Small businesses represent banks’ best opportunity to grow deposit balances, improve spreads and obtain overall superior relationship profitability. So why do so many small business owners feel a bit like the girl so attractive that she can’t get a date for Saturday night? Many are turning away from banks: more than 20 percent of small businesses that borrowed did so from an online lender, up from almost zero just a few years ago.
Banks have long struggled with the right approach to serve small business. According to the newly released 2018 FDIC Small Business Lending Survey, almost all banks use high-touch, staff-intensive practices to maintain and generate small business lending. But because it is labor intensive, banks seem to shift delivery strategies every few years as they search for the “sweet spot.” Centralize small business services? Build skills in the branches? Use “circuit riders” to serve multiple branches?
We believe financial institutions, rather than recycled, old approaches, must re-think assumptions about customer needs, channel preferences and marketing tactics. Here are five key factors to consider.
Start small. It may seem counterintuitive, but the fastest growing group of small businesses have no employees. None. Today, that represents 80 percent of all small businesses—and we expect their impact to grow even further.
Who are they? Think beyond the traditional sole proprietorship (the independent bookkeeper, consultant, appraiser, trainer, engineer, etc.). With the growth of the gig economy and the expansion of high-speed internet access, more opportunities exist than ever before to establish new businesses. Anyone with a high-speed connection can run a worldwide business: They no longer need a physical presence.
What’s more, entirely new industries and support mechanisms now back them. You can drive for Uber, market your goods on Etsy or share workspace and socialize at WeWork. The entrepreneurs who start these businesses often hope their part-time ventures will grow into sustainable full-time operations.
These incubator businesses represent two opportunities. First, they often hide from sight; you can’t walk down the street and find them the way you might locate a traditional office, or easily track them down them from business filings. But you can still identify them—and it may surprise you may how many operate in your branch trade areas.
Second, they are hungry for information. How can they market their business better? How can they network with others like them? How should they think about growth strategies? These are all areas where financial institutions can take a leadership role and serve as a valuable resource to help them now—and as they grow.
Target microbusinesses for deposits. The math is simple: 75 percent of businesses are not borrowers. Almost all non-employee businesses and 57 percent of small businesses with employees have sales below $500,000. These firms, while not loan prospects, present good opportunities for deposits.
But they usually fall through the cracks. Microbusinesses and deposit-only relationships are typically not assigned a dedicated relationship banker so it’s usually left up to the branches to service them. And without any formal strategy on how to serve them, they often fall into a “black hole” where no one actively manages the relationship.
This adds up to a major missed opportunity for deposit growth. Our work for a regional bank revealed that microbusinesses maintained average deposit balances greater than $10,000: just a fraction of their potential. By putting specific marketing, sales and product initiatives in place the bank nearly doubled profitability of these relationships without expending significant resources for new customer acquisition.
Refine your segmentation. First, use your NAICS (North American Industry Classification System) data better.
Not all NAICS categories have equal opportunity. Five industry classifications account for more than 40 percent of all business banking potential. Some industries are better served by close, convenient branches. Others with low transactions and currency usage can be served at further distance. With the right analytics and planning, you can create a sales calling and marketing strategy to optimize opportunity within the markets you serve.
Second, go beyond industry verticals. It’s easy to think in terms of industry specialization. (“We understand medical professionals,” “We’re experts at serving funeral homes.”) Many alternatives approaches can set your bank apart. Set up relationship strategies, not just approaches based on industry type. Some banks have set up value propositions for women business owners, LGBT business owners or ethnic segments. Others have been more creative, helping military veterans start and grow their businesses. Veteran-owned businesses represent more than 10 percent of all businesses with employees, and 42 percent have sales of more than $500,000 according to the U.S. Census of Entrepreneurs. Veterans not only have a higher propensity to start new businesses; they also have a higher success rate thanks to the leadership and management skills they learned in the military.
Leverage channel preference. You probably have more of these customers in your market than you realize: working six days a week, no time to visit the bank, no place for the banker to visit them. They are mature, successful and very profitable. They lack treasurers and bookkeepers and 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 approximately 35 percent of their line-of-business profitability.
By researching the needs of this segment, the bank discovered that these customers placed high value on having a banker available on their schedule, often outside of typical operating hours.
Thus they assembled small, centralized teams available by electronic channels well outside of normal banking hours. All bank communications were signed by each team member. It was an affordable solution because it served thousands of customers, where the typical high-touch small business relationship manager handles only a few hundred.
The lesson? “Remote,” cost-effective channels need not be impersonal. Don’t save your creativity for products. Be creative about resource staffing, too.
Find the “twins.” Fifty-five percent of small and medium-sized businesses enterprises would consolidate personal and business relationships at the same financial institution, according to a BAI executive research report. Yet we know most balances don’t get consolidated. Why is penetration so low? Blame the lack of right sales process and predictive analytics that target the right customer.
To enhance value, leverage the power of identifying account “twins”—business owners who have either their personal or business account with the bank, but not both.
How big is the opportunity? Twenty-one percent of a typical bank’s consumer customers are small business owners. Share of relationship tends to be low (in the 30 percent range) primarily because banks don’t implement tools to identify these prospects, let alone enlist sales and marketing strategies to create combined relationships.
The right data can unlock this puzzle. These prospects are “findable” and targeting strategies can locate those with a high consolidation potential. Combined with focused sales processes and product-bundling strategies, these methods can improve customer revenue by 85 percent.
Parting shot: Small is bountiful. The small business market is large and profitable—in some cases more so than retail “affluent” customers. It should remain a key source of attractive growth for banks willing to look past the surface, find opportunity segments and try creative approaches. You can turn small businesses into big business for your bank—using innovative thinking and action as the medium.