Carefully segmenting small-business customers and meeting their specialized needs may help banks fend off stiff competition from nonbanks.

That was the recommendation of several bankers in the field who addressed a small-business banking conference here Tuesday.

"You have women-owned firms, minority-owned firms, start-ups, at-home companies with three to four employees," said Michael Butler, vice chairman of small-business banking at Cleveland-based KeyCorp. "These people have become segments of their own; the groups have grown too far and too big for us to manage as one."

Banks face enormous pressure from nonbank financial companies in small-business banking, Mr. Butler and his co-panelists said.

Nonbanks' share of the small-business market grew to 65%, from 49% during the 10-years ending in 1998, according to Jeffrey P. Gaia, president of Bank One Corp.'s business banking group.

Commercial finance firms, mortgage companies, and other financial institutions have secured a significant majority of the small-business lending market, in part because of banks' lack of innovation, Mr. Gaia said.

Bankers suffer from very limited thinking, he continued. "Our status as trusted business advisers is no longer a birthright."

When big banks began their push to cater to small businesses in the early 1990s, all small-business customers were treated alike, Mr. Butler said. Later, lenders generally began distinguishing between firms with sales of more than $1 million annually and those with less.

Principals of firms with less than $1 million of revenues tend to "love the phone," demanding 24-hour access to account information, he said. They also want Internet access and packaged deposit products and can be successfully marketed through direct mail.

In addition, they generally do not require a relationship manager as their primary contact point with a bank, unlike larger businesses, which tend to need personal attention and sophisticated investment management services.

Further segmentation, however, is required to bring in new customers and increase the profitability of banks' small-business lending operations, Mr. Butler added.

It is no surprise that the competition for this market is fierce, the panelists said. Roughly 38% of the gross national product is derived from small businesses, and such firms employ more than half the nation's work force. Small-business customers are two to three times more profitable for a bank than retail customers, Mr. Gaia added.

One road to success may be to offer innovative services to small businesses, Mr. Gaia said. Chicago-based Bank One is testing new products for the market, such as payroll, benefits, and human resources outsourcing, he said.

Banks must also run tests to ensure that their small-business initiatives are bearing fruit, said Michael R. James, executive vice president of Wells Fargo & Co.'s business banking group.

The San Francisco banking company has employees who do nothing but run about 2,000 tests annually, Mr. James said.

The American Banker/Robert Morris Associates small-business banking conference runs through Thursday.

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