Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewdemystifying business banking
Business banking, the undefined line of business that falls between corporate banking and commercial banking on the one hand, and consumer loans on the other, is an unsolved mystery for most banks. We intuitively know that this business should fit well within the branch network. We know that it is a perfect candidate to leveraging the brick-and-mortar, as well as the human capital, embedded in those branches. Yet so few have successfully come up with the magic formula to achieve this elusive goal: serving small business needs, both credit and deposits, from the branch base.
The reason why so many banks ponder this question is obvious: the highest profitability tier of the small business segment (businesses with sales under $5 million, loans under $500,000) is four times more profitable than the most profitable retail customer segment ($4,000 vs. $1,000 average profitability). In one bank, which is representative of the industry average, the lowest profit tier of small business represents profits under $500, while the consumer side is at $180. With such attractive statistics, driven primarily by high average deposit balances, the small business segment is indeed a winner.
This is especially true in today's deposit starved environment that so many banks experience. The average small business deposit account balance is at $20,000, as compared with the typical free checking balance of $1,500 at best.
Conversely, both underwriting and servicing small loans are very costly to administer if you use traditional underwriting methods and the same standards for loan servicing as you do for larger loans. Figuring out how to underwrite, service, maintain and build the relationship with small businesses is the question most of us are facing.
As you revisit your approach to serving the small business market, consider the following elements:
Large banks offer small business services in a mass marketing mode. They often solicit by mail large numbers of prospects, underwrite them like unsecured personal loans using credit scoring models, and service them through remotely located phone banks. SuperCommuntiy banks cannot compete effectively with the mega-banks on the playing field, since they do not enjoy the scale these large banks can bring to bear, nor do they have the resources necessary to effectively build a small business underwriting scorecard and to revise it through continuous learning. SuperCommunity Banks needs to identify an approach to this market segment that will allow them to achieve a competitive advantage. Given their relationship orientation to the customer, vs. the transaction-based mass marketing approach described above, it is appealing to offer relationship banking and needs-based selling to the small business marketplace as a way to enter and expand such relationships beyond what the large banks can do.
The differentiation SuperCommunity Banks can offer centers on bringing relationship banking to the market while executing it efficiently by leveraging the branch resources. The model that works best for many community banks calls for an integrated approach of several sales forces: the branch, the business banker and, often, the private banker or financial planner, to offer a full service solution to the small business owner, business and its employees. As a generalist with the broadest product knowledge, the branch manager is the quarterback of the relationship, the business banker is the technical expert on the lending side, and the private banker offers the investment and wealth management specialty. Others, such as the cash management or merchant services sales forces, can be brought to bear as well, but the three legs of the stool to the small business solution are the branch, business and wealth management specialists.
This high cost model fits SuperCommunity banking, but it works only if revenues match and exceed the cost base. It is a high cost, high revenue strategy that demands teamwork and superior production on the part of all three sales forces, and its execution is tricky, as all silo-breaking strategies are.
Serving the small business market in a relationship-based model requires four basic skill sets:
These skills must be resident within all three sales forces for this strategy to succeed. The sales forces must be proficient not only in their own technical realm but also in effective needs-based sales execution, while working in a team environment to meet the full range of customer needs. The belief underlying this approach is that selling is, in fact, identifying and meeting the needs of the clients. The challenge is to ensure consistent, high quality execution through prescribing leading and lagging activities. An example of a set of leading activities includes:
Requiring each sales force to conduct 10 quality sales calls per week
Expecting 10 quality prospects identified each quarter
Conducting a weekly meeting of the branch manager, business banker and financial consultant to ensure they coordinate their effort and fully serve the customers
All sales forces should use the same nomenclature and sales approach to their clients, to facilitate consistency of the customer experience, a cornerstone in the success of relationship management.
The sales forces should work to identify the prospect's situation across the four major financial needs:
Together they have the requisite composite of technical expertise to address all these needs.
Relationship management for businesses can have many objectives. Typical examples include:
An effective sales process calls for both leading and lagging indicators that are measured, tracked, reported, celebrated and rewarded. An example of such indicators and other elements of the activities of all three sales forces is provided below.
Successful business bankers can grow their portfolio about 30% a year. Portfolio size is typically 60-90 relationships of the top tier customers for the business banker and 60-90 relationships for the second tier for the branch manager.
Some business bankers are better baby sitters than hunters, and those should have a place in your organization as well, with adjusted portfolio growth expectations focused upon retention success and lowered rewards.
All goals should be NET growth goals to ensure that enough attention is paid to retention.
Incentives for portfolio transfers and mentoring should also be put in place such that superstar business bankers will have the motivation to groom junior officers and transfer some of their relationships to up-and-comers.
Incentives motivate behavior if the definition of success and the path to earning money are both clear upfront. Effective business banking incentives often have the following characteristics:
There are several other tips that make a positive difference in the business banking initiative. While very tactical, they are also most effective.
All metrics should be done weekly and vs. goal.
In sum, small business is an underserved, highly profitable market. You should get your fair share of that market. The best way to get there is by: