It started as a tiny whisper. Then, the chatter increased. Some credit unions even started converting their charters. Gradually and without much fanfare, it's advanced to a widespread movement: the quest to attract commercial accounts.
Often ignored by the mega-banks, the small business market clearly offers growth potential. But if you think this untapped segment is a cinch, think again. Commercial business involves an entirely different paradigm than the consumer segment. To succeed in this arena, credit unions must recognize a number of critical differences and be ready to adapt their processes, staff, and systems accordingly.
One-to-one focus. While consumer business is a one-to-many proposition, with relatively standard rates and fees, commercial accounts demand a one-to-one relationship with fees, rates and other conditions sometimes established at the individual account level. Statement and notice distribution is often customized, too, with multiple people at multiple locations receiving copies (e.g. the CFO, an attorney, and individual franchise operators). One-size-fits-all ownership arrangements won't suffice either; in fact, it's not uncommon to have three account owners and 12 people with check-signing authority.
Fee-intensive. While many credit unions are fee-averse a tendency their policies and systems reflect commercial accounts involve many activities that trigger fees: the number of deposits and withdrawals, number of items in a deposit, night-bag drops, and many others.
Float vs. holds. Just as you might hold a member's deposit based on the clearing institution or account's age, commercial accounts usually involve float delaying dividend payments based on the originating institution. Same thing, right? Not exactly. Let's say your business member deposits 100 checks totaling $50,000. To apply float, you'll have to capture the ABA number on each check a labor-intensive process for staff, and one your systems must support. The numbers are then compared to a system table to determine the length of time before dividends begin to accrue and funds are made available. Another option is to implement a true Proof of Deposit operation, where items are scanned by machine to capture the critical numbers from the bottom of the checks.
Sweeps vs. transfers. Consumer transfers are usually for specific amounts on a set or recurring date; commercial account sweeps are transfers designed to achieve a specified balance so the transfers are variable and unpredictable. Sweeps are often used to manage zero-balance accounts, which aim to maximize the use of the business's funds. Money is typically swept in and out of an interest-bearing account to fund a checking account set for a zero target balance, with only enough brought in to cover the day's inclearings.
Frequent ACH and wire transfers. A health club that bills hundreds or thousands of customers monthly via ACH debits or a business that submits employee payroll electronically is sure to generate more ACH activity than the average consumer. Likewise, wire transfers may be weekly or daily occurrences for a business but a rarity for most consumers.
Check reconciliation. If you're like me, you love the ability to download transactions online and easily reconcile your checking account. For a business, that's just not enough. Commercial accounts demand an automated mechanism for check reconciliation not only due to the number of items, but also to help spot fraud.
Account analysis. As night drops, multiple-item deposits, and other activities occur, the credit union will need to track them, calculate the associated fees or dividends, and determine the net debit or credit at the end of each statement cycle. More complex businesses such as a franchise operation with six locations, each with a separate account, may require your systems to support analysis rolled up to one master account.
Internet cash management. Just as consumers have come to expect home banking services, businesses today expect Internet access to accounts. But the requirements are much more complex, as the business staff will want to perform traditional inquiries and transfers, as well as originate wires, ACH items, and other special services. Of course, this greatly expanded functionality requires greatly enhanced security.
Lending complexity. The prevalence of variable rates and indexed rates demands a mechanism to apply rate changes frequently, accurately, and efficiently. Your systems also must be ready to support very different payment arrangements like interest-only payments monthly and principal payments quarterly, or payments that fluctuate to reflect a business's seasonal nature (e.g. the Halloween costume store or a beach-side water sports company). Collateral gets tricky, too, as businesses often put up multiple properties, like vehicles, on one loan. Besides tracking insurance and titles, you'll need to track when property statements, financial statements and other documents are due and received. Other popular lending options include SBA loans, which require highly complex reporting.
There is one trait that consumer and commercial business share: the need for product parity. Just as your current members won't accept a limited product offering, neither will your business members because somewhere out there is an institution that will do it all. In fact, owning the entire relationship becomes even more essential to profitability in the commercial world, as it allows you to leverage fees and dividends across multiple accounts, resulting in more competitive rates.
These requirements could sound daunting IF you try to employ the same infrastructure you're using for consumer business. But serving commercial accounts is a lot like building a sales culture. When the concept first drew attention, some institutions immediately added new technologies designed to support proactive selling. They soon discovered that the technology is only effective as part of a broader initiative that demands change enterprise-wide: in processes, policies, staff, compensation, marketing and the list goes on.
Commercial processing technologies are clearly essential today but only as part of a broader business plan. So before investing in this functionality, your board and senior management should address questions like these:
* What is our goal: to meet the limited commercial needs of a few current members, or to aggressively grow this segment?
* How well does our skill set match up with this market? Are we prepared to recruit commercial banking professionals?
* What products/services do we lack, and are we willing and able to add them?
* How will our business processes need to be adapted?
* How can we ensure the pursuit of commercial business doesn't jeopardize service to our current members?
* What kind of ROI can we expect, short- and long-term? (As Cornerstone Advisors' Scott Hodgins noted on CUES Techport: "With hours and hours of hard work and some very capable professionals, the thrift industry has only managed to grow its business- related lending balance from 14% to 16% of assets in five years gaining momentum in the commercial lending market has been much more difficult than the thrifts ever imagined or projected.")
The bottom line: The commercial market is vastly different from the lion's share of your business. If you intend to tackle it, be ready to do your homework, plan carefully and prudently, and commit your resources to the processes, staff, and systems needed to support this segment.
John Schooler is Senior VP/Chief Technology Officer of USERS Incorporated. He can be reached at 1-800-523-7282 or JohnSchooler users.com.