In the battle to sell leasing, insurance, and investment products to small businesses, nonbank specialists are winning.

Although banks have many of the same products to sell, many small- business owners seem not to know it, according to American Banker's 1997 Small-Business Banking Survey.

Financial Institutions Consulting of New York, which conducted the national poll of more than 400 business owners, found 60% make some use of nonbank providers for their business needs.

Although almost all of those in the survey have bank accounts and more than 9 out of 10 consider a bank their primary service provider, they tend to turn to nonbanks for such needs as insurance or equipment financing.

The results put bankers on the defensive.

"We do offer the products; we just haven't done a good job of marketing them," said Craig Zander, vice president of M&I Bank in Milwaukee, a unit of Marshall & Ilsley Corp. "Nonbanks are perceived as being the experts."

The bad news for bankers could worsen-31% of the business owners said they plan to increase their use of nonbanks in the next two years. Only 14% said they were likely to cut back on nonbanks.

Of businesses with sales between $500,000 and $1 million, 48% named insurance companies as one of their primary sources of financial services. Twenty-five percent listed leasing companies.

"Banks, especially the big banks, have all the products in the world," said Charles Wendel, president of Financial Institutions Consulting. "The problem is that they are not communicating effectively."

Meanwhile, nonbank competitors keep getting more aggressive.

Merrill Lynch & Co. is disparaging banks' business checking accounts in advertisements for its working-capital management account. An ad in The Wall Street Journal and Inc. magazine stresses that Merrill's account pays interest.

Fidelity Investments is also selling its simplified Individual Retirement Account, which allows small-business owners and employees to make tax-deferred investments in mutual funds.

Nonbank competitors appeal most to-and are undercutting the loyalty of- some of banks' potentially most lucrative customers.

Owners of businesses with sales between $5 million and $10 million were the least likely to maintain their primary business and personal accounts at one institution. If a bank provides both these accounts, the profit that can be earned from the customer dramatically increases.

In the $5 million to $10 million group, 12% were dissatisfied, a higher percentage than in any of the smaller categories.

Dissatisfaction with service can have a big impact on a bank's bottom line. Of the small-business owners surveyed, 26% had recently closed or were considering closing one of their bank accounts.

Most of those severing ties to their bank cited poor customer service.

What's more, small-business customers who have used nonbanks generally said they were pleased with the service, making it harder for banks to win those people back.

"The banks have a dominant market share simply because everyone uses a bank," Mr. Wendel said. "As the awareness of nonbanks grows, they are becoming more of a threat to banks' business."

Nonbanks are getting the word out. Forty-nine percent of the small- business owners surveyed said nonbanks were more aggressive in courting new customers; 27% said banks were more aggressive.

Donald Hance, vice president and manager of small-business banking for Bank of Tokyo-Mitsubishi's Union Bank of California, said it is trying to establish itself as a one-stop shop for small-business owners.

Union offers asset-based lending through an outside finance company and is planning similar alliances for small-ticket leasing and insurance, Mr. Hance said.

"We want to be able to say 'yes' for all the products small businesses want," Mr. Hance said. "We will find them the services, whether we do it ourselves or through someone else."

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.