DALLAS - If the profitability of small business banking is their promised land, then most bankers are still wandering in the wilderness. That is what Gregory J. LaMothe, senior consultant with Dallas-based ActionSystems, has found in his work with banks that are trying to tap the potential of small business customers. While banks do a good job of connecting with those customers - either through a loan or a depository account - they often miss the profits that come with getting most of the relationship. In an interview, Mr. LaMothe said that banks that fail to cross-sell multiple products, from cash management to retirement plans, are missing opportunities in a segment that could generate an astonishing 5% to 8% return on assets. "There aren't many businesses left that a bank has that kind of profit potential with," said Mr. LaMothe, whose firm specializes in training and general consulting. He says banks must correct four structural problems that keep them from winning more of the relationship.: uncertainty over who is responsible for the relationship; failure to segment small businesses; a tendency to ask customers the wrong questions; and systems that reward bankers who build their own business lines at the expense of broader opportunity. "It's not their brains that get in the way," Mr. LaMothe says. "It's their bureaucracy."

Q.: Why is small business the customer du jour for banks?

LaMOTHE: As you know, the corporate market has defected. As banks continue to look for markets that offer profitable returns, small business emerges as one that has been underexplored.

Q.: Why is that?

LaMOTHE: I think the history behind that has to do with a problem that still exists today. That is: defining who is responsible for developing that relationship.

Part of the history is that it has always been the ... (responsibility) of the lender. And because it's been the lender's turf, what we are finding with banks cutting back on resources is that most commercial lenders are unable to get that deep into the market - down, for example, to the company that needs a $40,000 equipment loan. So they are not allocating enough resources or the right resources to cover the market.

The other probable solution would be to use the branch manager. But when the branch manager is responsible for going after the small business market, we are finding there is a tremendous fear of credit-related discussions.

We have talked with a number of banks that have asked us to help them go out and get their branch managers to drum up loan applications. They say, "We don't understand what the problem is. All the branch managers have to do is get these customers to fill out the loan applications, and we'll do the rest."

Q.: But aren't banks doing the wrong thing by focusing primarily on the credit relationship?

LaMOTHE: Exactly. Some (experts) have found that you can make 5% to 8% (return on assets), provided you get the whole relationship. A number of fee-based services that small businesses use extensively and are profitable are not being explored.

One of the most profitable and very much underexplored services would be retirement plans. For many banks the installation of a retirement plan, which has a life of forever, ... (is more lucrative than) a term loan, which is for three years.

Q.: So is it myopia that affects the way banks have developed their strategies in this area?

LaMOTHE: I would take it further than myopia. Every bank you speak to says, "This is a very, very attractive market, and we are going to focus a lot of attention on it" - so they know about the profit potential. But they are not doing the proper things to attack it.

Q.: You also feel that banks need to better segment the small business market. Could you explain that?

LaMOTHE: If you go back on the retail side, everyone will remember when we did this with senior citizens. We treated them as this monolithic market segment. We said well, they are old, they must be rich, so lets give them free checking.

The same thing exists here. In small business, you really have about a dozen segments that should be quantified and observed. The characteristics of those segments would help determine how we talk to these people and what we sell to them.

Q.: What should they be asking?

LaMOTHE: The size of the businesses' annual sales is obvious. What is less obvious is life cycle. Is the business emerging, is it in a growth mode, or is it very, very mature?

An example of what banks need to do with reference to life cycles is to decide which businesses need hand holding, which businesses need advice, and which ones are simply looking for cost savings.

If you have a manufacturing firm that has $4 million to $5 million in sales and is mature, that company will be riveted on any advice you give them about how to save money.

Q.: Is advice the key to the relationship?

LaMOTHE: Unquestionably.

What we are seeing today is the "value-deleted" call, where we go in and we ask all kinds of questions and we profile the business in terms of "What does the business do?" - as opposed to "How does the entrepreneur feel about what he is doing, and what are the implications?"

My suggestion is that we build a bonfire and take all those relationship profile forms and burn them up before we torture one more customer. We need to go in and ask the kind of questions that makes the businessperson think about why they do the things they do, not about what they do.

We ask questions like "What are the names and ages of your children?" and "Where's your vacation home and what is its approximate value?" We end up with an interview that sounds more like "What were you doing on the night of Aug. 11" than a profile.

Q.: Give an example of better questions to raise.

LaMOTHE: For instance, you could ask, "Have you given consideration to how having a retirement plan could help you in attracting and keeping skilled people?"

The banker has to stop and think of himself as a high-performance adviser who can add high value to the businesses he works with. Businesses are tired of having bankers traipsing through and sitting down and asking them 30 or 40 very bad questions.

Q.: Is there anyone on the nonbank side that is doing a good job in this area?

LaMOTHE: Merrill Lynch is the velociraptor of the small business market. They have been able to attract a large number of ... (bankers) and empower them to be able to go in and go after a need, without the paperwork and regulatory issues banks are faced with.

Merrill Lynch has had a background in being able to ask the high-impact questions. They are not going to go into a business and bore somebody stiff with factual issues. Because they have a brokerage background, they are going to go after every need beyond the loan.

Q.: What else do bankers need to reexamine about their small business strategy?

LaMOTHE:: One of the things that continues to evidence itself is that there doesn't appear to be a manager who is above the level of the lines of business that are in competition for the small-business business.

Let's suppose you have trust, cash management, commercial leasing products, as well as loans. Somebody within the bank is saying, "Our strategy is to go after small business." But the departments aren't working well together - and that is because the scoring system is wrong.

There is a reluctance for one line of business to assist another, and one of the reasons for that is the way we keep score.

Q.: What, realistically, is the opportunity for banks to still win the entire relationship?

LaMOTHE: I'm optimistic. I think banks do the things they do incredibly well. It's just that they do them incredibly slowly. It's not their brains that get in their way, it's their bureaucracy.

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