David Sosna_resized
David Sosna May 10, 2017

Small business, big attraction: Can small business banking be personal?

Small businesses have long mystified banks. They make up an overwhelming 99 percent of all businesses—yes, 99 percent—and employ close to half of all workers. They generate more than 60 percent of the private sector’s net new jobs. Yet despite the critical role small businesses play in the economy, most banks struggle to generate strong returns from this segment.

The rules of attraction … and subtraction

Many banks find high costs come with serving this segment—in particular with lending. Small business loans often generate low or negative returns. As the graphic below shows, high origination costs (as well as underwriting, loan review, operations, monitoring, compliance, and related expenses) quickly consume loan interest and fees. At some banks, loans of up to $250,000 can be value destroyers.

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(Source: FIC)


Going steady: More relationships = more profits

Lending alone may not be attractive but the overall small business relationship provides a bank with substantial value. And as interest rates rise, small business deposits will grow in importance. Best performing banks can capture two to three times deposits versus loans—meaning this segment can help lower overall bank funding costs.

Beyond deposits and cash management services, a bank can also benefit from attracting as much of the “household” opportunity as possible. This includes meeting the deposit and loan needs of the owners and key employees.

FIC Advisors, Inc. estimates that capturing sales from the owner and employees can double potential revenue versus focusing on the business alone.  However, FIC also finds that most banks sell fewer than three business products to their clients. Increasing wallet share spurs account profitability and relationship stickiness.

At one bank FIC found that  product sales from an average of 2.0 to 3.4 increased revenues by 50 percent. Beyond their bottom line impact, small businesses also allow a bank to meets Community Reinvestment Act obligations and market itself as a supporter of the local community.

It’s not the SME without you: Where’s the love, SME customers?

To combat high operating costs related to this segment, banks have increased banker account loads, oftentimes up to 100 or more accounts per banker. Some banks have switched to centralized, telephone-based customer service reps. In addition banks now emphasize online and mobile banking as ways to provide more convenience and flexibility to small business owners, while encouraging the customer to meet his or her needs without a banker’s help.

Despite a small businesses’ use of multiple bank products—and the clear need for personalized advice for owners—bankers have become reactive, responding to customer requests rather than proactively provide solutions.

Sales efforts often involve promoting a “product of the month” rather than a tailored sales approach. Unfortunately, customers express frustration about their small business bankers and complain about the lack of a relationship with their bankers as a result.

Let’s get personal: The insights of proprietary data

The good news for banks is that they have a chance to leverage proprietary data to personalize small business relationships. This happens when they provide customized insights and advice to their customers. At the same time, they can position their bankers as valuable proactive advisors, differentiating their personnel from competitors.

Bankers can progress from a reactive, customer-support-oriented approach to a proactive one: highlighting opportunities that address the specific needs of individual companies within their account base. This can improve small business performance, increase bank wallet share, and strengthen customer relationships.

The best small business banks will operate with this proactive approach that engages customers with highly contextual, personalized insights and advice. Productive goals include:  

  • Highlight cash flow issues and provide tips to address cash flow needs
  • Identify opportunities to improve the management of payments and receivables
  • Suggest relevant financing alternatives to support working capital and expansion needs
  • Provide retirement and investment options that meet owner and employee needs, and enhance employee satisfaction and longevity
  • Evaluate owner and business data to identify opportunities to build stronger total household relationships

And now, the proposal…

While banks have strived to do these things banks all along, artificial intelligence and predictive analytics technologies open up new opportunities to deliver this level of engagement at scale and with lower costs.

Small businesses clearly have the need and longing. Will banks step up? If they don’t, someone else will: a story as timeless as courtship itself.

 

David Sosna, the founder of Personetics, is a FinTech pioneer and leading authority on the use of AI and predictive analytics to redefine and personalize the financial customer experience. Previously, David was co-founder and CEO of Actimize, the leading provider of financial crime, risk and compliance solutions, acquired in 2007 by NICE Systems.

 

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