Client's Sales Are Poor Gauge Of Profit Potential for Bank

Revenues don't dictate which small businesses will be most profitable for a bank, data compiled by Oxxford Information Technology Ltd. show.

After evaluating about two million small and midsize businesses for its banking clients, Oxxford combined that information with its existing data base to make determinations on profitability.

It found that large sales volume does not necessarily translate into large bank deposits, and that many banks are not sufficiently exploiting sales opportunities with existing small-business customers.

Some industries need far less revenue than others to generate $100,000 in deposits, according to Allan Bloomquist, senior vice president for Oxxford, a research group in New York.

It Depends on Who Is Selling What

It takes the average manufacturer of canned food more than $8 million in sales to generate so much in deposits, for example, but the average medical practice does it with only $1.1 million.

"In the past, sales has been the gospel in market definition and segmentation," Mr. Bloomquist said. "We believe there are a lot better ways to do it."

One strength of community banks is that they often know their customers well enough to recognize that those with less than $2 million in sales will produce healthy profits if they do all their business with the bank. Banks must "know the customers and know their potential," Mr. Bloomquist said.

The Oxxford study shows huge potential in a bank's existing customer base, he added. Fewer than 10% of a bank's relationships represent 90% of its profits in the small-business market, the analysis shows. Changing that to 30% of clients producing 70% of profits translates to an overall increase of 175% in profits, Oxxford claims. This shift can be accomplished by cross-selling additional products and replacing marginally profitable customers with ones in market niches with more profit potential.

Most banks are not "aware of who their key small and middle-market customers are, nor do they have programs to track and monitor these customers," Oxxford notes. "There is a geometric increase in profits as the number of products used increases," Mr. Bloomquist said.

Profits increase nearly six times when a customer uses three products instead of one, the analysis shows. And going to nine products from one results in a 25-fold increase in profits. Oxxford uses individual banks' formulas to evaluate profits.

Whether a customer divvies up its business among financial institutions also has a big effect on bank profits, Mr. Bloomquist pointed out. The average small business has a relationship with about four banks.

"Most banks have the potential to increase their share of wallet from existing relationships," he said. "More than 60% of these customers use more than one bank."

Relationship Management

While relationship banking is frequently discussed, a remarkably large number of banks still place most of their efforts on new customer relationships, he said.

Automated systems combined with "relationship management" techniques can increase productivity in the small-business market, according to a survey of 227 commercial banks by the American Bankers Association. If the key to productivity lies in helping current employees handle more accounts, banking officers will "need to forsake pencil and paper and actually perform their daily work via automated systems," the report says.

Change Comes Slowly

Still, few banks are making such a transition. The overall approach to the market remains traditional, said Ted A. Parrish, a consultant with Management Advisory Services, Seattle, who coauthored the ABA report, "Efficient Delivery of Banking Services to the Small Business Market."

"Banks are trying to move people into a sales culture," he said, "but there is not a lot of help minimizing paperwork. There's not an avid use of technology. This segment still has a lot of bankers who have not integrated computers into their daily lives."

Ms. Franzoni, a freelance banking reporter, is based in Springfield, Mo.

Table : Tempting Targets

Table : For Bank Marketers Industries and groups listed in order of most profit potential for banks, with average revenues needed to generate $100,000 in deposits. Revenues ($ in millions)Labor union $0.57Stock brokerage 0.91Physician's office 1.13Packaged software 1.80Local trucking 3.21Crop harvesting 5.53Metal household furniture 6.35Specialty canned food 8.04

Source: Oxford Information Systems/Business Advantage Report, 1991

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