As community banks struggle with profitability, one segment offers a large opportunity for new revenue, according to George Noga, senior vice president of revenue enhancement at Fiserv: small business.
It's a segment that's been largely neglected for the past several years, he says.
Fiserv started conducting focus groups and accessing analyst research about the small business market on behalf of its clients about one and a half years ago. "That research has told us small businesses want a closer relationship with a financial institution," Noga says. "They're looking for a relationship with a banker who understands and cares about the business, someone they can call if they need to factor receivables, get a term loan, or get help with an ACH payment. When you're a small business, it's lonely out there if you don't have a partner you can call and count on."
When Noga was CEO of a small company technology company called Syngence (it makes e-discovery software), he experienced first-hand some of the financial difficulties small businesses face, especially the need for capital and cash flow.
"One challenging thing about running a small business is the payroll comes around every two weeks, and you need to have cash flow to meet that payroll," he says. "Sometimes you have receivables out and you need to get paid."
One time, when Syngence was about two years old and two days away from payroll, the company received a $900,000 check from the Department of Defense. "We figured we were fine," Noga recalls. "I took the check down the large bank that did our payroll, and was told there would be a 10-day hold. I said, we've been banking with you a long time, you run our payroll, give us some relief. I talked to the managers, they said that was the policy." Then he took the check to a community banker, who offered two-day availability of the funds. "Guess who I wound up doing business with and felt was my partner."
Another point this anecdote illustrates is that small businesses are not averse to paying fees for something like accelerated check availability.
"There's this preconceived notion that small businesses are very price sensitive," Noga says. "But based on focus groups we've conducted and analysts' work, they're less sensitive to price, and more sensitive to customer service." In the check example, Noga was charged $10, but would have been willing to pay $100.
Small businesses' needs vary tremendously by size.
"My small business needs were different as we grew," he says. His company didn't need person-to-person payments, for instance, but the sandwich shop across the street did. The key, according to Fiserv, is to find the right combination of products for each company and then price it as a bundle. The vendor has a service that will gather information about small business customers and market data and suggest such a bundle.
Online and mobile banking have become more important to small businesses, for obvious reasons, as have simple payment options, especially for retailers.
"Nonbank entrants into the market are starting to make headway, like Square and Paypal," Noga notes, "as are well-funded, short-term lending options coming out of Silicon Valley. Those represent threats. It's incumbent on financial institutions to understand those threats and understand what it's going to take to win."
Some alternative providers, such as Kabbage and On Deck Capital, rely heavily on data gathered from external sources to make quick lending decisions.
But such data-based lending comes with risk, Noga cautions. "Banks have to be careful about what information they access, unlike some nonbank competitors," he says. "But the more information that can be obtained, the more powerful a product or service can be."
Small businesses still tend to say it's hard to get a loan from a bank.
"One reason why small businesses feel it's difficult to get a loan is the regulatory pressure banks feel makes it hard to make a loan," Noga says. "Banks have to be very careful. The gap that needs to get filled right now is short term loans - the business that needs a couple thousand bucks for 30 days. It's not worthwhile for bank to go through the underwriting process frequently."
Banks may need to find a process that lets them offer such quick turnarounds.
A lending methodology that looks at a business owner's deposit history alongside other data accessed quickly from other sources "will probably wind up defining a winning product in that space," he says.
Banks that offer financial education and counseling also have an edge with this segment. "Most small business owners are subject matter experts, not necessarily business people; most haven't gone to business school," he says. The bank that can provide information on taxes and financial matters will be appreciated.