Small businesses play a vital role in the U.S. economy with almost 50% of workers employed by businesses with 20 or fewer employees. Yet economic uncertainty, persistent worker shortages, supply chain challenges, stubborn inflation, and concerns around bank stability following the rapid demise of Silicon Valley Bank, Signature, and First Republic has the confidence of small businesses at a 10-year low—all coming at a time when strong banking relationships are critical for small business success (if not outright survival).
On the banking side, the small business segment often represents 20-45% of a regional or community bank’s total deposits, positioning this segment as vital to most banks’ health—and yet, banks have historically struggled to serve the segment profitably and efficiently.
A constellation of problems commonly occurs throughout the management of this segment, including: developing product offerings that are not purpose-built; leveraging risk models, sales and servicing processes designed for larger commercial clients; relying on organizational models and decisioning designed for commercial clients; and utilizing disconnected and siloed enabling technologies.
The small business segment is neither a large commercial client nor a typical retail client, often rendering it an afterthought to most banks. The result? Increased costs and complexity to the bank and a poor experience on the part of the customer. This environment has also left the segment ripe for disruption by both the largest banks and fintechs.
Small businesses with less than 20 employees present incredibly valuable opportunities for banks—especially in the current market—as they generally provide consistent, granular deposits under the FDIC limit. They play a critical role in maintaining good deposit health and provide important diversification to minimize risks associated with holding uninsured deposits—all while demonstrating the bank’s importance in the local market. This reduces liquidity and concentration risk—not to mention creating lending and wealth management opportunities to the owners. By not focusing on serving small businesses more effectively (and digitally), banks are missing an opportunity to lend with lower risks than to other segments and reap the benefits that come with these clients.
While the current interest rate environment and concerns around bank stability have combined to create an incredibly tight lending market, small businesses continue to have credit needs. Small business owners tend to be sticky, reliable customers who look to banks for proactive advice and partnership as they steer their business’s future—both via traditional white glove service and increasingly through the digital channels we all access in our personal lives.
The challenge facing banks is that this segment and its customers are often being serviced via the same tools and processes as larger commercial clients, driving extensive manual reviews, document processing, and expensive operations that are unprofitable to operate at scale. The traditional division between commercial and retail has made serving small business customers inefficient, leading to either overly cumbersome processes and products being provided or ping-ponging between leaders and P&Ls trying to mix-and-match ineffectively, making the average small business experience the worst of both worlds.
Underscoring the complexity and challenges facing this segment is the generational transfer of wealth and business ownership. Effectively serving the small business segment now requires banks to address new expectations around what high quality service looks like for younger, digitally-forward small business clients. These changes also must be addressed by banks in the face of increased competition from the largest banking players who are seeking to commoditize the segment through extensive digital offerings, as well as legacy and emerging fintech competitors that operate with a digital-first mindset. The challenge cannot be understated.
Today, midmarket and regional banks fight for their small business clients by offering more distinct services delivered through extensive person-to-person contact, often resulting in an inefficient model that negates profits and forces business owners into interactions many don’t value or even want.
Small business customer expectations are rising and, moving forward, will seek even stronger digital experiences while seeking out less in-person banking—78% of small business owners say a completely digital banking service would improve their experience.
In addition, segment customers want digital products that are easy to use and priced for their business size. These products feature functionality such as tax prep or planning, autonomous tools for banking tasks such as bill pay, invoice management, payroll and tax preparation, integrated accounting software, business card management tools, and data integration for business insights and analytics.
By converting their historical relationship strength and local knowledge into a more digitally delivered model, however, regional banks can be well positioned to capitalize on immense opportunities to profitably grow small business share while increasing customer satisfaction and stickiness.
With more than 40% of small businesses owned by soon-to-be-retired individuals and ownership poised to transition to younger, digitally savvy owners, it’s time to make this shift.
Small business banking is ripe for disruption. Frequent shifts in accountability for the segment between Retail and Commercial, overly complex operating models and processes, and products and experiences not specifically designed for emerging owners all come to A head in reduced profitability for regional banks and unmet needs for customers. But the sands are shifting, and generational transitions coupled with digitization of bank experiences are colliding to bring the future of small-business banking into sharper focus.
Banks must take a step back and revise their strategy for serving the small business segment. Big banks and fintechs have been swarming the market, crowding it with still not-quite-there attempts. To get your organization to parity with those already winning, embracing a “best of both” operating model that combines the most suitable elements of retail and commercial banking to provide a premier, efficient customer experience fit for small business owners.
Bringing the commercial elements of digital white-glove service, industry expertise, deep product offerings to meet a variety of needs, and cloud integrated software to manage vendors and other elements to the table—combined with retail’s frictionless self-service, digital ecosystem, and automated lending and risk management—will pair small business owners’ greatest needs with the most efficient path toward meeting those needs.
Working toward this best-of operating model will get you to the table. But differentiating means going a step further to truly demonstrate how well you understand business owners and that you can meet their needs better than anyone else.
Once middle and back-office functions are optimized for small businesses, finding that point of differentiation to demonstrate how your bank is the best partner is critical to win the business. This competitive element requires your organization to embrace its DNA—the midmarket is fighting for smallmbusiness clients through personalized solutions. But this often results in an inefficient use of the model that negates profits.
Regional banks are positioned to leverage local strengths and capitalize on new opportunities to profitably grow small business share. While an element of white glove service is vital, the business needs to define relationships for the digital age with self-service elements and access to advice and people who understand their unique needs as a small business owner.
Building these relationships with the current owner and the next-generation owner enables you to best provide specialized advice for operating their businesses and managing their wealth—while creating that inter-generational and long-term partnership.
Small business is a market ripe for a digital operating model shift to enhance features, efficiency, and increase profit margin—while also helping mitigate risk through an increase of granular deposits. As banks embrace the shift from the traditional approach, they can win over these key customers and meet them where they are to provide that best-of solution and unlock potential for the next generation.