Profiling the Online Small Business Customer

By Charles B. Wendel and Sharon Williams

Small businesses that use online banking are distinctly different from other customers. Overall, they generate higher revenues and profits and are more satisfied with their bank than offline customers. At the same time, they use online channels for only a limited percentage of their banking needs. Most continue to require branch or person-to-person contact. Further, today the online customer represents a relatively small portion of the total base. As we will discuss, even the online customer cannot be considered as a homogeneous group

Why are today’s online customers important?

FIC recently had the opportunity to work with seven major regional banks to compare the characteristics of their online customers to offline channel users. We learned that across a number of critical criteria the online customer exhibits highly attractive traits:

Larger demand deposits. The average offline small business maintains average balances of approximately $21,000. The e-banking customer maintains $59,000 in average balances, 2.8 times higher. These higher balances lead to a much improved profit contribution by these customers.

Higher loan balances. The average offline borrowing customer carries a credit balance of about $42,000. The online customer’s loan balance totals $87,000, two times higher. This allows the bank to better leverage the fixed costs required to originate, underwrite, and process a loan, again fueling improved profits.

More accounts. The average number of accounts held by online customers is almost twice that of offline small businesses. Online companies have three accounts versus 1.7 for other companies. Multiple accounts is one of the key performance metrics at many banks.

Better satisfaction. Finally, online customers appear to be more satisfied with their banking relationships. With an average online attrition rate of 10 percent versus an offline rate of 14 percent, online seems to create the “stickiness” desired from web banking. In many cases, however, we believe that online has simply become an additional cost of doing business, a requirement rather than a differentiating factor.

Passive majority requires a different approach

As we will discuss in our next column, we continue to be skeptical of the online opportunity for enhancing revenue growth directly, except with certain limited customer groups.

While online customers are demonstrably more attractive, even these technophiles only use online functionality selectively. Customers could be doing more of their banking business online. Personal preferences, limited available functionality, and the need for security and training inhibit online usage.

FIC’s survey of small businesses points to online activities being largely focused on what might be termed “passive” requirements. Close to 70 percent of online users obtain account balances online; slightly more than 40 percent make wire transfers online. Conversely, only 15 percent of e-bankers say they have made an online credit application or have bought or sold investments online.

Personal preference continues to point many small business owners to a branch or a banking officer for transactions that they view as more sophisticated or complex. Similarly, online service fails to measure up to the best service available from a branch. One customer commented: “I get great service from my branch. They are willing to help. When I use the phone I get a lot of rules and regulations. It’s even worse online.” Customer service levels have to become more consistent if a bank wishes to transition more of its customers to online channels.

Security remains issue number one for customers considering online banking. Our most recent small business survey shows that small businesses cite improved security as the number one criteria for making their company more comfortable with e-banking. While security is issue number one, customer education and support appears to be nearly as great a concern.

As mentioned in last week’s column, branch personnel play a critical role in introducing online banking to customers and in providing small businesses with ongoing training. While the technophiles described above may be willing to invest the time and energy required to learn how to conduct e-banking, most customers either will not see the value in doing so or will be alienated by a process they view as daunting.

Usage will increase; characteristics will change

Management often appears to be searching for the Holy Grail of performance improvement. A year or two ago, some saw successful branding as the key to a better bottom line. The previous fad was reengineering; prior to that total quality management was the key. While online banking does change everything, on one level it is simply another tool for bankers to use.

Today, online customers represent a small piece of the total customer universe and even fewer customers select online as their primary delivery channel. But, we believe that the 15 percent of customers currently accessing their banking online will increase to more than 50 percent over the next three years. The pace of technology adoption is fast, and the benefit to the customer of online use is increasingly apparent to them.

As the number of online users increases, their profile will also change. Unfortunately, if a customer becomes an online user, his profile does not necessarily become that described above. Rather, current online users possess the characteristics of attractive first-movers. As the percentage of online customers grows from 15 percent to 25-30 percent and more, the group’s characteristics will more resemble the general customer pool.

Many bank managers want to use the Internet to promote increased self-service in sales and ongoing account management. However, customers may be willing to assume those roles only in a limited way. Banks may be pushing their customers, even their online customers, too far toward high tech/low touch. A better alternative may be to employ a high touch approach in those cases where the customer economics allow.

The rate of technology adoption and the extent of online use will continue to vary dramatically, based upon the specific segment group. As we will discuss in our next column, banks cannot offer only one value proposition to small businesses. Any bank that tries to “force” customers to follow the bank’s preferred approach versus adopting to the customer’s needs will alienate current customers and slow down the transition to online.

In some cases e-banking represents an important retention and revenue tool. With other customers its primary focus may revolve around cost reduction. Conversely, for some segments online may be largely irrelevant for maximizing profitability.