Banks offering insurance will have a tough time persuading small- business owners to buy policies from them, a study suggests.

PSI Global, Tampa, surveyed more than 900 businesses with annual sales between $500,000 and $10 million. Just 8% said they would buy insurance from a bank, and 74% said they would not even consider it.

"Banks that want to compete in this market will find it extremely challenging to grow their own business," said Gregory S. Long, research director at PSI. "Most small businesses are choosing providers by product category. When they want insurance, they go to insurance agencies."

The study, conducted early this year, suggested that the best way for a bank to win insurance business is to affiliate with or buy an agency, leaving the agency name in place, Mr. Long said.

These findings, released late last month, come at a time when many community banks are turning to insurance as avenues for growth. More than a third of community banks currently sell insurance, and 74% plan to do so within five years, according to an April study by Grant Thornton LLP, Chicago.

At the same time, small banks are trying to distinguish themselves from big-bank competitors by targeting small-business owners.

Scott Grigsby, chairman, president, and chief executive officer of $625 million-asset UnionBancorp in Ottawa, Ill., disagreed with PSI's findings. Mr. Grigsby, whose company announced a deal to buy insurance agency MIA of Illinois Corp. last month, said he believes the bank name will attract customers to his insurance products.

"I still think banking has a pretty good name for itself," he said. "People still look at banks as the source of financial services, including insurance and other nonbanking products."

When the deal closes-scheduled for this fall-MIA would take the Union name, but its sales force would remain distinct from bank employees.

"I am not sure it is possible for bank people to sell insurance, but I think insurance people can sell it under the bank name," Mr. Grigsby said.

Val Jordan, president of Jordan & Jordan Associates, a Belchertown, Mass., consulting firm, said the percentages could change as businesses become more accustomed to buying insurance from banks.

"By this time next year, most businesses probably would have been solicited by their banks, so it would not be such a foreign concept to them," she said.

Business insurance has huge potential for banks that are able to tie it to other commercial products, Ms. Jordan said.

"Banks are always looking for creative ways to attract business customers, from offering phone service to doing their mailings," she said. "Selling insurance is a real value-added service they can provide."

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.