Small-business lenders are not adequately factoring risk into their underwriting, a Wells Fargo & Co. executive warned.
"If they don't get smart about small-business lending, this could be the next problem area," said Michael R. James, executive vice president of Wells' business banking group.
Mr. James, who addressed American Banker's small-business banking conference here Thursday, said many lenders do not understand the market and have done a poor job of segmenting customers according to risk.
The result, he said, is a "one-price-fits-all model." Lenders risk losing good customers to competitors and may attract less-desirable customers with low rates, he said.
"If you don't understand it how do you properly price your product?" he asked.
About 600 offers have been mailed by various lenders to small businesses over the past six months, Mr. James said. Many of those offers have loose credit standards and are priced at very low interest rates, he added.
Mr. James encouraged lenders to price according to the individual risk of each customer. The customers with the lowest risk should get the best interest rates, he said.
He also warned that if the economy takes a turn for the worse, some lenders could face losses in their small-business portfolios.
"The economy has been awfully good for an awfully long time," Mr. James said. "When you see the types of offers, you've just got to wonder."
In addition, Mr. James stressed that banks should buy the technology necessary to understand small-business customers and their potential risk.
Les Dinkin, a director of the consulting firm Oliver, Wyman & Co., agreed. "Most banks lose money on small-business lending," he said. "There's clearly an opportunity to use information-based risk management, portfolio management, and customer management techniques to significantly improve the economics of small-business lending."
Wells, he said, is much further along than many other institutions.
With $6.5 billion in small-business outstandings, Wells would nearly double its small-business portfolio when it merges with Norwest Corp. later this year, Mr. James said. It would be the second-largest small-business lender among banks, second only to the new BankAmerica Corp.
Carl Pascarella, president and chief executive officer of Visa U.S.A., also spoke at the conference. He said lenders need to understand the needs of small-business owners and "bring down bureaucratic barriers."
Mr. Pascarella, who spoke only briefly about the government's antitrust case against his company, said Visa views small-business as an extension of its consumer market.
He noted that many small businesses are setting up Web sites, and that Visa is studying this trend. "When it comes to understanding the small- business mentality, we're working very, very hard," he said.