Why Some Small-Biz Bankers Do More than Just Run in Place
By Charles Wendel
American Banker, May 31, 2002

Performance disparities between small-business banking groups increased in the first quarter. Some banks exceeded deposit and loan growth goals; others bemoaned a stagnant lending environment. Many of the latter said they were living on a deposit treadmill, running to bring in new deposits to replace those going out the door.

Why are the best players outperforming others?

They are focused. Increasingly, the best small-business bankers are selecting the customers they want to serve and downplaying others. Similarly, some are eliminating products or selling them on an as-requested basis. These players seem to be focusing on the basics: deposits and loans.

They show that big does not have to mean bad. Community banks have effectively positioned themselves against the huge banks formed through multiple mergers. They state, often correctly, that big banks don't care about small businesses and fail to show commitment to that market.

But some large banks, like National City Corp. and U.S. Bancorp, have worked overtime to reject that claim and position themselves as small-business specialists, offering personal attention plus big-bank sophistication.

That is a very difficult path for a big bank to follow. Almost every bank says it is a friend of small businesses; few are up to the challenge of demonstrating it.

They operate in a well-aligned organization. Strong evidence exists that senior management should view small-business as a quasi-consumer business belonging in a bank's retail organization. The most successful banks foster cooperation between the branch system and small-business, in part by housing them within the same organization.

Even today, however, at many banks the commercial-versus-retail organization wars continue. Too much energy is spent on internal accounting and reporting issues. Sometimes this hurts deposit and portfolio growth.

They view the branch as the front line for profit growth. Small businesses continue to rely on the branch. For most it is their primary point of contact with the bank. Other channels are increasingly important, and most customers demand a multichannel approach, but the branch is the key.

Community banks seem far ahead in building a strong working relationship between the branch and the small-business area.

Branches need incentives from the top to support small-business enthusiastically. Small-business deposits may need to "belong" to the branch system. At a minimum, the best banks employ a shadow accounting approach. Giving the small-business or commercial sides of the bank primary credit for deposits will result in some branches paying too little attention to this group.

They pay their employees effectively. The best performers have instituted compensation schemes that encourage cooperation between units while pointing the branch and business bankers toward specific goals of deposit growth and the generation of quality loans.

They operate with an ongoing focus on operational efficiency. Doing more with less has become a consistent mantra at the best performers. The best managers have effectively leveraged segmentation analyses to put different levels and types of resources against different customer segments. They think of themselves as business owners rather than bank employees.

They emphasize risk controls and early collection. Delinquencies have increased at many banks. The best players have already tightened their credit requirements and are strengthening their approach to early-stage collection.

Many top banks have already centralized collection. Those that are more decentralized are rethinking that approach or taking other steps to increase the consistency and effectiveness of collections bank-wide.