One Person's View On How The Flux Within Banks Can Be Tapped By Credit Unions When it Comes To Small Business
Ongoing acquisitions of community banks by larger banks is only creating more opportunities for credit unions in the small business market, according to one person.
Joe Sullivan, president of Market Insights, told the California league's annual meeting that the number of credit unions involved in small business services is now some 17% of all CUs. Market Insights is a financial services industry consultancy based in Chicago.
The reasons for credit union interest in the small business niche is no secret. There are 25-million small businesses in the U.S., and they employ nearly half of the nation's workforce, Sullivan said. Of the approximate 9,500 credit unions, just 500 are participating in the Small Business Administration's loan program, although the SBA recently modified the rules to allow increased credit union access.
"With community banks being acquired by larger banks, there is an opportunity for credit unions to meet the demand for small business loans," he said. "However, credit unions do not seem to be filling the void."
The first step, he said, is understanding the market. A "small business" often is defined as a company with annual sales of $1 million to $9.9 million. A "micro business" has sales of $50,000 to under $1 million.
"There are eight-million micro-businesses in the U.S.," he said. "Many are home-based businesses. Their product needs are simple."
Market Insights has hosted numerous focus groups, and out of them Sullivan has compiled a list of the top three issues facing small businesses: the rising costs of health care and other expenses, obtaining education on critical topics such as business planning, marketing, and tax issues, and managing customer perceptions regarding deep-pocketed competitors.
He said small businesses have four basic needs from a financial institution: investment options and advice regarding excess funds, loans for operations and expansion, management of day-to-day cash flow, and response time-they need a quick resolution when they contact a bank or credit union.
Once they understand the market, CUs should assess their areas for prospects. Sullivan recommends checking business density by zip code near the credit union's branch or branches. He said many small businesses choose a deposit provider by convenience of location, service and relationship management. They choose a credit provider by price (rates and fees).
Sullivan urged credit unions to recognize that it isn't just the small business market that's changing, but the marketplace of competitors seeking to serve that market. Credit unions, he said, should be "paranoid" about non-traditional competitors, noting that as has been demonstrated in mutual funds, mortgages and credit cards, non-traditionals are devastating competitors.
Obviously, banks also are competitors. Sullivan said banks have some advantages over credit unions when it comes to serving the small business owner. They dedicate a banker to each account. The banker visits the establishment regularly to inquire about the state of the business and he or she is available by phone for questions and to expedite requests. Most banks offer seminars on business planning, financing and marketing.
Despite those obstacles, Sullivan said his company's focus groups have found credit unions often could get a small business owner to switch all of his or her accounts by doing one thing: asking.
"Remind your members the credit union can take care of their small business. Credit unions get so busy doing everyday things, they forget to ask simple questions."
When a financial institution has a small business client with a personal relationship, as opposed to no personal relationship, profitability and number of services used goes up. Sullivan said banks recognize CUs have a leg up on the personal side of the balance sheet.
Many financial institutions realize there are several methods to serving small business owners. Sullivan said the key is to choose a strategic direction and move toward it. He detailed five "winning strategies," including:
First: be a "category killer." Identify and exploit a critical skill or advantage the credit union has. This helps to develop brand recognition.
Second, aspire toward a relationship strategy. Sullivan recommends using a range of relationship approaches.
Third, offer members a discount distribution strategy. Fourth, practice product aggregation by supplying the distributors to small business, such as OfficeMax.
Fifth, offer integrated payments.
Sullivan's final advice: "Be aware of the continuing migration to online banking. Credit unions must make multiple channels available to small business clients- including branches, phone, automatic voice response, mail and the Internet. Also, know that loans to small businesses are a litmus test of the relationship. Credit unions can demonstrate their commitment by giving loans and credit, putting them in better position to sell other products."