As recently as 1990, small business customers basically belonged to banks-and lucrative customers they were, generating a steady stream of fees and interest income from checking accounts through credit products. But some of that territory has been slipping out of their grasp.

"What the banks have not been proactive about is pricing credit," says Libby Chambers, a New York-based partner at McKinsey & Co. "They've been inflexible, for instance, in pricing credit lines, which opened up a window for credit card companies. They've also been unsophisticated in extending credit based on the fundamental credit characteristics of the proprietor."

Slipping into that window: American Express, which opened its small business services division in 1987, offering a range of credit products and business services that allowed it to chip away at the banks' empire. American Express' small business customers total some 1.7 million in 1998, say company officials. "Small businesses are a relatively under-served segment in the U.S.," says Steven Alesio, president of the Amex unit. "Banks and financial institutions have paid a lot of attention to individuals and large companies, but the small business sector got lost in between."

One major way that Amex has exploited this business without sustaining crippling losses: Proprietary credit scoring and decision support technology that lets it find the line between risk and reward in individual small business customers, and measure it against what Alesio calls acceptable default rates. He declined to quantify them.

The banks, though, are also actively pursuing small business. Some banks are offering customers automated, retail-type services, while others, like KeyCorp, have responded with expanded products and services and faster reaction time on credit requests. Visa says its small business operation, which began in 1993, grew 30 percent in the 1997-98 period, but declined to be more specific. "Entrepreneurs have a lot more choices than they had in years past," says Sandy Maltby, vice chairman of KeyCorp's small business services. "On the one hand, that's made our job more difficult because there's more noise in the market; on the other hand, we're glad to have those choices." For the bank, such choices might include a Visa-type line of credit, for example.

Such competition has affected how KeyCorp does business, says Maltby. "We can also approve (traditional) lines of credit in a day, as quickly as you can get (one) from Visa."

Although the small business market certainly presents its challenges- administrative costs have to be kept down as well as default rates, which tend to be high-there's plenty of reason for financial services companies of all stripes to target this market segment. New small business formation reached another record level in 1996 (842,357 new firms), a 2.8 percent increase over the 1995 record level, according to recent statistics issued by the Small Business Administration.

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