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Solving the Puzzle of Small Business Banking

Bankers have long puzzled over how to serve small business customers profitably, given that this market falls into a fuzzy grey area between retail and commercial banking. The typical small business – and its owner – needs products and services more complex than those offered to consumers but less robust than those used by large corporations. How do you bridge that gap and then price appropriately? And which side of the house manages the relationship?

The solution recently developed by Bank of Oklahoma (BOK) in Tulsa is to put small business customers under the Consumer Product Management Team, which manages those clients through business bankers stationed in the branch network. However, those employees offer their clients products developed by the treasury team in the commercial banking unit. “So, you’ve got two product management teams that report independently but have got to work together,” said Paula Barrington, senior vice president, Treasury and International Product Development and Regional Group Sales. 

“I wouldn’t say it’s been a challenge but it’s just been something we’ve really had to work through – to figure out who owns what at the end of the day,” she added.

Barrington detailed BOK’s approach in a session at the recent BAI Retail Delivery event entitled “Achieving Success with Small-Business Customers.” Christine Pratt, a senior analyst at Boston-based Aite Group, set the stage for the discussion by noting the importance of small business banking as “an important source of fee revenue” at a time when “fee revenue has dried up quite a bit within your organizations” due to recent regulatory restrictions on overdraft, debit card and credit card fees.

“Despite the best efforts, there’s still a real disconnect between what small businesses need and what their financial institutions offer,” Pratt told the attendees, citing small business surveys Aite conducted in 2009 and 2011. “Many business customers look like consumers, leaving them under-served; they’re not getting the message from you that you have things to offer.”

Under-served Market

A major reason for this disconnect is that small businesses are typically served from consumer banking platforms that lack commercial functionality, Pratt said, noting that small businesses need tools – particularly online tools – to help them manage their accounts receivable, cash flow and payroll. “Small businesses tell us that they need many of the online functions that are available on commercial banking platforms and – by the way – they are willing to pay for them,” she said.

Barrington said BOK previously served small business customers from a business banking unit under commercial banking that covered customers with between $5 million and $20 million in annual revenues with support from commercial’s treasury department. The bank’s 175 branches in seven states, meanwhile, primarily focused on retail customers. “They would take care of a business customer or small business client if they came into the branch but we weren’t actively pursuing that market,” Barrington said. “It was an under-served market in our footprint.”

Earlier this year, BOK switched gears and began a program of stationing business banking employees in the retail branches, beginning with 11 officers in four cities in Oklahoma and Texas. The plan is to expand the program into other markets in the other five states served by BOK over the next few years, according to Barrington.

Now that they’re stationed in the branches, the business banking officers are supervised by the retail product management team rather than by the commercial group. They do, however, offer treasury products that are typically downscaled versions of those offered to large commercial clients, such as Automated Clearing House, remote deposit capture (RDC) and cash management services, Barrington explained, citing RDC as an example of the BOK approach.

“We’ve actually taken the product that we sell to the corporate side of the bank and we’ve bundled it,” she said. “What I mean by ‘bundling it’ is that we’re keeping it simple. Small business customers can’t pick six scanners like larger companies; they get one scanner for one flat price. You want to make it simple and easy for them.”

Barrington also noted that a bank the size of BOK (with $24 billion in assets) can’t afford to develop new Internet banking platforms or remote capture products just for the small business market. So, of necessity, the company adopted a strategy of taking existing commercial products and finding ways to adapt them to these customers. “Once we see what the success is, we may opt to make some changes there,” she added.

For example, BOK is planning to add a commercial Internet platform geared to small businesses with “a true business bill payment with business invoicing capability,” which Barrington described as an expansion of the bank’s consumer bill payment service that small business customers can currently access on the consumer Internet platform. “We think this will be a big added-value to this segment,” she said.

Aite’s Pratt had noted earlier in the discussion that lack of a “dedicated point person” or relationship manager was one of the major reasons that small business customers switch banks. Barrington said BOK focuses a lot of effort on training its small business bankers and bolstering that training with weekly sales meetings and then bi-monthly meetings that include Treasury and Information Technology staff. “The communication, I think, is critical to make this successful,” Barrington said. “We all need to know where we are, where we’re going and how we’re doing along the way.”

From a marketing standpoint, BOK focuses on “existing consumer customers that own businesses,” according to Barrington. “We already have some sort of relationship with them on the retail side, so let’s try to go get the small business activity that they’re doing somewhere else. We want to cross-sell into our existing customer base.”

Mr. Cline is managing editor of BAI Banking Strategies. He can be reached at [email protected].