Serving Small Businesses: Balancing Online and Offline

By Charles B. Wendel and Sharon Williams

Managers of small business groups face several challenging issues today, including maintaining revenue growth in deposits and loans, managing credit quality, avoiding product commoditization, and fighting off continued inroads by the non-banks.

In recent months, however, an outsized portion of management focus has shifted to online issues, despite their relatively low importance to current small business customers.

FIC’s annual survey of small businesses indicates that less than 5 percent of small businesses cite the online channel as their primary method for banking; further, as we will show in our next column, most customers require only limited online functionality. Conversely, close to 80 percent of small businesses cite the branch or banking officers, often housed in branches, as preferred banking channels.

Too much online focus?

Media hype related to online has played a part in driving senior management attention to issues related to the online world, often at the expense of areas with greater near and even medium-term impact on revenues and profit.

While developing a strategic approach to online distribution is important, as today’s numbers suggest, the majority of small business customers continue to rely on offline access and face-to face contact. In many cases we find that bank management attention tends to over- focus on online related issues. Similarly, oftentimes management tends to focus on products having marginal impact on the bottom line, whether in the near or medium-term.

Our client experience indicates that not only do most of today’s customers continue to require access their bank in the old-fashioned way, but their banking needs are almost exclusively focused on traditional products: deposits and loans. At most banks, 90 percent or more of small business customer revenue comes from these two product areas. Our client experience indicates that deposits generate anywhere from 65-75 percent of small business revenue; loans generate 20-30 percent.

Everything else, insurance, investments, advisory, etc., generates the remaining 5-10 percent. And, in many cases, despite the widespread use of credit scoring and loan standardization, the credit product is marginally profitable at best. Success in the small business market remains largely a deposit game.

We certainly believe that addressing online issues are important; we also think that developing strategies related to new and untested products are critical to long-term success. Banks do need to determine whether and how they will offer smart cards, EBPP, e-procurement platforms, online loan marketplaces, etc. But, one critical management issue involves achieving the optimal balance between those channels and products that may have a long-term impact versus maximizing revenues and returns from the products that dominate today and, probably, tomorrow.

As for distribution, managers need to determine the appropriate balance between online and offline, that is, when to use which approach for sales and servicing of customer needs. To our knowledge, at this point no bank has successfully integrated online and offline channels into a cohesive approach addressing these areas. All too often, banks are pursuing a one-size-fits-all approach across the entire customer base. As our third column will underscore, a more selective approach is necessary.

The success of a small business group requires the effective execution of a business model that in effect merges offline and online into a holistic customer offer. Practically, this means knowing when to sell and service specific products to specific segments using an optimal delivery channel. For example, a mass-market effort to sell loans or leases online is probably doomed to failure. Rather, only certain segments merit that marketing pitch.

Additionally, the bank must provide the structure to bring cross-bank resources to bear on key segments. A significant revenue and efficiency opportunity exists for those providers that can execute the right channel mix.

Why a misaligned focus?

Several factors drive what we consider a misaligned focus on online versus other areas. Over the past five years, small business has shifted from a relatively unappreciated area to become a high profile component of a bank’s retail banking strategy. With 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, perhaps even more so than their consumer or larger corporate peers, use the branch. With little direct 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.

While consultants often talk about the need to work closely with branch personnel, the fact is that this is hard to accomplish. Branches have dozens of products to sell and effectively highlighting small business requires a strong internal marketing effort, a compensation system that encourages branch activity, and senior branch management staff whose goals are in synch with those of the small business group. All too often, selling through branches has proved frustrating, particularly for non-community banks.

One irony of the online focus is that our research and client work points to the branch as the key place for selling online banking. Branch personnel strongly influence a customer’s receptivity to online access and play an essential role in training and answering ongoing questions. Managers who hope to shift customers to online need to gain the enthusiastic cooperation of branch-based personnel.

Management has been unable to revitalize existing products. Many banks continue to avoid offering sweep accounts, hoping against hope that current levels of demand deposit balances will continue. Most banks have developed few deposit “innovations”.

At the same time many managers view loan products as being close to commodities.

Small business credit is more available than ever before. Weekly, small businesses receive large line of credit solicitations from card companies such as American Express, CapOne, and others. At the same time leasing solicitations offer significant pre-approved credit.

As the best banks know, those bankers that see themselves primarily as lenders are fighting a losing battle for share and profitability. Leading small business players know that loan reliance will result in shrinking margins and limited growth. FIC’s analysis of the small business financial services dollar shows that credit generates only 20-30 percent of the total amount that small businesses spend on financial services products. Relying on that area, particularly in light of what some view as an unsettled credit horizon for small business, is a losing strategy.

Business line leaders are searching for the next exploitable opportunity for differentiation. They hope that online may offer the required growth engine.

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 “How will we use wireless?” lead managers directly into focusing on online issues whose impact may be tangential to a group’s core strategy. Too often top management causes middle managers to expend energy and capital on products that may be “neat to offer” rather than “have to haves”, all the while taking their eye off the group’s core business

The role of online needs to be viewed in the context of the entire small business customer group. A future column assesses the characteristics and the size of today’s online customer.