Thursday, March 25, 2010

Large Banks Not Adequately Serving Small Businesses

While there is little denying the revenue potential of serving the financial needs of small businesses, there continues to be a significant disconnect between small business needs and the way large banks serve this segment according to a research report released today by Aite Group (Small Business Opportunities: Are Large Banks Missing the Boat?). And with the continuing financial crisis, availability of sophisticated cash management products to smaller banks and the significant negative press around large banks, this gap in expectations is widening. In fact, the percentage of large bank small business customers describing themselves as 'extremely satisfied' with their primary institution has dropped from 50% in 2007 to 33% in 2009. This has led to a shift of small businesses considering a community bank to be their primary financial institution from 24% in April 2006 to 35% in April 2009.

According to Christine Barry from Aite Group, the low satisfaction rates and disappointing cross-sell ratios are due in large part to large bank's failure to properly segment the small business market, thereby improving the understanding of the market. Without adequate segmentation and research, it is difficult to provide a personalized experience based on the small business' unique needs.

Another challenge is that it is difficult to even identify all small businesses since as many as two-thirds don't have business banking accounts according to a 2009 Javelin Strategy & Research report. These relationships may pay lower fees by being handled in the consumer platform initially, but they are quickly underserved as they grow and their needs expand to include payroll, specialized lending and enhanced cash management services.

One of the responses to this need to better understand the underserved small business banking customer is a shift in reporting structure at some large banks from being handled through the retail or commercial side of the bank to being handled by a standalone small business unit, where specific offline and online products can be developed and needs adequately researched. Another response has been the introduction of new services for this segment including scaled down cash management services, invoicing and payroll services and personal/business financial management products.

To win in the small business banking competition, it will be imperative to segment small businesses beyond a size categorization that neglects industry or needs segmentation. Data collection will also need to be enhanced since the amount of public information is much less reliable for small businesses than for retail customers. Finally, there needs to be constant direct communication with small businesses to demonstrate the desire to serve this segment and to provide ongoing leads for a better trained sales force.

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