U.S. banking organizations have traditionally struggled to serve smaller businesses. During the past four to five years, we’ve seen an even greater disconnect between banks and the “smallest of the small,” meaning sole proprietorships, micro-businesses and start-ups. Although this category (less than $250,000 in annual revenue) constitutes nearly 90% of U.S. businesses, they pose a formidable challenge to banks seeking to serve them profitably, efficiently and with relevant products and services.
The most recent ath Power Small Business Banking Study shows that less than one in five of micro-business/sole proprietorship customers are “very satisfied” and almost one-half are “neutral” on the question of whether their bank understands their needs and challenges. The problem seems to be that banks do not fully leverage the opportunity to meet with and engage with these types of small business owners (SBOs) when these customers visit the branch.
Banks provide fewer than one in three SBOs with a business relationship manager and even when they do, many business owners report only minimal contact with their assigned banker (66% said “rarely/a few times a year”). While the economics of small business banking may not allow for individual attention to most SBOs on an on-going basis, there certainly appears to be room for improvement in that interaction.
Another source of disconnect is the products and services offered by banks. According to our study, most SBOs in this smaller business segment have little need for more specialized services such as cash management, tax, payroll or merchant services – citing them as mostly irrelevant for managing and growing their business. Yet many bankers choose to promote these services to their small business customers without ascertaining relevancy.
Even basic business banking products are shunned by some business owners, as they choose instead to use their personal banking products for business needs. We found that almost two out of three SBOs use their personal checking accounts for business purposes, while nearly one-half fund business purchases with their personal credit card. The use of personal banking products for business purposes occurs even when the SBO holds a business product equivalent: for instance, 42% of SBOs who use their personal demand deposit account (DDA) for their business also have a business checking account.
More so, some business owners fail to see any real difference between their bank’s retail offering and the business equivalent – other than the fact that fees associated with business accounts can be significantly higher. While the difference between certain personal and business products may be blurred for some SBOs, distinguishing between offerings of competing banks is an even greater challenge: 75% of those surveyed considered their banks’ product and services offerings as “somewhat similar” or “very similar” to those of other banks.
However, a strong majority of SBOs, four out of five, say they would view their bank more positively if they were offered products and services that fit better with their particular needs. We believe that one opportunity for banks lies in services that help owners manage and develop their business, for example, tools that help SBOs keep track of their finances (comparable to Intuit’s Quickbooks) or generate invoices (PayPal’s Payments solution). Other types of tools may be provided to help business owners tap into technologies for uncovering efficiencies or expanding markets served such as building and hosting a business-focused Website (Yahoo Small Business) and credit checking and monitoring on customers (certain Dun & Bradstreet services).
Would small businesses be receptive to the concept of banks providing these types of services? In fact, a majority of SBOs see their bank as a credible provider of such non-traditional services and 30% would consider switching to a bank that offered them. The added benefit is that the customer experience for SBOs visiting a branch would improve if discussions with bankers were more focused on the customer’s business and less on selling traditional bank products. In addition, banks may find themselves attracting more of the personal accounts of business owners if they provide improved offerings that truly speak to the needs of the business owner.
The concept is certainly worth exploring, at least, and we suggest banks begin by leveraging “voice-of-the-customer” efforts to assess the level of interest among their small business customer base. Banks should also involve line of business, marketing and legal departments in these discussions to try to ensure broad buy-in within the organization and seek potential partners to provide these services and test the concept in a few markets.
Mr. Aloi is president and CEO of ath Power Consulting, which is based in Boston and Washington, D.C. and is a full service marketing research firm providing demand-side research and training solutions to banking and financial institutions. He can be reached at faloi@athpower.com.
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