According to a reliable reckoning, between 15% and 20% of the discounted cash-flow value of the banking industry comes from serving small businesses.
Small-business banking is one of the biggest contributors to industry shareholder value. Arguably, it merits the distinction of being called the jewel in bankings crown.
Unfortunately, this jewel is far from theft-proof. In fact, it is being stolen at this very moment by those who understand that:
Small businesses want and need to be online.
Their appetite for nonfinancial services far exceeds that for financial services.
By satisfying the principal small-business online nonfinancial needs, one can elbow aside the established financial product providers and preempt the lions share of the banks small-business dollars.
Small businesses are becoming Internet-fixated. Over 80% of the 7.5 million in the United States have Internet access, and about 40% have their own Web sites. They use the Internet to e-mail, buy and sell, and get product, industry, and professional information. They also use it to acquire sales leads, recruit, and make travel arrangements.
Additionally, they bank online, but a survey of 100 small-business Web sites found that banking ranks 11th in importance in a group of 12 online activities.
But if business owners are hell-bent to get online, it is very likely that they will tarry a tad longer at their favorite Web sites to take care of their banking needs, provided these sites offer a banking capability. That seems to be the wave of the future spending just a little more time at the stickier nonfinancial sites in order to bank without the intercession of bankers.
That prospect quite understandably terrifies bankers and encourages them to move beyond their current business models toward one that includes providing the nonfinancial services most valued by small-business customers.
It appears that emerging small-business online habits are rendering moot a popular banking strategy dubbed incrementalism the gradual migration of traditional banking products to a Web environment. Savvy bankers understand that they must do much more for their small-business customers, or they will end up doing much less.
A true banking revolution is at hand, grounded in the notion that money is just another form of information, and that those who once confined their dealings to money must become fully diversified information enterprises. However, most of the companies that have embraced this approach are not banks, but e-marketplace portals.
The best ones provide a potpourri of services.
Founded in 1996, Onvia originally helped businesses acquire computer equipment and office supplies. Now it offers items running the gamut from news to loans to advice served up by experts in selected industries.
Onvias customer base has grown from 18,000 to nearly 400,000, which suggests that one-stop shopping, apparently no longer in favor with U.S. consumers, is still very much beloved by U.S. businesses.
One of Onvias more popular offerings is online purchasing. Small businesses labor under a pricing burden because of their size, typically buying goods for about 20% more than their larger counterparts. By aggregating the demand of multiple small businesses, an electronic portal like Onvia can negotiate better prices and pass back most of the savings to its participants.
Additionally, e-procurement confers process economies, making it far cheaper and quicker to create purchase orders and to monitor individuals for adherence to purchasing authority. According to one estimate, the cost of creating a paper purchase order at an average company is about $120; its electronic successor should cost no more than $10.
The breadth and burgeoning popularity of Onvia and its all-in-one rivals require banks to make a vigorous response, which can take one of two forms: an alliance with an existing e-marketplace or actually launching a portal.
In the alliance approach, exemplified by Citigroups association with America Online, the bank offers financial services through a third party. This helps expand the banks reach, but relegates it to the role of captive product manufacturer for the portal partner and forces the bank to share fees with that partner.
Having your own portal, either launched from scratch or acquired, is a better strategy, one calculated to maximize service to customers and therefore facilitate control over them.
Big banks can become superb portals, since they can marry their superior brand names, immense customer bases (Bank of America alone has 1.7 million small-business clients), and abundant capital to the innovative value propositions of the best-of-breed e-marketplaces.
Banks that are abundantly gifted with technologically skilled personnel, like Wells Fargo, can probably go it alone. But those overendowed with Cobol-skilled mainframe types but deficient in XML-schooled personnel may need to seek out qualified strategic partners or, if these are unavailable, purchase some of the more attractive e-marketplace firms and without delay.
In truth, banks cannot profit very much longer by paying information-deprived small businesses less than the marginal value of their deposit funds a principal source of the small-business return. But they can continue to prosper by helping to marshal and interpret the unwieldy amount of information now available to the business owner at the click of a mouse.
The refurbished role of a bank is therefore that of navigator and adviser. This role is not easily commoditized and thus may fetch a handsome return, serving to cement for some period of time small business standing as the jewel in bankings crown.
Mr. Currie is a partner and Mr. Dawson a senior manager in the Toronto office of Deloitte Consulting