When Hibernia National Bank courts a small-business owner, it showcases more than just the traditional deposit, credit, and lockbox products.

Customers are also attracted with life insurance, key-executive insurance, and-coming soon-property and casualty insurance.

"Insurance represents the biggest piece of small-business financial purchases that banks do not already own," said Robert M. Kottler, the New Orleans-based bank's senior vice president for small-business banking.

Hibernia's strategy is increasingly popular. According to a Consumer Bankers Association survey to be released today, nearly half of banks polled during the fourth quarter said they offer a wide range of insurance products to small-business customers and another 20% said they expected to do so by mid-2000.

"Insurance is clearly at the top of the heap for new products," said the group's president Joe Belew.

Investment products-individual retirement accounts, 401(k), and brokerage services-are hot, too. In fact, 72% of banks polled said they expect to expand their small-business banking product line within 18 months.

"A bank is a partner for small businesses, and one that they trust," said Jeffrey S. Rosen, senior vice president at Milwaukee-based Firstar Corp. who works out of Covington, Ky. "It is very natural for them to gravitate to us for a wide variety of services."

The group surveyed 46 banks with a combined $2.59 trillion of assets. These banks, which make more than 40% of all small-business loans, include First Union Corp., KeyCorp, BankAmerica Corp., Wells Fargo & Co., and Chase Manhattan Corp.

Despite their progress in product innovation, banks face mounting competition from finance companies and other nonbank players. And banks generally are not paying enough attention to the inroads these companies are making, said Kathleen C. McClave, who conducted the survey for the group as president and chief executive officer of Furash & Co., a consulting firm here.

More than 60% of bankers polled did not list a single nonbank, such as American Express or Merrill Lynch, as one of their top-five competitors.

"Nonbank competitors are continuing to capture market share around the country," said Shane Passarelli, an associate at Furash. "Yet the banks are overlooking them."

Instead banks see other banks-local, regional, and national-as top competitors for small-business customers. In five years, however, banks expect Merrill Lynch and American Express to become an increasing threat, the survey said.

By then, it may be too late, Ms. McClave said, who in mid-January became a consultant at Towers Perrin in New York.

"The banking community is still not focused enough on the threat from nonbank competitors," she said. "They know it's out there, but they are not moving fast enough to counter it."

Ms. McClave predicted a radical transformation in the small-business market over the next two to three years. The bulk of small-business profits will no longer come from cheap deposits. Instead, she said, market leaders will be generating income from an array of products and holding costs down by using alternative distribution channels.

The shift is already occurring as interest is increasingly being paid on deposits that used to be free. The survey found 78% of the banks offer sweep accounts while another 15% expect to provide the service within 18 months.

"Banks must realign distribution and product mix to meet the new economic dynamic while they still have time," she said. "They've added products, but have not aligned distribution and marketing to maximize profits."

Other findings from the group's 10th annual small-business survey include:

Half of the banks polled expect Internet banking to be one of their top-two distribution channels within two years-none do today.

Nearly 60% of banks expanded their small-business sales force within the past 12 months and 57% said they expect to add staff within 18 months.

Incentive pay varies from 2% to 100% of base salary. The median incentive pay for small-business relationship managers was 33%, for branch managers 20%, and for customer service personnel 15%.

Of the banks surveyed, 85% rely on branch managers to maintain small- business banking relationships, while 70% use a dedicated small-business banking staff to open new accounts.

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