By Libby Bierman
It’s no secret that the small and medium-sized business (SMB) lending market is highly competitive. The best businesses have a host of options when choosing financial partners, so banks have to put their best foot forward to win and retain these customers.
To compete and serve their borrowers well, banks must find a way to identify and understand the needs of their targeted segment. And they must have the right information to define their segmentation strategy.
Taking a page from a B2C approach.
Having recognized the importance of identifying their target markets’ needs, some B2C companies have taken “know your customer” to the next level. They send market researchers to their customers’ homes to watch them use the product: how they open the package, where they tend to store it, what friction points they have in using the product, etc.
All of this information—combined with data on how and why they buy—helps companies form the buyer persona, the framework they will use to make decisions on targeting and servicing that customer.
Translating that to SMB lending.
Of course, such an intense level of scrutiny may not be possible for bankers. But by gathering meaningful insights on the clients they serve, SMB bankers can become more effective in how they segment the market. And that will allow them to optimize the use of their time, including spending more time building relationships with existing and prospective borrowers.
Steven Martin, vice president at Sageworks, has observed, “Many bankers fall into the trap of using the same sales process with every one of their business clients. The more strategic banks recognize and tailor the sales process based on borrower needs and expectations.”
Martin explains that SMB bankers can use the following non-exhaustive list of questions for refining their SMB strategy:
- High-growth industries – Which industries in your footprint have the highest growth in revenue? These might be the businesses to target in future outreach.
- Spending and investment habits – What are the different reasons a business seeks financing? A borrower’s needs will be different when financing one-time equipment purchases versus intermittent cash flow needs.
- Historical loss experience – If your bank has served borrowers in the industry before, how did the loans perform? Was the loss rate higher or lower than average for your bank?
- Market rates – If your bank has a large or growing geographic footprint, how do loan pricing benchmarks compare for a given type of loan across different states? If you’re in South Carolina, for example, and looking to expand into North Carolina or Georgia, it’s worth noting that the average C&I loan originated in Georgia was an average of almost 70 basis points higher priced in 2017 than in North Carolina, according to data from Sageworks Loan Pricing.
- Customer lifetime value (CLV) for SMBs in different industries – Have you measured CLV for businesses in your footprint? This metric can help to refine who your most valuable SMB targets are. If your bank is using a pricing software today, it can help calculate this figure based on loan, deposit, and other fee-based interactions with the bank.
- Average turnaround time for SMB loans – Are you spending too much time for too little return? If the cost and resources associated with these loans are too high, this might mean your segmentation strategy includes a floor for loan size. For example, it may not be lucrative to make loans under $75,000 unless the institution invests in streamlining the process for efficiency.
Depending on your bank’s management information system (MIS), some of this reporting may be straightforward based on existing data sets. Other research questions may require more digging. But this information offers insight that can serve as a starting point for banks looking to refine or tighten their strategy for targeting SMB customers.
Libby Bierman is vice president of marketing at Sageworks, a financial information company that provides lending, credit risk and port