Small Business Banking Segment Strategy

Strategic Banking Insights
Small Business Banking Segment
Strategy
Calvin W. Turner Jr.
Founder, Strategic Banking Insights
August 20, 2016

Strategic 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.
2

Strategic Banking Insights Small Business Banking Segment Strategy3
Strategic
Considerations
and Implications

Key Considerations
1. Development of the Small Business Banking Execution Strategy
2. Implementation of Segmentation Strategy to align Small Business
Bankers into their new roles
3. 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
4

Key Considerations - Continued
6. 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 Alignment
9. Incentive Plan Alignment
10. Tracking and Measuring Results
11. Industry and Competitive Feedback
12. Understanding of Small Business Customers’ needs
5

Understanding
the Competitive
Landscape

The Typical Small Business Customer
7

Understanding Small Businesses
1. 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.
8

The "Fully Engaged Small Business Customer
9
Business
Credit
Card
Merchant
Services
Business
Checking
Online
Banking
Bill Pay
Check
Card
Checks
Personal
Checking
Check
Card
ChecksOnline
Banking
Bill Pay
Personal
Credit
Card

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 Strengths
1. Strong lending culture
2. Excellent credit quality and risk management
3. Superior relationship management and customer service
4. Strong brand recognition within market areas.
5. Business Banking resources (product management and sales)
have excellent knowledge of business banking industry trends.
12

Sample Bank’s Weaknesses
1. 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 customers
5. Delivering business banking products and services by branch
personnel.
6. Streamlined processes for new account opening
7. Branch bankers lack an understanding of the needs of business
customers.
8. Cumbersome and inefficient online banking enrollment process.
13

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.
14

Sample Bank’s Opportunities
1. 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.
15

Sample Bank’s Threats
1. 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.
16

Sample Bank’s Generic Strategies
Based 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).
17

Sample Bank’s Grand Strategies
In order to align with the Focus and Differentiation Generic
Strategies, Sample Bank should pursue the following Long-
Range objectives (Grand Strategies):
1. Market Development
2. Product Development
3. Innovation
4. Joint Ventures
5. Strategic Alliances
6. Consortia (where applicable)
18

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 Services
4. Increased Fee Income
20

Resource
Alignment

Resource Alignment
Three 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.
22

Resource Alignment
Consider 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.
23

Resource Alignment
The 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).
24

Resource Alignment
1. 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.
25

Resource Alignment
3. 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.
26

Resource Alignment - continued
6. 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.).
27

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.
29

• 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.
30

Consider 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.
31

1. 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.
32

2. 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.
33

5. 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.
34

Develop
Competitive
Products and
Services

Competitive Products & Services
1. 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

1. 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

3. 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

4. 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

5. 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 Considerations
1. 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

Small Business Banking Segment Strategy

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