With respect to financial services, the business market's "smallest of the small" have been stuck in the middle for many years.

Small offices/home offices or SOHOs-either fledgling businesses or ones that have opted for lesser scale-often have suffered the business equivalent of a middle-child complex. In particular, larger financial institutions, while focused on the consumer retail space and the lucrative fee-based corporate arena, have been prone to overlook the in-between SOHO market.

"For the most part, this is a segment that banks have historically underserved," says Dave Potterton, research director for the e-financial services unit at Meridien Research, based in Newton, MA.

But banks are beginning to realize that small business is not small potatoes. Bolstered by the advent of Internet technologies and further encouraged by the SOHO market's impressive growth, financial providers are fostering efforts to appeal to these small business customers.

SOHOs, especially one- or two-person shops or home-based freelancers, might resemble a small business in some ways, a consumer in others. As a result, they were not always well suited to banks' product and service offerings for retail and corporate clients. Big banks often would "piggyback" their small business customers onto consumer or middle-market business programs, rather than target SOHOs with more specialized products and services.

Another reason SOHOs may have lacked appeal to bottomline-conscious banks: Many small businesses and entrepreneurs, interested in forging a personal relationship with a local bank, were perceived as "high-touch" customers who demanded a lot of time and delivered little benefit.

Until recently, Potterton says that the banking industry's "record to date with small businesses has been spotty at best."

But with the PC revolution and the advent of the Internet came tremendous growth in this business segment. Once they found difficulty "fitting in"; now, SOHO customers are becoming a big part of banks' marketing plans.

Just how big is this segment? Over the past several years, the SOHO market has experienced a boom that appears unaffected by the mercurial Internet market and the NASDAQ's rise and fall. The Small Business Administration estimates there are 25 million small businesses overall in the United States, employing roughly half the country's work force.

A more conservative estimate is offered by PSI Global, a financial services research firm based in Tampa, FL. The company reports that there are about 7 million SOHOs, businesses with annual revenues between $50,000 and $500,000. According to PSI, that's roughly three times the number of larger small businesses, those with revenues of $500,000 to $10 million a year. Any way you slice it, Potterton points out, "this market is huge."

Terri Lonier, president of Working Solo Inc., a New Paltz, NY-based strategic adviser to companies targeting SOHOs, says the market is attractive to banks because SOHOs represent an almost recession-proof growth segment.

"In good times and bad, people are starting businesses. In good times, they figure there's little risk, because they can always go get a 'real' job," she says. "When the economy is faltering, like the current environment, people start a sideline business for extra income, or they don't want to face the resume-and- recruiting mill again and decide to go out on their own."

But the big attraction is not just the existing SOHO market, but the future one as well. Fueled by the growing entrepreneurial trend, the U.S. small business market is expanding by a sizable 14% per year, according to New York researcher CyberDialogue.

Pair this double-digit growth with analysts' opinions that small and very small businesses are among the most Web-savvy. International Data Corp. predicts that Web-related investments made by the small office/home office industry will grow 45% from $19.6 billion in 1999 to $85.4 billion in 2003. Considering the favorable factors, the opportunities for banks seem clear.

To reap maximum benefits, however, FIs may need to consider a shift in strategy. "[SOHOs] have long been serviced at the branch," says Potterton. "It's the most costly channel. ... So the extent that banks can break that tether to the branch, it makes these businesses more attractive."

In bygone days, SOHO customers might have been left to smaller banks, credit unions and non-banks. But big banks now are making a full-court press, and they are offering far more than the typical lending and banking services. Extras can include assistance with accounting, help with human resources and expansion and matchmaking with potential suppliers. In short, larger banks are building relationships with SOHOs that largely didn't exist before.

Cases in point: National City, already the nation's fifth-largest small business lender, late last year began to expand its online banking service to small businesses. Through its Small Business Banking initiative, the Cleveland- based bank began offering online account access and funds transfer, electronic bill payment and e-mail messaging to the bank. In May of this year, Philadelphia-based PNC Bank beefed up both virtual and real-world offerings to its small business clientele, adding 38 business center branches in the Delaware Valley. PNC also previously expanded its Account Link for Business online banking service.

Meanwhile, longtime small business lender Wells Fargo has established a primary role in the SOHO space. And the San Francisco-based bank, which was developing its own homegrown small business banking software in the mid-1990s, obviously has maintained its dedication to the small business online.

Visitors to Wells Fargo's home page find the "small business" bar front and center, appropriately located between "personal finance" and "commercial services." The bank provides financial services to small businesses, assisting these smallest and most time-starved of companies with an all-in-one resource center. Here, financial services offerings are only one area of support; in addition, Wells provides help and advice in human resources, marketing and purchasing.

"Wells has done a great job," says Potterton. "They've focused on the small businesses better than most large banks. They've dealt with it from the credit perspective. ... They understood the credit needs of these small businesses and have taken it from there."

Wells is a leader in the field, but many FIs have followed suit. A quick glance at most of the top banks' online sites reveals their elevated and extended small business efforts. Many of these banks see not only the sheer size of the SOHO market and the ability to reach them more successfully through a low-cost channel like the Internet, but they also recognize the potential to gain revenue in other ways.

By providing general business services, from building Web sites to assisting in employee recruitment, banks can often collect a matchmaking fee from other service providers who work through the bank or its portal. Small businesses have greater accounting and tax support needs than the average consumer, and many entrepreneurs do not have the time during the day to go into branches-so they end up dealing with such matters on the Net. Banks laying out the carpet for these small business owners are also expecting another upside-that these small business customers will turn into retail customers as well.

"SOHOs have long memories and big mouths," Lonier says. "They network with peers extensively."

Karen Epper Hoffman is a writer in Ulster Park, NY.

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