The April 2001 issue of the Federal Reserve Bulletin has an important study on the small business marketplace. Instead of reading a dry, analytic piece from the guys who think “Greenie” Greenspan is a party animal, let me give you the Gonzo abbreviated version:
#1. Most small businesses are damn small.
Nearly two-thirds of small businesses in America have fewer than five employees. Banks have not found effective approaches to target and service this “SOHO” (small office – home office) marketplace by better integrating business and personal banking services. Banks had better be careful because credit unions now see this as an un-served niche opportunity.
#2. Go to the traffic jams, Mr. Banker.
80% of all small businesses are located in urban areas. This explains why banks everywhere are continuing to build brick and mortar in metro markets while at the same time they are selling and closing some of their no-growth rural outlets.
#3. “Hear me roar!”
24% of small businesses are owned by women. Woman-owned companies are the fastest growing small business segment. Traditionally, commercial lending has been a playground for the good ol’ boys. (“Honey, could you make me lunch reservations at the club?”) Let’s hope traditional lenders don’t miss this opportunity. I’m not a big fan of banks making special departments to cater to women-owned businesses. (“Good morning, miss. Please allow me to direct you to our Woman Owned Business Division. I think you’ll find they’ll more fully understand your special needs.”) Instead, banks need to understand that woman-owned businesses may have differing needs, educate their loan officers and keep hiring more female lenders. A good portion of the best, most aggressive and customer-focused lenders today are women.
#4. Deposits are more important than loans.
About 99% of the business banking gene pool is full of credit folks, but the vast majority of future small business revenue has little to do with lending. Only 55% of small businesses have loan, lease or credit lines. In the very smallest business segments, only 33% use credit services. On the other hand, 94% of small businesses have checking accounts. An important battle over the next few years will be for the small business customers who don’t borrow but want more than an automated voice response unit and brain-dead tellers serving them. (Sidebar: A typical business owner entering the reengineered retail branch hears something like this: “I’m sorry sir, I don’t have the authority to do that. Can you come back when my manager is here? And oh, by the way, can I interest you in an annuity? I, like, haven’t made my sales goal yet this month.”)
#5. One word, Benjamin: “Plastics”.
Credit card usage continues to grow in popularity with small businesses. Companies with fewer than 20 employees tend to use personal credit cards while those with more than 20 gravitate toward more formal business credit card programs. Banks targeting the small business market need to get serious about their business credit, debit and merchant processing programs. Every click is income – ka-ching!
#6. The digital infrastructure is in place.
There’s an interesting dichotomy going on with small business and technology. Banks see growing but still low interest in online small business services. At the same time, small businesses are going digital and wiring themselves up faster than ever. Today, 77% of small businesses actively use computers, primarily for bookkeeping and inventory functions. A full 59% now regularly access the Internet, but only 15% use online banking. This is an issue that banks have to take the lead in solving. We can’t wait for interest to perk up organically from business owners – they’re too busy. Banks need to lead the transition and MAKE it happen. Branches need to be calling on every business in a three-mile radius to pitch Internet banking. Cash management divisions need to build niche capabilities in specific industries and begin integrating banking, supply chain and B2B functionality. Partnerships need to be deepened with Quicken and Microsoft to integrate small business accounting packages with banking services. By getting more active in how small businesses use technology, banks will undoubtedly hit some “Eureka!” moments when ideas for new money-making services arise.
#7. Penetration of alternative financial services is lame.
Banks are right on track with their attempts to sell additional financial services such as retirement, investments, cash management and insurance to the business customer. But so far results have been tepid. This is another area where banks will need to educate small businesses to prime the pump. The Fed study indicates that only 12% of small businesses use trust and retirement services, and only 5% use cash management services (sweeps, etc.). Retirement services for small business could be a gold mine, but right now the brokers are killing us with three times the market share.
#8. Banks aren’t dead yet. Far from it!
Small business is the most critical strategic opportunity for banks because the industry still owns the market. 89% of small businesses use a bank, much higher penetration than any other financial service provider. With all the bad news we hear about disintermediation, banks still trounce the finance companies (14%), brokers (11%) and leasing companies (7%) in their popularity with small businesses.
The Fed obviously spent a lot of research effort putting this study together. With profitability pressures as strong as they are today, innovation in the small business market has to be a top priority for GonzoBankers.
Can I hear an Amen, brothers and sisters? -sw