Nonbank FINANCIAL INSTItutions are snatching billions of small business dollars from traditional banks, according to a new study by the Bank Administration Institute and McKinsey & Company. The solution to gain market share? New products, approaches and technologies that give small businesses what they want-when they want it. "We're talking $100 to 200 billion of potential financial services revenue in the small business market," says BAI evp David Taylor. "This has traditionally been a good business for banks of all sizes but the fact of the matter is it could get a whole lot better."
The study, called "Unlocking Winning Strategies to Serve Small Businesses," notes the decreased importance of geographical connections between banks and small business customers, as well as the increasing emphasis on new strategies. A shift in marketing strategy that also maximizes new technologies could help banks haul in the 60 percent of revenue connected to small business-dollars that are presently captured by nonbanks.
Estimates show that 45 percent of the average $14,000 spent on financial services by a small business owner each year goes to purchasing insurance. Almost all small businesses own some type of property and casualty insurance (including workers' compensation), generating $22 billion in annual revenue.
Most of the areas that nonbanks dominate-insurance is the biggest- are ones where technology innovation and distribution strategy can aid banks in gaining greater market share. Other technology-linked products that siphon potential revenue from banks are accounting, payroll and tax services provided by certified public accountants and dedicated payroll processing services from the likes of ADP and others. These services generate about $5 million in yearly revenue, according to the study, and are prime businesses in which banks could strike strategic alliances as a way to increase customer profitability. "I'm not saying a bank would need to develop all that itself," Taylor says. "A bank is sort of a natural aggregator. They can put all of these various products and services together and offer them as a very attractive package to a small business customer."
There are also technology-related revenue opportunities closer to banks traditional businesses. Recent stats indicate that 86 percent of small businesses presently use PCs and 23 percent are regular Internet users. An IDC/Link survey estimates more than 1.4 million small businesses will be on-line banking customers by 2000. "To us, it's clear that small business people are going to be early adopters of technology as soon as it comes along," Taylor says. "That means if they're going to be offered new ways of doing their banking and all their financial needs, there's no question they're going to do that."
Banks that marshal potential dollars in electronic payments, on-line banking, Internet access, automated loan machines and call centers will be formidable opponents to nonbanks and narrowly focused institutions that currently harvest the bulk of small business market share.
The challenge is for banks to encourage small business owners to consolidate both retail and commercial accounts within their bank. This means that banks must reconfigure their current information systems to link owners' personal and small business accounts. In the short term, banks that configure their marketing infrastructure to gather customer data and analyze marketing potential will have an advantage over those who don't.
The study came in response to a request from BAI's research steering committee whose members faced similar challenges at their own banks. "For any banker who sits down to read this study, the good news is (that small business is) a huge market. The bad news is that you better get busy."