Analyst Projects MBL Opportunity For CUs
SAN ANTONIO-Higher than normal turnover in the small business banking space offers a window of opportunity for credit unions to step up and serve a growing market.
That was the message from Leigh Sherman, senior retail consultant for Cornerstone Advisors, who noted that small business market now totals 27 million companies, with more on the way.
"After every recession there are more small businesses as people lose their jobs and go to work for themselves," he explained.
Of those 27-million companies, 20 million are sole practitioners, including doctors and lawyers. Some 50% of Americans work for a small business, most of which are service businesses, some retail.
Sherman said these small businesses collectively spend $500 billion annually on financial products and services. Of that total, 87% goes to commercial banks, and just 8% to CUs.
"This is not necessarily a loan market," he said. "About 60% to 70% of relationship profit comes from deposits."
At a typical large CU that serves small businesses, those members offer revenue to the co-op that is six times those of regular members, he continued. Of particular note is the fact 10% of businesses have switched banks in the last year. Sherman said several trillion-dollar banks have "alienated" small businesses, while community banks are under severe earnings pressure and as a result are hoarding cash and not making loans.
Small business members are an excellent opportunity, Sherman advised, because the majority of business owners keep their work and personal accounts in the same institution.
"If you get one, you get the other," he said. "Convenience drives financial institution selection and satisfaction in the small end of the market."
Credit cards fund more small businesses than bank loans, said Sherman. Of non-credit products and services, online banking is the most heavily used. Fifty percent of small businesses use online banking daily and 37% pay more than one-quarter of their bills online. Direct deposit for employees, he added, leads to other ACH services.
When deciding whether to enter small business lending, Sherman recommends asking three questions: Is it real? Can we win? And, is it worth it?
For the "Is it real?" query, he said there are several sub-questions to consider, including: What does the market want? Do we have the products? Is there enough demand? Why should they do business with us? Do we have a unique selling proposition?
Under "Can we win?," Sherman said CUs should ask: Do we have the people, products and organizational structure to compete in small business segments? In which segments will we compete? Which segments align best with our strengths? Which segments provides the shortest build path to winning?
For the third question, "Is it worth it?" he said it is important to decide: How successful do we have to be in the chosen segments to provide positive and substantial return to earnings? What does success look like? Can we actually achieve that level of success?
In deciding whether to pursue a small business strategy, Sherman said the first step is to determine the market opportunity. Next, choose the segments in which it will compete. Three, align products and channels to the needs of the segment or segments. Four, organize the credit union to optimize the sales contact with the segment.
"Calling on a potential business member every six months is not enough," he advised. "Pick a narrow market segment and go after it harder than the banks."
Credit options for business members should be kept simple and flexible, he said, and the CU should have in place a technology and delivery "road map."
"Formalize the delivery model so everyone at the credit union knows who does what and where they fit," he said. "Also, don't paint the target after the arrow lands-set performance benchmarks now."
If a CU gets into business services and lending without a "robust" risk management function in place, Sherman said it is "better off not making the loan."
"Business knowledge equals business service success," he said. "The best way to market is up and down the supply chain."