Though commercial banking companies are still the favorite financial services provider of most small businesses, banks have not made the most of the Internet or of opportunities to cross-sell, according to a study.

The survey of 500 small-business officials found that they overwhelmingly prefer commercial banks to thrifts, commercial finance companies, and brokerage firms.

"Small businesses continue to really like their banks -- the industry continues to have a privileged position with them," said Charles Wendel, president of New York-based Financial Institutions Consulting, which conducted the survey in conjunction with American Banker. "The question is what banks do with it."

Enticing small-business customers, especially those with annual sales of $100,000 to $1 million, to do their banking over the Internet can be far more cost-effective for banks than dealing through traditional branches.

The survey showed that 17% of small businesses use Internet banking. The smaller the enterprise is, the more likely it is to use branches.

Sixty-two percent of businesses with annual sales of up to $1 million rely primarily on branch banking, compared with 46% of firms with yearly revenues of $5 million to $10 million. But these larger businesses are considered the most profitable for banks.

"You want to get the bigger businesses in the branch more, because you can sell more to them," Mr. Wendel said.

To attract these larger, more profitable businesses, banks must improve their sales training and persuade entrepreneurs to use the Internet for more sophisticated purposes -- for example, applying for credit rather than just checking balances, Mr. Wendel said.

One respondent -- a nonprofit organization with sales of $2.5 million to $5 million -- said its bank did a poor job of marketing its on-line services.

"If they could show me how I'd benefit, I'd be willing to give it a shot," the respondent said.

Robert M. Kottler, executive vice president of Hibernia National Bank, said "everybody is still in the early stages of offering the Internet to small-business customers." This is partly because most statistical and profitability research into Internet usage has been conducted in retail banking, even though the small-business area has more profit potential, he said.

Customers introduced to Internet banking were found to be more satisfied with their financial service providers than those who relied on traditional delivery channels. Internet banking also aids in customer retention, Mr. Wendel said. Half of the survey respondents said they expect to increase their reliance on Internet banking in the next two years.

"Once they use Internet banking, they get hooked on it," he said. The study concluded that banks could spur usage by reassuring customers that their transactions will remain secure and their level of customer service will be maintained.

Despite the potential for cross-selling, 36% of the businesses surveyed said that their financial services provider had not asked them to move their personal accounts to the bank.

"Selling 101 is just not happening enough," Mr. Wendel said. "You want to grab those deposits before someone like Merrill Lynch does." ?

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