Bankers may fret that the traditional branch is dying, but a new survey reveals that bricks and mortar are vital to the success of one growing customer segment: small businesses.

The Consumer Bankers Association's 1995 Small Business Banking Survey, due to be released today at a New Orleans conference, found that more than two-thirds of banks still use their branch system as the primary delivery mechanism for serving small business customers.

"There is still the need in the small business community to sit down and have a consultation with a banking officer at the branch," said Joe Belew, president of the CBA. "There may be more efficient ways of delivering, but it may not be what the customer wants."

Of the 72 large banks participating in the CBA's survey, 69% said they use their branches to sell deposit products. Another 57% use this delivery system to sell loans and other credit products.

The branch took on an even bigger role in servicing those customers once they are in the door, according to the survey. Nearly 79% of the servicing activity on deposit accounts for small companies, and 46% of the service provided on loan and credit products, were handled at the branch level.

Only the sale of investment products and other business services were more often handled away from the branch setting. The survey reported 42% of banks use a special small business unit to sell investment products, while a commercial unit was the preferred delivery method for business services, accounting for 37% of total sales.

Not reflected in the study is the fact that many regional banks are experimenting with the issue of alternative delivery to small business. Several have set up 24-hour telebanking centers for time-starved business owners who can check on balances or apply for a loan on their own schedule. Others are experimenting with alternative delivery, ranging from grocery branches to gas station locations designed to appeal to the on-the-go business customer.

While customer interaction still largely happens in the branch, they survey also found that banks are increasingly shifting the underwriting process to a central location.

Only 8.1% of the survey respondents say the branch handles underwriting of loans. In 55.4% of the responses, the small business unit handled this function, compared to 25.7% using their commercial units and 9.5% using a central service center.

The survey also highlights the different marketing approaches taken by banks that use their retail divisions to serve their small business market and those that use a more traditional commercial division.

The study also suggests that retail-oriented banks have a stronger, more diverse marketing focus than competitors who use the commercial approach to small business banking.

But some of those efforts are not getting the kinds of returns hoped for. Georgetown University professor William Droms, a co-author of the study, said that telemarketing and database marketing efforts, used largely by retail-oriented small business banks, have not been successful to date.

"Bank referrals and direct sales efforts work the best," Mr. Droms said. "Nearly one-third of the banks surveyed are using database marketing and telemarketing, but the efforts have not been particularly effective."

Bankers say that may be because the technology is still new to their line of business.

Sandra Maltby, a senior vice president with KeyCorp in charge of small business services, said many banks have had trouble with bad data purchased from third-party vendors. She said the only way to get clean information is by developing a data base in-house, something KeyCorp is doing.

The survey also pointed out that banks using the retail approach had an average 2.4% of their loans past due 31 to 59 days, compared with 0.9% for banks using the commercial approach. Likewise, retail-oriented divisions had higher delinquency rates above 60 days than commercial divisions handling small business lending.

However, the higher delinquency rates from a consumerized approach may be offset by cost savings from improved underwriting and marketing efficiencies. According to the survey, banks using a retail focus spent an average of $771.40 to service a loan, 21.1% less than the $977.10 it costs under the commercial method.

KeyCorp's Ms. Maltby said this may be due to the willingness of retail divisions to adopt new methods.

"The commercial side has a certain way of doing business and they are less likely to adopt retail disciplines," said Ms. Maltby. "There is no reason a bank can't get standardization and centralization on the commercial side, but they are more readily adapted in the retail division."

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