Managers of small-business groups face several challenging issues today, including maintaining revenue growth in deposits and loans, managing credit quality, avoiding product commoditization, and fighting off continued inroads by nonbanks.

In recent months, however, an outsize portion of management focus has shifted to online issues, despite their relatively low importance to small-business customers.

In our annual survey of small businesses, fewer than 5% said the Internet is their primary method for banking. Further, most require only limited online functions.

Close to 80% said the branch or banking officers are their preferred banking channels.


Media hype has played a part in driving senior management attention to online issues, often at the expense of issues likely to be more significant for near-term and even medium-term revenues and profit.

Similarly, management tends to focus on products having marginal impact on the bottom line, whether in the near or medium term. Our client experience indicates that not only do most of today's small-business customers continue to require access to their bank in the old-fashioned way, but their banking needs are almost exclusively focused on traditional products: deposits and loans.

At most banks, 90% or more of small-business customer revenue comes from these two product areas: deposits and loans.

Deposits generate anywhere from 65% to 75% of small-business revenue. Loans generate 20% to 30%.

Everything else - including insurance, investments, and advisory services - generates just 5% to 10%.

Success in the small-business market remains largely a deposit game. But in many cases the credit product is marginally profitable at best, despite the widespread use of credit scoring and loan standardization.

We certainly believe that addressing online issues are important; we also think that developing strategies related to new and untested products are critical to long-term success. Banks do need to determine whether and how they will offer smart cards, electronic bill payment and presentment, e-procurement platforms, online loan marketplaces, etc.

But it is crucial to balancing channels and products that may be important in the long term with those that dominate today - and probably will tomorrow too.

As for distribution, managers need to determine the appropriate balance between online and offline - that is, when to use which approach for sales and servicing customer needs.

To our knowledge, at this point no bank has successfully integrated online and offline channels into a cohesive approach addressing these areas. All too often banks are pursuing a one-size-fits-all approach across the entire customer base. A more selective approach is necessary.

The success of a small-business group requires the effective execution of a business model that in effect merges offline and online into a holistic customer offer.

Practically, this means knowing when to sell and service specific products to specific segments using an optimal delivery channel. For example, a mass-market effort to sell loans or leases online is probably doomed to failure. Rather, only certain segments merit that marketing pitch.

Additionally, the bank must provide the structure to bring cross-bank resources to bear on key segments. A significant revenue and efficiency opportunity exists for those providers that can produce the right channel mix.


Several factors drive what we consider a misaligned focus on Internet versus other areas.

Over the past five years, small business has shifted from a relatively unappreciated area to a high-profile component of a bank's retail banking strategy. With success has come the challenge to strengthen its position against other lines of business. To get there, senior managers juggle the latest technology and hope to find the profit pot of gold.

  • Traditional branch behavior is difficult to influence. Small-business customers, perhaps even more so than their consumer or larger corporate peers, use the branch. Small-business leaders, who have little direct control over the day-to-day branch activity, view the Internet as an opportunity to directly influence customer behavior, lower transaction costs, and strengthen business line value. While consultants often talk about the need for small-business banking leaders to work closely with branch personnel, the fact is that it is hard to accomplish. Branches have dozens of products to sell, and effectively highlighting small-business activities requires a strong internal marketing effort, a compensation system that encourages branch activity, and a senior branch management whose goals are in synch with those of the small-business group.All too often, selling through branches has proved frustrating, particularly for noncommunity banks.

    One irony of the online focus is that our research and client work points to the branch as the key place for selling online banking. Branch personnel strongly influence a customer's receptivity to online access and play an essential role in training and answering ongoing questions. Managers who hope to shift customers to online channels need to gain the enthusiastic cooperation of branch-based personnel.

  • Management has been unable to revitalize existing products. Many banks continue to avoid offering sweep accounts and are hoping against hope that the current levels of demand deposit balances will continue. Most banks have developed few deposit "innovations." At the same time, many managers view loan products as being close to commodities.Small-business credit is more available than ever before. Each week small businesses receive a large amount of credit solicitations from card companies such as American Express and CapOne. At the same time, leasing solicitations offer significant levels of pre-approved credit.

    As the best banks know, bankers who see themselves primarily as lenders are fighting a losing battle for share and profitability. Leading small-business players know that loan reliance will result in shrinking margins and limited growth. Relying on that area, particularly in light of what some view as an unsettled credit horizon for small businesses, is a losing strategy.

    Business line leaders are searching for the next exploitable opportunity for differentiation. They hope that the Internet may offer the required growth engine.

  • Executive management is exerting pressure. Discussions with senior managers reveal the strong influence of corporate peer pressure. Questions such as "What is our smart card strategy?" or "How will we use wireless?" lead managers directly into focusing on online issues whose impact may be tangential to a group's core strategy.

Too often top management causes middle managers to expend energy and capital on products that may be "neat to offer" rather than "have to haves," while taking their eye off the group's core businessThe role of the Internet needs to be viewed in the context of the entire small-business customer group.
Editor's note: This is the second of four columns by Mr. Wendel on this topic.

Mr. Wendel is president and Ms. Williams is senior engagement manager at Financial Institutions Consulting in New York.

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