The profits in small-business banking come from deposits, not loans, said bankers and consultants at a conference last week.

Banks are focusing too much on loan volume as a measure of success in small business, they said at the Best Practices in Financial Services conference in Palm Desert, Calif., sponsored by Thomson Financial Media, the parent company of American Banker.

Instead of loading up on loans and adding enhancements such as Internet procurement, human resources management, and online loan products, banks should pay more attention to the basic depository relationship, the speakers said.

At least 80% of small-business customers’ profitability comes from deposits, said Charles B. Wendel, the president of Financial Institutions Consulting Inc. in New York. Lending to small businesses is only marginally profitable at most banks, he said.

Meanwhile, lending should enhance or support the small-business deposit relationship, not outweigh it, Mr. Wendel said. Loan volume is not a measure of success.

“Too often the [bank’s] small-business group is too focused on risk-asset generation as opposed to getting deposits in the door,” he said.

Robert Kottler, a senior vice president at Hibernia Corp., said its small-business deposits grew twice as fast as small-business loans last year. If anyone had predicted that nine years ago, when the New Orleans banking company launched its small-business unit, “I would’ve laughed,” he said.

But he said it can be hard to track small-business relationships because they fall under the jurisdiction of various departments.

Mr. Wendel said that the need to increase deposits becomes more pronounced in a slowing economy. Loan growth slows as small businesses become reluctant to take on debt, he said.

Meanwhile nonbanking companies are vying for small-business deposits. Too often, Mr. Wendel said, banks respond only after the deposits — and the relationships — dry up. Banks must then compensate for the drop in deposits by increasing sales or raising fees.

Banks also are overspending on technology, he said. The Internet is “fool’s gold,” Mr. Wendel said; though 30% of small-business customers now bank online — twice the number that did a year ago — most are using the Internet just to check balances.

He noted that many banks’ attempts to set up online marketplaces and storefronts have failed. “Banks have invested heavily in an Internet strategy that often has not been aligned with customer needs,” he said.

Small businesses, he said, typically choose a bank not for its Internet offerings but for something much more basic — branch locations. “Never mind the glitz and all the new products; how close you are to the branch counts the most for many small-business customers,” Mr. Wendel said.

These customers, he said, want access to bank employees who can give advice and help them solve problems. This is “critically important” to small-business owners, he said.

But many banks have been trying to replace high-cost employees with low-cost technology, he noted. “If you do that badly, you take out cost but you also take out revenue,” he said.

Barry L. Star, co-founder of OneCore Financial Network Inc., a Bedford, Mass., company offering integrated online services to small business, defended the role of technology in banking and said small businesses benefit greatly from the Internet’s convenience.

“You’d be shocked at the amount of things that go on in a small-business owner’s life at two in the morning,” he said. “The Internet is nothing more than a tool, but it’s a tool to provide quality customer service 24 hours a day, seven days a week.”

Banks can use the Internet to give business owners greater control over cash flow, Mr. Star said.

“It all revolves around cash. That’s the power of a financial institution, and that’s the leverage,” he said. “The business owner wants to be in control. They want to know where they stand at any particular point and what things are going to look like in the future.”

Mr. Wendel suggested that banks concentrate on segmentation strategies to attract small-business customers. Banks, he said, should use customer data to develop practical segmentation strategies that are easy to manage and teach to staff.

“Small business is a very diverse market — banks can’t be all things to all small-business customers,” he said. “There are increasingly clear segments, and segmentation is a continual process.”


From Our Archive

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.