Small Business White Paper

Online versus offline integration. Several intriguing issues face small business leaders today. The online versus offline distribution discussions are both provocative and highly relevant. To our knowledge, at this point no bank has successfully integrated online and offline channels into a cohesive approach for small business sales and servicing.

Media-driven hype related to online directs senior management attention primarily to the online world. Yet, today, the majority of small business customers still want to use offline channels and have regular access to face-to face contact. In many cases we find that bank management attention has over focused on online related areas, negatively impacting the opportunities related to more traditional products and channels.

The success of a small business group requires the effective execution of a holistic business model. Practically, this means knowing when to sell and service specific products to specific segments while at the same time choosing the optimal delivery channel. Additionally, the organization must provide the structure to bring cross-bank resources to bear on key segments. A significant revenue and efficiency opportunity exists for those providers who can execute the right channel mix.

Mind share shift. The online delivery channel proliferation consumes nearly all of the current financial services space. To both the media and the senior executives serving small business, this is no exception. While fewer than 5 percent of all small businesses name the Internet as their primary delivery channel, senior managers tend to focus more than half of their time addressing issues related to it. (graph)

Several factors drive the misaligned focus. Over the past five years, small business has shifted from a relatively insignificant piece of the corporate bank to a high value generating component of a retail banking strategy. With the success has come the challenge to strengthen its position vis-à-vis other lines of business. To get there, senior managers juggle the latest technology hoping to find the profit pot of gold.

Traditional branch behavior is difficult to influence. Small business customers, more so than their consumer or larger corporate peers, use the branch. With little control over the day-to-day branch activity, small business leaders view online as an opportunity to directly influence customer behavior, lower transaction costs, and strengthen business line value.

Loan products are close to commodities. Business line leaders are searching for the next exploitable product opportunity. New delivery channels and lack of product differentiation contribute to lending margin demise. The Internet’s ability to enable lower lending delivery costs and new revenue sources contribute to its mind share consumption.

Executive management is exerting pressure. Discussions with senior managers reveal the strong influence of corporate peer pressure. Questions such as, “What is our smart card strategy?” or “Do we think wireless is required?” lead managers directly into the ever-growing online space. Once there, the challenge is separating the “neat to offer” from the “have to have”.

Reality check. It is difficult to predict to what extent business line leaders can and should hang future success on the Internet. Current knowledge, past experience, and future predictions together provide a solid starting point.

Online customers form a highly desirable customer segment. The initial results are in and the online segment proves to be a winner. In a recent study performed to understand the product differences between online and offline small business customers, all major benchmarks favored online. On average, online customers kept 2.8 times higher demand deposits and 2 times higher loan balances than their offline peers. Offline customers use an average of 1.7 products while online customers use an average of three. With an average online attrition rate of 10 percent versus an offline rate of 14 percent, online seems to create the “stickiness” promised.

Online customers represent a small piece of the total customer universe. Even fewer customers select online as their primary delivery channel. In spite of their attractive metrics, online usage remains limited to simple, non-interactive activities.(graph) Many customers continue to voice security concerns as a major obstacle to more aggressive, active online usage.

One objective does not fit all segments. Depending upon how numbers are sliced, 80 to 90 percent of small business customers remain offline. While opportunity exists to migrate a portion to the virtual, some will move craving the technology but more will need to be convinced of the value. A single value proposition leaning in one direction versus the other is both customer alienating and organizationally costly.

The path to gold. To maximize small business customer potential, organizations need to create targeted approaches and value propositions. Depending upon the segment-specific product and behavior traits, each of the created approaches aims to incorporate an optimal mix of online and offline channel use.

Ultimately, successful delivery channel integration is measured by the incremental addition of bottom line value. In order to accomplish this, a business line needs to achieve several key milestones. The milestones aim to be both discrete and highly measurable making it quite easy for to gauge both near and long-term success.

Perform a thorough assessment and refinement of current customer segmentation scheme. Evaluate current approach and measure against industry “best practices.” Modify these segments as required to make them highly actionable. For example, ten segments create confusion not action. Three or four segments with distinctly different characteristics are much more practical and drive actionable foci. (graph)

Evaluate and fine-tune segment-matched value propositions. Assess segment traits and create profiles. Determine actionable needs and define segment specific value propositions. In light of these propositions, product and channel choices may need to be evaluated and new priorities may need to be set. For example, while the current online users, early adopters, are both intriguing and valuable, the mass market surpasses them in both size and potential impact to the bottom line.

Determine specific sales, service, and support requirements for each discrete customer segment. Cleary understand organization specific delivery channel costs. Assess segment profitability. Assign primary, secondary, and tertiary sales, service, and support channels. Once this is complete, job roles and goals can be created for each channel and specific customer segment.

This approach is likely to yield discrepancies in current versus desired customer behavior. It is necessary to first determine proposed impact to current channel behavior. Once this is complete, engage relationship managers to set migration strategy and gain commitment to making it happen.

Create performance evaluation metrics to benchmark progress. Measuring incremental increases in value is critical. To get there, organizations must first assess current channel and segment performance. The next step is to establish benchmarks based upon industry best practices and internal indices. This enables gap analyses throughout the process and facilitates development of a timeline for increased value creation. Metrics will be segment specific and may include: account retention, new product sales, branch usage, and sales or transaction cost reduction.

Tailoring these tactics to organization specific needs and objectives will improve the likelihood of implementation success. For example, a segmentation scheme may no longer be current or prove difficult to act against. In this case, the solution creates an optimal segmentation approach that leverages existing competencies while augmenting challenges through strategic partnerships. Under other circumstances, organizations may need to decide whether to build or buy delivery channels deemed critical but not existing in-house today.

How FIC can help. For the past six years, FIC has helped small business leaders create additional business line value by designing delivery solutions tailored to both the institutions’ core competencies and market needs. As a specialized firm, we can focus on providing clients with high impact and high value recommendations drawn from our collective industry experience, our client database, and our direct assessment of client-specific opportunities. We work hard to understand your organization and your customers in order to provide a solution leveraging FIC proprietary knowledge but built on Allfirst footings. This approach substantially increases the likelihood of successful implementation of our recommendations.

Our Delivery Channel Alignment program has evolved from matching small business customers to either branch or business banking channels to effectively integrating both offline and online delivery channels to better manage customer and shareholder expectations. Effective integration results from action oriented customer segments supported with strong, differentiating value propositions. In the end, the program strives to improve overall business line and customer value by matching segment value propositions and costs to serve to the appropriate delivery channels.