In this hyper-regulated and politically correct world, many banks will not admit that, at their core, they dislike banking small businesses. With actions speaking louder than words, it seems apparent that despite all the hype and “We love small business” signs in the branch windows, many banks either ignore small businesses or are clueless about what it really means to work with them.
Why? First, small businesses are, well, small. You need a lot of them and much of their wallet share to make any significant dollars, to “move the needle,” as bankers like to say. Obviously, consumers are small too, but they are a core franchise for most banks and are both better understood and appreciated by senior bank management, even though they pale in attractiveness to the potential small business offers.
Small businesses also suffer from a perception that they are inherently riskier than other bank customers. During the last downturn many banks proved this to themselves by poorly managing their small business credit scoring and risk management processes. However, instead of blaming their inadequate procedures for their losses, many blamed the small businesses as if the businesses themselves were responsible for the bank’s bad judgment.
Further, bank leadership usually emerges from areas other then small business. The small business segment lacks a champion or, to use a New York phrase, a “rabbi” at the top of the house. At many banks, the segment perennially seems to be treated like Rodney Dangerfield, always fighting to get respect, even though small businesses can provide strong returns and significant non-credit income as well as the depth of a household relationship many banks want and need for growth.
Wrong Product Set
Historically, banks have approached small businesses with the wrong product set. Most small businesses are non-borrowers, but at least until recent years small business bankers were loan-focused, leaving deposit opportunities up to branch staff. And, those banks that do want to lend to them often view small businesses as if they were a larger business with the reporting capabilities and infrastructure available to big players.
Further, while the commercial and personal needs of many small businesses are interlinked, banks that say they want relationships operate with silos that fail to effectively address both the business’s need for transaction and cash flow services and the owner’s loan and investment requirements. Too many banks are pitching products rather than offering a holistic, solutions-based approach.
The best banks serving this segment appreciate that this group of more than 10 million is hardly homogeneous, and therefore, needs to be segmented. Some focus on gathering deposits from this often cash-rich segment and then lending to other types of targets; others focus on investments and cash management. In other words, one of the reasons that some banks do not like banking small businesses is that they have failed to do the spadework required to understand the diverse needs of this group and how their own institution can best serve them. Basic stuff, but still an analysis that most banks fail to spend enough time on.
On the lending side, banks have reacted to the economy (and after the loan-loss horse has left the barn) by narrowing their focus to the extent that many credit worthy companies either do not fit the bank’s criteria or decide to opt out of what they view as onerous bank credit hurdles. Community and regional banks should own this segment but, instead, they appear to be opening up the door to allow more competitors to enter what should be their private preserve.
Some non-bank lenders, such as OnDeck Capital Inc., make credit decisions in part based upon account information that the banks themselves have access to, meaning banks hold the information in-house but do not know what to do with it. Others have defined themselves as a “bank” that only does bank-like lending. For example, many banks view the lending that a merchant advance company does and the high interest rates it generates as unbankerly despite (or in part because of) its high returns. So, banks stay away from this business even though their customers are willing to pay for those types of facilities. In working with one merchant advance company we saw that many of their customers had very acceptable credit scores and performance; these companies chose to pay higher rates because they appreciated the responsiveness that their non-bank lender provided. Recently, companies such as Fundera go further than banks in offering a variety of lending options to customers, providing borrowing options to meet the majority of borrowers’ needs.
What will change the apparent gap between the “talk” and the “walk” at many banks? Here are six first steps:
Appoint an internal small business lending champion with authority to make the changes required to serve this segment. This has to be a person other internal groups respect.
Complete analysis that results in selectivity in the sub-segments the bank targets. Banks need to determine what to emphasize and, to the extent possible, avoid selling to various groups. Small businesses appreciate a quick no with an explanation rather than foot dragging that leads nowhere.
Agree to a multi-year commitment to this segment. The leading small business banks have operated with a long-term view, understanding that they both needed to organize effectively and develop a brand with their targets. That takes time.
Break internal silos. The customer sees his personal needs as closely related to his business needs; many banks still do not.
Create a small business career track. Small business bankers should be able to develop client portfolios much like financial consultants. This approach both locks top employees in and encourages a transition from product pitchman to solutions provider.
Determine how to partner with the non-bank players who can complement the bank’s offers. This can result both in additional fee income and further tying in a customer to the bank.
Why bother to pursue these and other steps? Banks need to be actively protecting and building one of the few franchises they have left. Alienating the small business customers not only loses revenues but also erodes much of a bank’s franchise value.
Mr. Wendel is president of New York City-based Financial Institutions Consulting, Inc. He can be reached at firstname.lastname@example.org.