by Charles Wendel
Banks should view the small business segment as a critical bank franchise, one that provides sustainable growth and the opportunity to build a strong relationship that cuts across multiple products and client needs. Unfortunately, many banks are missing this opportunity by focusing too much attention on products with poor returns while failing to develop an organizational approach that can build strong relationships.
Banks need to consider eight issues in pursuing a small business strategy.
- It is not about the lending. Most small businesses do not borrow or borrow very infrequently. Within our clients’ small business portfolios, usually about 25-30 percent of customers borrow with the rest being deposit generators.
- It is all about the lending. Even though most customers do not borrow, those that view themselves with potential borrowing needs expect their bank to provide funding when necessary. However, in recent years most banks have narrowed their lending focus and are operating within a “credit box” that may exclude the majority of potential borrowers.This is one reason why banks should at least consider teaming up with an alternative lending company (AFC) that may be willing to provide a loan on a white label basis, allowing the bank to maintain control over the relationship. It is worth noting that those banks that do not want to pursue that path with an AFC may instead find they can cost effectively lever an AFC’s technology to provide a digital solution to the customer, one that can streamline internal processes and reduce operating costs.
- Two words: cross sell. When I stress the critical role of effective cross sell to bankers, I often think of the acronym MEGO: my eyes glaze over. I have seen bankers wince when I mention this topic, since for many executives it causes them to remember past failed attempts to work across organizational lines. Nonetheless, banks have to revisit this topic and turn past failures into future successes. On the consumer side Wells Fargo has long been known for the phrase, “Eight [products sold]is great.” The targeted number will differ at each bank based upon their product set and how they categorize them. However, we found one bank that prided itself on its relationship focus achieving a cross-sell ratio of only 1.7 products, well below industry best practices and dramatically below the bank’s own expectations.Cross-sell opportunities involve both business and personal needs. On the business side they can include loans, cash management, foreign exchange, among others in addition to a set of solutions aimed at the owner and, as appropriate, employees: deposits, loans, investments, retirement accounts, etc.
- Segmentation fosters success. Depending upon the definition, the number of U.S. small businesses can range from 5 million to 11 million to 30+ million. Each bank needs to define its small business focus for itself, based upon its capabilities, interests, and risk appetite, among other factors, Banks often segment based upon one or more elements such as industry, geography, product needs, or risk. Once determined, these criteria should serve as a checklist for bankers, focusing their marketing efforts and reducing the tendency to “throw a deal on the wall to see it if sticks.”
- Sales management practices must be rigorous and consistent. Too often, bankers in effect design their own jobs, determining how much time they will spend on sales and client development versus credit, administration, and other areas. Instead, management needs to design the bankers’ job so that they spend as much time as possible in front of the customer. If the banker is uncomfortable with a heavy emphasis on selling, he is the wrong person for the job. Banks, in particular community players, are often paternalistic institutions that are slow to replace poor performers. Increasingly, banks cannot afford to put the employee before the customer and the bank’s bottom line. Team leaders need both to coach and ensure that each banker follows the agreed to segmentation strategy, hits their calling goals and, ultimately, their sales hurdles. Both the team leader and the individual banker need to be held accountable for their performance.
- Compensation needs to change. If banks want to sell, they have to pay bankers to sell. Yet most compensation is salary-based, with relatively little differentiation in compensation paid to top performers versus mid-level players. This approach disincents the best performers and can result in turnover. Compensation seems to be a particularly sensitive topic and one that cost banks hesitate to tackle, although the potential benefits of doing so can be significant.
- Small business is a career not a rite of passage. I recently talked with a 20-year veteran of a major bank. He commented that his bank reorganized once every nine months with many players moving from one slot to another. Small business was one area in which top management changed regularly, making it difficult for the bank to operate with a consistent or even coherent approach to the segment. At too many banks, particularly but not only large ones, the head of small business is just stopping off in that area for a while on the way to another assignment. This indicates that bank management does not view small business as a major initiative, one in which its best people can build a career.
- Senior management needs to align words with actions. For a small business effort to succeed top management needs to “get it.” They need to understand the franchise value of this segment and the potentially strong economics that capturing the small business household (business and consumer) can generate for a bank. Without leadership and commitment at the to of the house, small business performance will continue to disappoint.
Banks are operating in an environment in which growth has become difficult to achieve and increased competition continues to threaten established areas for generating revenue. The small business segment remains an opportunity for a bank to build a sustainable franchise by serving a critical customer constituency. Focus, discipline, and commitment provide the keys to performance success.