Published in American Banker
Thursday, December 30, 2010
Retail banks should pay attention to small businesses, in view of the 2010 World Retail Banking Report that the segment contributes nearly 30% of their net banking income despite constituting less than 10% of the sampled banks' customer portfolios.
Lacking the substantial fee income paid by large corporate accounts, small businesses are an attractive yet tricky target. To squeeze more value out of these customers, banks are challenged by the paradox of meeting expanding customer needs while reducing support costs.
Large-business customers often require a team of relationship managers, specialists and sales executives to ensure that their needs are met, but the less complex demands and smaller revenues of small businesses do not justify this level of service.
Corporate online banking systems can cater to the small-business segment. The key, however, is selecting the right corporate online banking platform to tap and expand the small-business market potential by reducing day-to-day support costs but maintaining the agility to meet expanding customer needs — thereby securing customer loyalty and driving fee income.
In a myopic effort to avoid maintaining multiple systems, some banks try to take their consumer online banking product and stretch it to business; others try to take their large-business system and tame it down for small businesses.
The more strategic route, however, is to adopt a corporate online banking system designed from the outset to serve the needs of any business, small, midsize or large.
As a small-business customer's needs grow, a bank should simply activate options to essentially deliver a "new," yet familiar, product without forcing the customer to make a wholesale platform change.
Customers can grow with and further leverage the system organically and with minimal impact, which reduces the risk of their switching banks as they switch products.
The ability to grow with small-business customers' needs not only builds all-important loyalty but also consolidates traditionally separate banking products to reduce costs and increase cross- and up-selling.
An effective corporate online banking system should have the flexibility to segment and package branded products that respond to different small-business needs; these packages should be tailored not only to business size but also to business type.
To achieve this, a superset of online banking features and functions must be integrated into one platform — for example, simple ACH for doing payroll, reporting for cash management, electronic invoicing, Web-based ACH and wire payments, real-time balances and activities, trade finance and foreign exchange.
Using value-based pricing and offering only the precise functionality needed in these packages, banks can offer more streamlined products and enjoy additional fee opportunities as small-business customers grow and increase functionality options.
For example, a sole proprietor may be content with basic reporting, account transfer and bill functions, but a business with $1 million to $10 million in sales needs more advanced options, such as payments by check, ACH and wire; direct payroll deposit and the ability to make commercial loan payments and federal quarterly tax payments.
A larger small business may also want to take advantage of functionality that provides extensive payment and reporting options.
Despite its strategic potential, the small-business market also comes with risks embodied in its higher bankruptcy rate and general vulnerability in comparison to large enterprises. Though small businesses contribute 27% of retail net banking income, they account for 46% of total retail risk-weighted assets.
Credit risk related to payment systems has always been a substantial barrier to serving the small-business market.
Typically, traditional methods of managing risk involve slow and expensive credit approval methods that are difficult to justify considering the large number of small-business customers required for profitability. Effective corporate online banking systems include features such as prefunding modules that let banks secure a customer's available funds when ACH transactions are originated, thus eliminating the need for ACH credit approval.
Additional risk management features to look for include strict limits on the types of payments bank customers can make and dual-control features that enforce security within a small business by creating complementary roles between two users. For example, one user is in charge of creating transactions, and another must approve the transactions and release the funds.
Retail banks should take a hard look at how to profitably pursue and serve these relatively small-revenue accounts.
Tools such as an agile and integrated corporate online banking platform can help capture and retain these clients with low servicing costs, while also coaxing out their revenue potential through cross-sell and up-sell opportunities.
In turn, technologies such as corporate online banking can drive operational efficiencies in the small businesses themselves — such as payroll management, invoicing and cash management — to increase the customer's own stability and profitability. Though these small-business relationships do not provide the immediately satisfying gains of large-business clients, taking the long view, banks that build a small-business client portfolio can gain market share over time to generate significant increases in business as well as to strengthen these small businesses along the way.
Gareth Priest is vice president and general manager of product management at ACI Worldwide