Small-business lending will consolidate dramatically in the next decade, with six companies ending up cranking out 60% of small- business lines of credit, an industry consultant said.
Consultant Allan C. Bloomquist made the assertion at a conference last week, "Reengineering Small Business Lending," sponsored by AIC Conferences.
The 30 bank officials at the conference, representing institutions ranging from a $160 million-asset Texas community bank to New England powerhouse Fleet Financial Group, all are keen on securing a place in the increasingly competitive territory described by Mr. Bloomquist, senior vice president of Oxxford Information Technologies Ltd., Rockville, Md.
The message they got from conference speakers, ranging from consultants to vendors to industry officials to nonbank rivals, was simple: Banks must become faster, smarter, and leaner if they want to compete.
Mr. Bloomquist said information is the key. The top lenders of the future will be ones who work their data bases to find prospects more efficiently than the competition does.
"By the year 2006, six firms will provide 60% of the new small-business lines of credit less than $30,000," he said during his April 29 presentation. "There are going to be a host of economies and sophistications that are going to be available. Data base management and analysis are going to be keys to success."
In his speech, Mr. Bloomquist focused on the use of internal and external data bases to find candidates for credit as well as determine their riskiness.
In an interview after his speech, Mr. Bloomquist predicted a market share shakeout will begin in two years.
"One motivation is greed," he said. Big players "have been witnessing the super-profitability of small business, and there's going to be a sense among the players that it's time to move."
So far one bank's aggressiveness and vision has placed it on Mr. Bloomquist's list of the Small Business Six: Wells Fargo & Co.
The San Francisco banking company last year began to solicit businesses nationwide for lines of credit and is continually experimenting and refining its approach.
At least one nonbank will be a big player 10 years from now, he said. "They're used to operating without branches so they have experience as national marketers," he said. "They're more sophisticated users of data" than banks.
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Mark E. Hill, president of software company Baker Hill Corp., Carmel, Ind., argues that banks have the data they need to be players in the small- business arena. Unfortunately, they're not able to use it.
Many banks are hobbled because information about a single customer's deposits, loans, and other services is scattered among the data banks of different departments, he said. If banks want to get in front of the competition, they need to bring all that information together and track down cross-selling opportunities.
"If you want to go from a credit culture to a sales culture you need to pull together your information and spend your marketing efforts on profitable customers," he said.
Mr. Hill refrained from making a hard sell during his conference presentation, but Baker Hill offers a software system - OnePoint - that purports to do just that.
"If you talk to a banker about all the systems they have, they have different kingdoms of data," he said. "With this Windows system, they're able to put it all together."
OnePoint is a suite of integrated Windows applications, including statement analysis, compliance and collateral tracking, underwriting, and other functions. The first component came out last May and a pricing and profitability analysis application is due this month. The system also allows access to Dun & Bradstreet small-business data bases.
With the system a banker can see, on a single screen, what relationships an entrepreneur has with the institution as well as competitors.
Baker Hill is targeting banks that have between $500 million and $15 billion in assets - in other words, those that are too small to create such a system on their own.
Currently about 300 banks use components of the product, while 10 have the entire suite. Price varies accordingly.
"A single component for a single work station could be $4,000," he said. "An enterprise-wide system for a $5 billion bank could be $225,000."
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Two nonbank rivals warned conference attendees that they weren't waiting for bankers to learn how to be more competitive.
Deborah A. Foley, a regional account manager of business finance for AT&T Capital Corp., on stressed the importance of using technology to save companies time and money.
As examples, she pointed to AT&T Capital's "EZAPP" Small Business Administration loan application process that allows entrepreneurs themselves to fill out applications on computer disks. She also said that AT&T Capital is taking applications over the Internet.
"We're out there, we're aggressive, and we want the business," she said. She pointed out that AT&T Capital is the No. 2 nonbank SBA lender after only three years in the arena.
A representative of the Money Store Investment Corp., the No. 1 SBA lender, said the financing giant was getting leaner in the servicing area.
Donald W. Coombe, vice president of national loan servicing, said the company is the midst of a reorganization that will allow it to service more loans more efficiently with fewer people.
To that end, over the last year the company cut staff to 53 from 82, and reorganized employee responsibilities and workflow, he said. In June the Sacramento, Calif.-based servicing center will go live with a new servicing system and in the third quarter it will start using imaging.
Also, Mr. Coombe said he would fight for better wages for the employees who now have a greater range of responsibilities.
If he could do it all over again, Mr. Coombe said he would have moved slower with the bloodletting.
"It was a morale killer," he said. "There is still distrust. Attrition may work better. It's slower, but he could be better. And reengineering is so uncomfortable that you will get attrition."
But despite any ill side effects, the reorganization will pay off, he said.
"We've been quite successful at filling this niche at the banks' expense," he said.
