The rush to small business is raising a dust cloud as big as a major cattle stampede.

If there is to be significant growth in the soft U.S. economy, it will be in this segment. If banks are able to grow their commercial portfolios, it will be from this segment.

Competition, however, intense. And as in any stampede, there is plenty of risk.

The small-business market calls for a carefully crafted strategy that maps the way to profit while keeping credit quality up and establishing a strong, growing market position in the face of competitors.

As larger banks address this market they are confronted with three classes of competition.

The competition from small banks is serious but diffuse.

These banks are noted for their closeness to the customer and flexible credit standards. But despite these strengths, they have significant weaknesses.

Their lending capacity is limited, and the risk of any one deal means much more to them than to a larger bank. They also lack banks, variety of products, services, and delivery channels.

A smaller bank is not particularly likely to mount a specific counterattack to a challenge from a larger bank - especially if that challenge plays to the larger bank's strengths and to the smaller bank's weakness.

For the larger bank, the trick is to hit town with a program that reminds the small banker of Wal-Mart's arrival. The idea must be to change the competitive landscape forever.

Heavy Hitters

Competition from larger banks is more serious.

These banks have the financial and marketing muscle to match products and marketing programs quickly.

Care must be taken if the major players in a market are to avoid beating each other's immediate profits to death while driving down portfolio quality.

A third area of competition is from nonbank lenders, such as Ford or Merrill Lynch.

These lenders approach the business very differently. They have distribution systems that are sales oriented and underwriting and administration operations that are factories.

The cost for their entire delivery system is very low, giving them a significant advantage in pricing smaller transactions.

Better Service, Lower Cost

In the small-business market, a bank must develop its own twists and variations to make the sale and to build relationships. The process must be more customer responsive than the most successful competitor's. A key factor may be getting applications completed in less than 72 hours.

Credit risk management should be at least as good as in your best, lending operation. This market provides an opportunity to manage risk, rather than just avoiding it. The answer lies between a credit process that you would use for credit cards and one used for large corporate deals.

Also, the cost to deliver your product should be lower than planned by your lowest-cost competitor. You simply cannot spend the same to make a $50,000 loan as you do for a $5,000,000 loan.

Banking technology has changed more in the last four years than in the previous 20. Processes can be rethought and rebuilt so they are more closely aligned with the objectives and needs of both the customer and the bank.

Today's technology brings four key advantages to process and delivery systems:

* User interfaces that make it easy for the line lender or relationship manager to work with a system.

* Portable computing, so work can be taken into the field.

* Easily accessible customer and relationship information.

* Location independence, so a bank can design its process with each element placed for maximum effect.

When designing a new delivery system, don't start with your old one. Start with the basic needs of the customer and the bank, and build a system to fit those needs like a glove.

Make the most of location independence. Optimize the use of your branch system and lenders for building customer relationships and sales. Structure centralized functions for marketing support, underwriting, and administration.

Insist that each element, whether central or in the field, contribute to your overall success in terms of cost of delivery, credit quality, and service.

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