Small Business Banking Segment Strategy

Strategic Banking Insights

Small Business Banking Segment Strategy

Calvin W. Turner Jr.Founder, Strategic Banking Insights

August 20, 2016

2Strategic Banking Insights Small Business Banking Segment Strategy

Small Business: The Forgotten Customer Segment

• Most banks believe they are committed to servicing Small Business customers. They develop products and services for this segment; they invest considerable amounts of time and money trying to improve their Small Business Bankers’ business development (i.e., sales) skills; and some may even create a line of business within the bank entitled “Business Banking” or “Small Business Banking.” But most of these efforts fail to produce the desired growth objectives because banks don’t really understand the needs of the small business customer.

• If banks are serious about implementing successful Small Business Banking programs that produce long-term growth opportunities – for both the bank and small business owners – they will need to become more focused on aligning their execution strategies to small business customers’ real needs instead of just peddling loans. Because if they don’t, the alternative lenders, payroll providers, independent sales organizations, credit unions, non-banks, and other savvy businesses are rapidly stepping into the landscape – that has historically been the domain of the banks – to provide small businesses with a full range of financial services.


Strategic Considerations

and Implications


Key Considerations1. Development of the Small Business Banking Execution

Strategy2. Implementation of Segmentation Strategy to align Small

Business Bankers into their new roles3. Communication of the Vision, Small Business Banking

Strategy, and Resources, and Introduction of Key Stakeholders across the organization.

4. Integration of the Small Business Banking Strategy (roles, responsibilities, new cultural paradigm, etc.), to the organization

5. Understanding of the Small Business Banking Execution Strategy Implications


Key Considerations - Continued6. Resource alignment across multiple functional areas (e.g.,

Corporate Training, Retail Banking, Marketing, Treasury Management, Branch Operations, Product Management, Channel Management, Back-Office Operations, Centralized Underwriting, Customer Experience, etc.), to ensure all stakeholders and touch points are properly aligned.

7. Processes and Procedures Alignment.8. Product/Service Strategy Alignment9. Incentive Plan Alignment10. Tracking and Measuring Results11. Industry and Competitive Feedback12. Understanding of Small Business Customers’ needs


Understanding the Competitive

Landscape


The Typical Small Business Customer


Understanding Small Businesses1. According to the SBA, there are approximately 27 million small businesses in the U.S.,

and 92% of them are micro small businesses (see Small Business Banking Segment Analysis).

2. According to industry statistics, Small Business customers generally prefer to do their banking at branch locations.

3. These small, walk-in business customers are typically not large enough to have Business Bankers assigned to service them.

4. Only 65% of small business customers borrow from the bank (they tend to use personal funds or other sources of income).

5. As such, they are under-serviced within our (and most banks’) current business banking model.

6. Credit card usage continues to grow in popularity with small businesses. Companies with fewer than 20 employees tend to use personal credit cards.

7. Because of this disconnect with banks, increasing numbers of Small Businesses are utilizing non-banks (digital disruptors) for their financial services needs.

http://www.slideshare.net/CalvinTurner/small-business-banking-segment-analysis-061016


The "Fully Engaged Small Business Customer

Business Credit Card

Merchant Services

Business Checking

Online Banking

Bill Pay

Check Card

ChecksPersonal Checking

Check Card

ChecksOnline BankingBill Pay

Personal Credit Card

Strategic Banking Insights Small Business Banking Segment Strategy

Where are the Profit opportunities?• $443 – average annual earnings on deposit balances per

customer (based on $22,126 ACB for non-analysis customers at 2.00% spread).

• $293 – average annual business check card income per customer

• $839 – average annual Net Merchant Services income per customer

• $519 – average annual business credit card income per customer

• $2,095 – average annual fee income from a fully engaged small business customer


How can Sample Bank best

compete in the marketplace?


Sample Bank’s Strengths1. Strong lending culture2. Excellent credit quality and risk management3. Superior relationship management and customer service4. Strong brand recognition within market areas.5. Business Banking resources (product management and

sales) have excellent knowledge of business banking industry trends.


Sample Bank’s Weaknesses1. Current process to implement new technology and deliver new

products, services, and processes is slow.2. Deposit gathering – losing deposit relationships to other banks,

and bankers go after loans and leave deposits on the table.3. Cross-selling additional products and services to new and

existing businesses.4. Collecting fees from customers5. Delivering business banking products and services by branch

personnel.6. Streamlined processes for new account opening7. Branch bankers lack an understanding of the needs of business

customers.8. Cumbersome and inefficient online banking enrollment process.


Sample Bank’s Weaknesses - Continued

9. Regional bank with little “brand” recognition in new markets.

10. Fragmented culture, priorities, and consistency.11. Business Bankers and Commercial Bankers think of

themselves as “lenders” rather than as full-service bankers, so they don’t sell other banking services.

12. Incentive plan rewards loans more than other elements of the small business banking relationship.

13. Weak small business credit card product offering.


Sample Bank’s Opportunities1. Utilize digital technology and Big Data to optimize delivery

channels based on customer profiles to maximize service, cross-sales, and revenue opportunities.

2. Opportunity to provide consistent training and development for all bankers to support broad strategic initiatives.

3. Expand products and services to meet customers’ present and future needs.

4. Streamline processes to deliver new technology to meet business objectives.

5. Good news is that most other banks are also struggling to more effectively service small business banking needs.


Sample Bank’s Threats1. Need to determine the best “fit” for the Retail/Business

Banking segments to ensure maximum efficiency of resources while retaining specific expertise and characteristics of the these two distinct yet overlapping market segments.

2. Business Banking products and services need to be expanded and tailored to meet the needs of small businesses.

3. Need to determine “boundaries” between Business Banking, Treasury Management, Commercial, and Retail.


Sample Bank’s Generic StrategiesBased on the competitive analysis, it is expected that Sample Bank will best be able to compete in the Small Business Banking marketplace by employing the following generic strategies:

1. Focused Strategy – striving to create and market unique products for varied customers through integration.

2. Differential Strategy – striving to appeal to the small business customer by focusing on their cost or differential concerns (i.e. customer experience, challenges, and needs).


Sample Bank’s Grand StrategiesIn order to align with the Focus and Differentiation Generic Strategies, Sample Bank should pursue the following Long-Range objectives (Grand Strategies):

1. Market Development2. Product Development3. Innovation4. Joint Ventures5. Strategic Alliances6. Consortia (where applicable)


Action Plans and Short-Term Objectives


Action Plans and Short-Term Objectives

In order to enable Sample Bank to develop and execute a successful Small Business Banking strategy, the following action items must be implemented:

1. Align Resources to better service Small Business Customers.

2. Improve Sales Culture and Business Development Effectiveness

3. Develop Competitive Products and Services4. Increased Fee Income


Resource Alignment


Resource AlignmentThree critical elements:

1. Top-down understanding, embracing, and reinforcing of the importance of Small Business Banking to the organization’s overall strategic objectives.

2. Segmentation of Small Business Banking customers to execute targeted strategy to effectively service this group.

3. Aligning Small Business Bankers, Branch Bankers, Marketing and Product Management, Human Resources, Back Office Operations, Support Staff, and other human and technical resources to achieve organizational objectives.


Resource AlignmentConsider that:– Approximately 92% of business customers in most banks’ market

area typically have annual revenues under $1,000,000.– Most of these customers are not seeking – nor will they qualify

for – small business loans. But they do require other financial products and services.

– These small business customers are not adequately serviced in a typical lending-oriented business banking model.

– As such, need to align branch resources to better serve this market segment.

– The problem is most branch bankers are not knowledgeable enough about small business banking products and services, nor do they understand the small businesses customers’ needs.


Resource AlignmentThe most effective way to service small business customers is through a strategic combination of Small Business Bankers and Branch Bankers.– Small Business Bankers – would service the larger Small

Businesses, primarily in markets with high densities of these customers.

– Branch Bankers (Including Small Business Banking Specialists) – would be trained to service the Small Business customers who typically come into the branches for service e(approximately 90% of Small Businesses).


Resource Alignment1. First order of business is to develop knowledgeable

bankers– Need “top down” training for Bankers – from Regional

Management to Business Bankers, down to Branch Bankers – on how to execute the Small Business Banking strategy.

– Implement specific training for bankers depending on their respective roles.

2. Must train Branch Bankers to gain confidence diagnosing small business customers’ needs and selling non-lending products and services to increase low-cost deposits and fee income.


Resource Alignment3. Business Unit activities should be tied to the

objectives of the Small Business Banking LOB and Corporate goals.

4. Need a formal communication plan to ensure alignment of all Small Business Banking sales associates (both Small Business Bankers and Branch Bankers) to segment and corporate strategic objectives.

5. Bankers should understand which daily, weekly, monthly, etc., activities will help drive the attainment of the overall business strategy.


Resource Alignment - continued6. Redesign Incentive Plan to reinforce desired banker

behaviors– Must move away from Small Business Bankers gravitating

towards lending products and services, and instead focus on meeting all of the financial needs of the small business customer.

– As such, incentive plans must be redesigned to reward bankers for deepening the small business relationship (e.g., deposits, credit cards, debit cards, merchant services, online banking, payroll cards, business owner personal accounts, etc.).


Improve Sales Culture and Business

Development


Business Development• With approximately 27 million small businesses in the

United States, it would seem logical that servicing this segment would be relatively easy for banks.

• The problem is most banks prospect and market to small businesses in much the same way they do for commercial customers.

• But when you consider that 92% of small businesses fall into the micro small business category, and don’t borrow from banks, it becomes readily apparent that a commercial banking sales/business development model is not effective with this segment.


Business Development• Of the three “true” banking lines of business

(Consumer, Commercial, and Small Business), the small business segment offers the most significant growth opportunity for banks. – Unfortunately, the Small Business Banking segment in most

banks tends to be a subset of Retail Banking, which does not provide the level of focus within the organization that is really required for true success and goal achievement.

– Marketing and business development budget and emphasis should be aligned in a way that does not give the appearance of a primary focus on Retail Banking; but rather as a resource to support the overall Strategic Objectives of the bank.


Business DevelopmentConsider the following:– Consumer Banking – This segment already has banking relationships

somewhere. Granted, the relationships are often fragmented, but targeting this segment puts banks into competition with each other for a piece of the customer relationship.

– Commercial Banking – These customers make up less than 8% of all businesses in the U.S., and they also already have deep banking relationships somewhere. Bankers offer up all sorts of “perks” to attract and retain these customers. Again, bankers who target this segment are competing for a piece of the customer relationship.

– Small Business Banking – A significant number of small businesses are SOHO and Micro Small Businesses that “fly under the radar” of most tracking statistics. These customers generally prefer to do their banking in the branch. Targeting these customers offers a tremendous opportunity to develop and grow these relationships over time.


Business Development1. Gather New Business (easiest)– Most – but not all – of these customers will walk into the branch

to open a new checking account, which is usually all they get.– Focus on “cross-solving” at new account opening to expand

share of wallet (e.g., deposits, online banking, check card, merchant services, business credit card, personal checking account, personal debit card, personal credit card, etc.).

– Consistent follow-up on/with ALL new accounts opened.– Utilize Secretary of State lists to target direct mail marketing to

new businesses in the service area.– Leverage key partnerships with other Small Business resources

(JEDCO, Small Business Development Center, Good Work Network, Idea Village, etc.) in each market to cultivate new business.


Business Development2. Increase share of wallet among existing customers

(moderately difficult)– Target calling on (and marketing to) existing relationships

for new opportunities (e.g., loans, deposits, treasury services, mortgages, personal accounts, etc.).

3. Prospect for new customers (most difficult because they already bank somewhere else).

4. Build regional alliances with outside resources such as:– SBA, FDIC, Local Universities, Small Business

Development Incubators, Alternative Financing programs, USDA, etc.


Business Development5. Coordinated strategy to utilize social media,

business mixers, circles of influence, regional small business seminars and training initiatives, and networking opportunities to cultivate new business, gain referral opportunities, and position the bank’s Small Business Banking offerings to both customers and prospects as a value-added resource that can contribute to the success of their businesses.


Develop Competitive

Products and Services


Competitive Products & Services1. Develop a competitive BOLB product

– All new small business customers should be automatically enrolled in online banking at new account opening (without a banker asking if they want it).

– Online enrollment (for existing small business customers) without the need to come back into the branch (since banks already have the customers’ information to validate for enrollment).

– Consolidated view of all account information (business accounts, credit cards, loans, personal accounts, etc.).

– Ability for small business customers to electronically invoice their customers and allow them (the businesses’ customers’) to make electronic payments on invoices online.

– Financial management software for small businesses.36


Competitive Products & Services1. Develop a competitive BOLB product - continued

– Online access for small business customers to add credit card users and/or maintenance cardholders’ credit card information (e.g., raise or lower limits, restrict access to certain MCCs, etc).

– Ability to pay employees via ACH– Make tax payments online– B2B payment capability– Need to differentiate TM and Small Business customer packages,

features, and pricing

2. Loans and Lines of Credit geared for business customers– Increased focus on SBA loans (since this is the type of loan that

most small businesses are going to request)– Online application and approval process (for certain types of loans)– Carve out term loans on lines of credit.

37


Competitive Products & Services3. Credit Cards

– Absolutely imperative to have a robust Small Business Credit Card product for this segment.

– Differentiate Small Business, Corporate, and Purchasing Cards

– Incorporate pre-approval at new account opening– Online application and approval– Online accessibility to view transaction and account information and make payments

– Online card maintenance (add cardholders and/or modify cardholder access).– Target new businesses by underwriting credit cards based on business owners’ FICO

scores.– Position the small business card as a lead product for new businesses .– Implement teaser rates and risk-based pricing, along with balance transfer capability.

– Incorporate overdraft protection as a credit card option.– Credit card rewards program

38


Competitive Products & Services4. Payroll Services

– Offer Instant Issue Payroll Cards • Provide customers with the option to allow employers to pay the

employee Monthly Maintenance Fee.• Provide option to include employer logos on payroll cards.

– Offer Payroll Services – Offer Direct Deposit services– Online employer tax payment capability

5. Debit Cards– All business customers should be setup to receive a

business debit card at new account opening– Ability to order debit cards online for customers who don’t

have them rather than have to come back into the branch.39


Issues to Discuss

40


Competitive Products & Services5. Merchant Services

– Understand customer needs to determine whether they plan to accept credit/debit/prepaid cards or other electronic payments (mobile wallets) to suggest Merchant Services as the solution.

– Merchant Services must be seen as an extension of the bank’s small business banking suite (not an outsourced service).

– Streamlined referral process– Automated lead referral tracking system– Push revenue to branches to provide incentives to

managers.– Need a seamless coordination with Merchant Services

partner on customer service and retention efforts.

6. Promote Remote Check Deposit 41


Increased Fee Income

Opportunities


Increased Fee Income Opportunities

1. Hold Bankers accountable for waiving fees on accounts

2. Standardized pricing on small business loans (minimize exception pricing).

3. Increased emphasis on Debit Cards, Credit Cards, and Merchant Services

4. Implement returned check service

5. Partner with other providers to offer website design, printing services, etc., as a complement to Small Business Banking product suite.

43


Other Considerations


Other Considerations1. Retail/Business Banking overlap

– Branch Bankers will be selling small business products and services.

– Need to ensure marketing and advertising resources are not skewed towards retail at the expense of Small Business Banking.

2. Small Business Banking needs to have dedicated Marketing and Product Management resources.

3. Need a career development plan to grow Branch Bankers into Small Business Bankers.

4. Treasury Management and Business Banking convergence– Need to consider a scalable online banking platform that allows

businesses to incorporate additional Treasury Management features and functionality as the business grows.

45


Calvin W. Turner Jr. is the Founder of Strategic Banking Insights, a resource that provides industry intelligence, and strategic expertise and insights to enable financial institutions to develop and execute successful programs that contribute to new customer acquisition, improved customer retention, greater share of wallet, higher levels of customer service, and ultimately increased profitability for the bank.

Please feel free to visit our website to learn more about Strategic Banking Insights.

Follow Strategic Banking Insights on LinkedIn.

Follow Calvin Turner on LinkedIn

46

http://www.strategicbankinginsights.com/

https://www.linkedin.com/company/strategic-banking-insights

https://www.linkedin.com/in/calvin-turner-1178785

Small Business & Entrepreneurship

Small Business Banking Segment Strategy