Do banks provide what their small-business customers need? One viewpoint is that they focus too much on loans and not enough on other potentially useful services.
“The most profitable products banks have are the loan products,” says BC Krishna, president and CEO of online payment tool provider MineralTree. “If you’re going to sell loans, you need to segment your customers by the products that most likely appeal to them.” That often means grouping customers by revenue ranges, but there is no industry-wide definition for small companies, Krishna says.
When it comes to payments, for instance, revenue may not even be an effective way to segment businesses. “A million-dollar doctor’s office is nothing like a million-dollar construction company from a payments standpoint,” Krishna says. For example, they use different tools and have varying levels of receivables and payables. “A construction company might use software [from Sage 300 Construction and Real Estate] to manage its accounts, whereas a doctor’s office might use Quickbooks. Or the office manager might be the one that takes appointments and enters bills in a doctor’s office, whereas at a construction company a controller might do that job.”
MineralTree wrote in a recent whitepaper that 88 percent of banks have strategic initiatives to grow small- and midsize-business market share over the next one to three years. But only 35 percent of the banks surveyed said they are meeting small-business payment needs well or very well (a result that behooves MineralTree’s business interests).
The banks’ hyper-focus on loans, perhaps at the expense of other services, could do a disservice to small-business customers, Krishna says. “Take our business. If a bank didn’t tell me, how would I know about an electronic product or a better payments product? I don’t have time as a small business owner to keep doing research on all of the inefficiencies that I might know or not know about in my business.”
But Gary Young, CEO of banking risk management consultancy Young & Associates, says he has not noticed banks focusing on loans over other services. “Small business is the lifeblood of the community banking industry,” he says. “They are by far the most profitable customers. There’s more risk involved, but it’s extremely difficult to make a decent return on equity without successfully implementing a strategy for meeting the needs of small business.”
Community banks “can’t take care of the biggest businesses in the country because they have legal lending limits, so they have to focus on small business,” Young notes. “I just do not see, in a strategic planning process, that any bank would turn its back on that business line.”
Young does allow that there can be “a disconnect between what small businesses want and what banks can deliver.” A small business might be interested in a service that a bank does not consider profitable, for instance, or a small business might request a loan that the bank is not willing to approve.
Krishna acknowledges that not all banks will want to get involved with specific services. “The list of things that a bank can potentially help their customers with is quite long,” he says.
For their part, small businesses said in a survey conducted last year that they have been underserved. Their satisfaction with banks trails that of retail banking customers, according to the 2012 J.D. Power and Associates U.S. Small Business Banking Satisfaction Study.