As the small-business segment rebounds, a digital-forward delivery model is within reach for banks
As the U.S. economy continues to re-open and outlooks brighten, even small business owners—one of the hardest hit groups of the pandemic—appear increasingly optimistic. In a recent report by Bank of America, 60% of small business owners indicated they’re expecting revenue growth in 2021. Coupled with that outlook is what’s poised to be one of the most impactful effects of the pandemic on American life: the accelerated adoption of digital interactions and digital experiences across all industries and services.
What does this combination of rebounding small businesses and digital-forward customers mean for banks?
Financial institutions of all stripes historically have struggled with ways to profitably meet the needs of small business customers. Caught between products designed for commercial customers and the need to deliver them at a scale more aligned to retail banking, financial institutions have struggled with how to efficiently meet the needs of the small business segment in a way that works for both. Poorly conceived product offerings, mismatched operating models, and disconnected legacy technologies have all served to make small business delivery inefficient. Throw in credit policy, procedures, and pricing strategies designed for large commercial customers and it’s no wonder that many financial institutions consider serving small businesses a losing proposition.
Against this backdrop, however, is the chance for banks to capitalize on increasing digital adoption by small business owners and the increasing availability of flexible digital technologies. Banks have the opportunity to rethink the small business segment by carving out a specialized team specifically focused on the working off of a quick-to-deploy “bank-in-a-box” technology stack and operating model specifically designed to meet the unique needs of the small business segment.
By exclusively focusing on this historically underappreciated and underserved segment, a digitally enabled small business segment is setting banks up to create a new segment for growth where previously there were thin margins and limited upside.
A combination of increased digital expectations, automatability of low-value activities, improved integration of required systems, and high availability of potential customers all indicate an emerging opportunity for financial institutions to simultaneously provide small business customers with exactly the service they are looking for, while aggressively managing down the cost to serve.
The small business segment is undergoing rapid generational turnover as waves of owners are retiring and handing off to digitally-native Millennials and Generation Z leaders that expect instant, convenient self-service options. This effect was compounded by the rapid digitally-enabled delivery of large sums of PPP loans that created new expectations of what is possible in small business credit delivery for both customers and banks.
Many of the processes that historically made serving small businesses cumbersome and costly can now be fully automated, including application processing, CIP/KYC, approvals, loan and credit card fulfillment, streamlined monitoring, and renewals.
Best-in-class small business customer engagement applications can now be seamlessly combined with shared technologies, data and analytics tools, and legacy Core Accounting Systems to create an off-the-shelf, "Bank-in-a-Box" solution:
Larger financial institutions including Capital One, Chase and American Express that have invested heavily in digital for decades are leveraging their digital capabilities down-market to efficiently serve core loan and card offerings to the small business segment. At the same time, emerging and established FinTechs such as Fundbox and BlueVine are disrupting the space with digitally-native funding options. Institutions without digital capabilities may not be able to fully compensate simply by leaning heavily on historic strengths in high-touch community relationships.
The pandemic has dramatically changed how we do business as a society and has created a high degree of churn in the market as customers find new providers that best meet their needs. This effect has been keenly felt in small business banking as thousands of small businesses sought new banking providers to rapidly secure limited PPP funding.
Building a focused small business segment supported by dedicated resources, an optimized end-to-end process, and right-sized technology can move the needle not only with bottom line profitability but also by providing greatly improved customer experience. Three key metrics that a thoughtfully constructed Small Business segment can enhance include:
Commercial lending origination processes designed to treat every business loan request the same needlessly slow the decisioning, closing, and funding processes for small business loans and cards. Institutions that develop operating models with customer-focused technologies can develop a credit delivery process aligning risk with speed. The result is a differentiated customer experience that efficiently assesses risk and right-sizes the effort needed to serve the small business segment.
The cost to originate and service loans and cards for small business customers can be prohibitive in what is a narrow margin business segment. Applying customer service and loan monitoring techniques appropriate for larger businesses makes achieving profitability difficult. A Small Business segment supported by the right automation technology can efficiently manage an exponentially larger portfolio significantly reducing the cost of service.
There is significant customer experience upside in the rapid delivery of small business products via bankers that are focused exclusively on the segment. Small businesses appreciate streamlined processes that allow them to quickly obtain information, quotes, and ultimately capital to support their business needs. These businesses recognize and appreciate a financial partner that values their time, addresses their specific needs, and meets them where they are digitally.
Applying sales strategies, operating models, and supporting technologies designed for middler market customers to the small business segment is not a profitable strategy. Banks must focus on the unique needs of small businesses and design an end-to-end service delivery model tailored to their needs.
Successful delivery of products and services tailored to small businesses requires a thoughtfully designed operating model streamlined to fit the needs of customers in this segment. This model requires bankers that understand small businesses and how to orchestrate the right mixture of high touch advisory engagement with no-touch automation and speed. These team members will need to be driven by an appropriate incentive structure designed to optimize behavior and supported by technology providing the automated digital delivery of exceptional customer experiences.
Lending, deposit, card, cash management, payment, and treasury services should be specifically designed and bundled to meet the unique needs of small businesses without overcomplicating setup or pricing.
Small Business Customers expect to be able to interact and transact through multiple channels (online banking, mobile banking, portals, digital payments, chat, etc.), and will seek out a bank that can meet them on the go while also being available to sit across the table and think through critical credit decisions.
To maximize digital investments in this segment, tailor solutions to niche markets that are of strategic importance to the institution. Striving to “be everything to everyone” risks commoditizing the small business offering back into a low-profitability space rife with competitors. Successful institutions will find their own unique value proposition and leverage digital investments both offensively and defensively to hold and expand their market position.
The promise of online applications must be backed up by technology that ensures requested products and services can be fulfilled in a streamlined, efficient manner.
Small Business focused applications should be seamlessly integrated with core enterprise applications to drive efficiency, leverage data and reduce manual work.
Risk adjusted policies should be established to automate approvals, streamline monitoring (covenants, tracking items, reviews, renewals, modifications, etc.), and ease the compliance burden on Small Business Segment relationships.
The time is now. Small businesses that survive the pandemic will have endured a stress test unlike any conceived by the most conservative underwriting scenarios. With their business models fully tested, small businesses will be looking for reliable financial partners with products, services, and delivery models aligned to their needs.
The time is now to design the experience, build the operating model, and align the technology, process, and team structures needed to focus exclusively on the small business segment.
The demand is substantial, the digital tools are available, and the opportunity to profitably serve small businesses has never been more real.
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