
Do the research. Approximately 10% of total U.S. households are small business owners, representing 21% of a typical bank’s consumer customers. Share-of-relationship tends to be low – in the 30% range – primarily because banks don’t have the data to identify these prospects and have not implemented the operating rhythms needed for success.
But improved data and advanced analytics can unlock this puzzle. Research conducted for a regional bank identified over 80% of the bank’s hidden small business customers with some revealing results: 64% of the bank’s business customers had sales of less than $500,000 and were considered micro-businesses, too small to warrant a focused effort. But these customers were also maintaining average deposit balances greater than $10,000, which only represented a fraction of their potential.
By putting specific marketing, sales and product initiatives in place, the bank was able to nearly double the profitability of their existing customers, without having to dedicate significant additional resources to new customer acquisition.
Listen when they tell you what’s important to them. Segmentation research conducted for a mid-sized bank showed that approximately 75% of all small businesses desire credit, but only 35% were actually borrowing at any given time. Even though many were looking for just a back-up line of credit, they all placed great value on having a low interest rate. Research further showed that 90% of small business loans were for less than $100,000.
Accordingly the bank designed a new small business line-of-credit product, up to $100,000, that tied the customer’s interest rate to its checking account balances. It was a remarkable success, not because it stimulated borrowing – very few of the lowest rate customers borrowed – but rather because it significantly boosted the proportion of accounts with high balances.
The lesson? Believe your customers when they tell you what’s important to them, even when – especially when – it surprises you! For these small business owners, a low interest rate was itself a point of pride, a measure of success.
Leverage remote channels with personalized expertise. You probably have more of these customers in your market than you realize: small shop owners, working six days a week, no time to go to the bank, no place for the banker to visit them. They are mature, successful and very profitable. They don’t have treasurers or bookkeepers so they tend to keep excessive deposits in non-interest accounts. When they borrow, they tend not to pay down debt as quickly as they could. One bank discovered that this segment represented 27% of the small business market, yet accounted for approximately 35% of their line-of-business profitability.
By researching the needs of this segment, the bank discovered that these customers placed high value on knowing someone at the bank who understood their needs and who was available on their schedule, which was often outside of typical banking hours. These business customers preferred to contact their banker via e-mail or phone, not in person.
The bank met those needs by assigning these customers to centralized, small remote teams comprised of experts in small business products, with each team member educated well enough to stand in at least temporarily for other experts. Team members kept longer hours, since they were available by electronic channels well outside of normal banking hours. All communications from the bank were signed by each member of the team. It was an affordable solution because these teams were able to take care of thousands of customers, where the typical high-touch small business relationship manager can handle only a few hundred.
The lesson? “Remote” channels don’t have to be impersonal to be cost-effective. And if your customers don’t want to be served through an impersonal call center, relegating them there to save money is a false economy. Don’t save your creativity for products – be creative about resource staffing, too.
Align with your customers’ “buy channel” to improve marketing ROI. Small business customers, just like their consumer counterparts, have never found a delivery channel they didn’t like. They will transact using the phone, the mail, an ATM, online, mobile, at the branch, and so on.
But deeper research shows that is not true when it comes to buying. Making the decision to buy and actually buying the product or service takes place in the channel of preference. Customers’ “buy channel” is the one where they feel the most comfortable.
That is important information to know. Once customers have made that choice, it only makes sense to market and communicate with them through that channel. One bank made a practice of immediately switching its marketing tactics once the customer had signaled its preference through a purchase. For example, if the product purchase was made over the phone, that customer would no longer get direct mail, but would be solicited via phone. The return rate on the phone tactics increased to 9%, compared to the 1% rate when the bank utilized direct mail. The bank was able to achieve a higher return from marketing and slash its direct mail costs at the same time.
The lesson? Customers’ channel choices won’t always seem logical, but bankers argue with these “buy channel” preferences to their detriment. Marketing through the wrong delivery channel is money wasted.
Mr. Carey is a director at Austin, Texas-based Peak Performance Consulting Group, and Mr. Kerstein is president. They specialize in retail, community, and small business banking and can be reached at ric.carey@ppcgroup.com and dkerstein@ppcgroup.com.
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