Jeff Judy

Jeff's Thoughts -August 10, 2016

Committed to Small Business?

Committed to Small Business?

In a recent article on BAI Banking Strategies, Charles Wendel wrote about small business avoidance. That is, he observed that many financial institutions advertise that they love small business customers, and then try to avoid working with them. Many of them find it difficult to generate the revenues they would like. Wendel went on to share a number of tips for success with the small business market.

My first reaction to Wendel's observation was to wonder why you would market yourself to a type of customer you do not intend to pursue! If you think you can't make money dealing with small businesses, I understand that. But it costs money to advertise, to create marketing materials aimed at any particular segment. If you are not going to book that business, don't spend part of your marketing budget pretending that you want to acquire these kinds of customers.

Some of Wendel's elements of success with small business customers fall into what I would call, "consumer plus." For instance, he notes that small businesses bring much larger deposits into the institution than do regular consumers.

And cross-selling opportunities can abound with this market. Many small business owners wear two customer hats: one for business products and services, and one as a relatively affluent consumer. Serving their business builds trust and loyalty that open the door to discussions of their consumer needs as well.

After all, we already treat small businesses as "consumer plus" in underwriting. It is somewhat ironic that the industry has been quick to embrace small business credit scoring -- which is mostly the application of consumer analysis models to bigger numbers -- while we have been slow to recognize the "consumer plus" opportunities small businesses bring us.

Still, there's a certain balance to be struck between extending other models to small business customers and dealing with them as a distinct market segment. The trick is to apply what fits both upstream and downstream, from consumers and from larger business customers, while recognizing some of the unique aspects of small business that require specialized attention.

On the one hand, small business owners don't respond very favorably to being treated as just "big consumers." Their business is part of their identity, and they want to feel respected for their success in overcoming the many challenges that come with running a business.

On the other hand, small business credit, especially, is more than "middle market made smaller." Taking the view that "business is business," regardless of size, is a sure path to frustration rather than enhanced revenue.

When you commit to marketing to small businesses, commit to the infrastructure to serve them. Designate staff to deal with small businesses, so you can concentrate the necessary training and skills to be effective. Make sure they thoroughly understand working with SBA. Reflect your small business philosophy in your policy and procedures.

Many institutions lose money on small businesses because they want to capture the opportunities without doing the necessary work. Small businesses overlap with smaller and larger customers in many ways ... but not in so many ways that you can get away with cutting corners.

If you are willing to make a serious commitment to putting all the parts in place to serve small businesses, you might be pleasantly surprised at what this segment can do for your institution.