The small-business market continues to be a very important segment for bankers, demonstrated by loan growth of 29%, according to our latest Small Business Banking Study.

What are bankers' plans for creating advantage in the marketplace? The answer lies in greater focus on the details of execution, more product options, increasing use of the Internet for delivery, and attention to the needs of local community business owners.

  • Broad product access. Consumer Bankers Association respondents look to an ever-widening set of product options to protect and enhance their competitive position. Cash management, sweep accounts, lock-box, cards of all types, IRAs, telephone banking, and traditional loan and deposit accounts are standard fare for most banks. And nearly half offer payroll services as well as auto and health insurance directly or through alliances.

At the same time, the breadth of products offered is not without cost. Bankers report that more than 20% of their customers use cash-management options, but customers using trust accounts, life insurance, and investment products total less than 10% of the customer base.What is the outlook for 2000? Bankers expect to place much more focus on packaging and bundled accounts to lock customers into broader relationships. At the same time, we expect more bankers to fine-tune market segmentation and product promotions, to rationalize product lines, and to focus on the customers who can and will use a broader set of products. Overall, bankers will be working to better align the small-business owners' expectations for products with more effective penetration activities.

  • Distribution has its challenges. As products have proliferated, so too have the channels used by bankers to reach the small-business customer. The branch and dedicated small business sales forces are the two most important channels for reaching the market, according to bankers.

At the same time, 92% of the banks are adding dedicated sales professionals. But banks may be struggling to find shelf space in the branch for small business. Changing demographics, coupled with changes in the role of the traditional branch, translate into greater pressure on branch sales teams to sell more profitable products and a broad array of investment services. The result can be a crowding-out of branch shelf space, forcing small-business segment managers to beef up local marketing efforts with dedicated sales teams if they are to protect and expand their book of business.As with all areas of banking, the Internet is having an effect on the small-business market. While the branch is important today, in five years 39% of the respondents say they expect the Internet to be one of the most important channels for small business.
More than half say they believe on-line customers are better customers - they buy more products, generate higher average profits, and have longer relationships with their banks. But banks must provide small-business owners with the functionality they need at the point of sale. Over 85% of the respondents have an Web site for small business. Yet fewer than half can open accounts on them.

  • Managing with more precision is a priority. Turnover is a problem in most financial services businesses and CBA members are no exception. Respondents report average turnover rates of 19% on dedicated sales teams. But the good news for most of them is that this rate is somewhat lower than at consumer banks. To stem turnover and ensure a productive sales team, bankers are focusing on improving the leadership capabilities on sales teams and sharpening the focus of incentive programs.

Measuring performance looms large as a continuing challenge for bankers in this market segment. Less than 40% of respondents say they use profitability measures to manage operating performance day-to-day. "Profit metrics" are more often used to measure the line of business or the contribution of the small-business segment. Nearly half require a "special report" to measure profitability; only 30% have system-generated measures of activity costs.Though the number of banks that are able to measure profitability grows annually, a large number use proxy measures to calibrate their efforts. And for most, capturing the economic contribution of broad-based cross-selling of all but traditional banking products remains an aspiration.
In the longer term, imprecise performance measurement will take its toll on banks' ability to drive the overall contribution of the small-business segment. The effects are apparent today in the low penetration rates of a large number of products. If banking is to make good on the enormous potential it has to leverage broad distribution with the sale of comprehensive product solutions, solving this measurement challenge should be a high priority.

  • Competition is local, for now. Small business continues to be a local market game, according to the CBA's research. Local and regional banks are the primary competitive challenges for most small-business programs, but bankers see the emerging threat of large national players such as Merrill Lynch, American Express, and GE Capital. Bankers are responding with more product options, more bundling of products, and more direct marketing efforts.

Despite the competition, credit quality remains strong. A growing number of banks use automated scoring systems to make credit decisions or support the underwriting process. More small-ticket leasing is available in the market and over 80% offer loans of $25,000 to $50,000 without a financial statement. Keeping a sharp eye on fair-lending practices in local communities is a high priority for most respondents.

  • Staying close to the customer provides the edge. Double-digit growth plans, the effects of competition, the fallout from mergers, and turnover all evoke a common response from bankers. Staying close to the customer is the best way to protect and build a franchise. Bankers believe this personal response to an increasingly high-tech marketing and sales environment is imperative to attract new customers, retain good ones, and enhance relationships with all.

Mr. Belew is president of the Consumer Bankers Association, and Ms. McClave is practice leader at Tillinghast-Towers Perrin.

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