Banking on Small Business

Banks have singled out small businesses as their next profitable growth market and are aggressively introducing new products and services designed just for them.

By William George Shuster, Senior Editor -- JCK-Jewelers Circular Keystone, 1/1/2003

The relationship between banks and small businesses—including jewelers—isn't always easy. Many recall the recession of the early 1990s, when banks called in loans and tightened credit. Others believe banks consider small businesses second-rate compared with larger corporate clients. "Banks tend to treat jewelers as paupers who must sign every loan or credit request in blood, with liens on everything in sight," growled one Illinois jeweler in a recent JCK survey.

A number of banking people concur. Some banks "neglected small business and its needs in the past, putting their primary focus on consumers and corporate customers," notes Lou Portcelli, Internet banking manager for Whitney National Bank, a New Orleans-based bank chain serving the Southeast. Bill Reid, president of the Independent Community Banks Association (ICBA) Financial Services Corp., says that businesses with five or six employees traditionally have been "below the radar" of big banks and not targeted by them.

Now that's changing. Community, regional, and national banks are quickly adding or expanding services specifically for small businesses, such as fast loan approvals, unsecured credit up to $50,000, debit cards, online banking, cash management, help with 401(k) plans, even putting banking boutiques in office supply stores.

Competition. Why are banks now enthusiastically courting small businesses? Two big reasons are bottom-line pressures and competition in the financial services industry. "The industry wants new markets with growth potential," Keith Leggett, senior economist for the American Banking Association, told JCK. "Growth in the corporate sector is limited," he notes, especially with its ongoing consolidations and financial problems, plus big companies also have access to other capital and can bypass banks. "The U.S. small business market, on the other hand, is dynamic and a key driver of economic growth and employment."

James Schepker, vice president, small business, at Fleet Boston, a major Northeast U.S. bank, says, "Banks, especially large ones, are awakening to the opportunities and growth potential of small businesses. They have a stable credit base and growing revenues. There are millions of them. And they aren't tied to the Enrons of the world." Kent Stone, executive vice president at U.S. Bank, located throughout the Midwest and West, agrees. "In addition to being relatively immune to the woes of larger companies, small businesses are tough, strong, optimistic, and more adaptable to change" he notes.

Meanwhile, community banks are feeling pressure as larger banks—and also credit unions, insurance companies and brokerage firms—agressively target small businesses in their hometowns. "There are a lot more big banks trying to get into the small business services market," says Tom Cook, ICBA spokesman. "But small businesses are community banks' bread and butter, so they're stepping up to the plate with a wider range of products and services for them to solidly position themselves as their primary lender."

Technology. Rapidly evolving improvements in computer and Internet technology and more commercial software packages written specifically for small business are also important reasons for this new focus on small business. These make it easier and less expensive for large banks to offer services once available only to large clients, notes Taylor Vaughn, senior vice president at First Tennessee. Smaller banks, meanwhile, are able to offer a wider array of cash management services such as "sweep" accounts (daily transfers of business funds between checking and interest-bearing accounts).

At least 75% of all U.S. small businesses have access to the Internet, claims a 2001 report in Bank Marketing magazine, while a Jewelers of America estimate puts that figure at about 50% of retail jewelers. Not surprisingly, then, banking Web sites designed specifically for small businesses and offering an array of services and products just for them are proliferating. And more small businesses use them. A recent Consumer Banking Association report said those using online banking grew "significantly" in 2001—doubling in a year—to 12% of "micro-businesses" (less than five employees) and 35% of all small businesses (between five and 99 employees).

The big attraction is convenience. As one Canton, Ohio, jeweler recently told JCK, "We can follow our money hour by hour, at any time of day, aiding our cash flow and giving us a better handle on balances." And studies show businesses that use electronic banking are more loyal to and more involved with the banks providing it.

Many small-business owners, though, remain leery of electronic banking and still prefer doing business with their bank by phone or in person.

Reid says, "People my age [mid-50s] are reluctant to use the Web for business, but that's changing with the next generation. My kids think nothing of using it, and neither will theirs." Bank Marketing magazine estimates 50% of U.S. small businesses will be banking online by 2004. Banks—especially community ones—are hastening that by helping hesitant small-business clients "migrate to online accounts, showing them how to use the technology and integrate it" into their operations, says Cook.

Marketing. Since banks' courtship of small businesses is just beginning, many are still unaware of it. A recent JCK Retail Panel survey, for example, found only 18% knew whether their local bank or lender had added services for small businesses.

But this will change, say banking industry observers, as more of the country's 10,000 banks (90,000 outlets), both large and small, aggressively market to small firms. U.S. Bank, for example, with 2,133 outlets in 24 states in the Midwest and West, has started twice-a-year "small business blitzes," says Kent Stone. "The whole company focuses on developing new leads and contacting and working with as many small-business customers as possible." GreenPoint Bank, with 75 branches in greater New York City, is training some 200 bank employees to serve small-business customers. First Tennessee, with 200 outlets in Tennessee, Mississippi, and Arkansas, has set up "Business Reference Centers" in libraries in several cities, which give access to print and Web business and banking resources.

Most creative is a new alliance between FleetBoston, with 1,500 branches in the Northeast, and national office-supply retailer Staples Inc. A 150-sq.-ft. "Fleet Small Business Zone," located just inside Staples' entrance, is open six days a week.

Two trained specialists describe FleetBoston's "Small Business Package," including payroll service, credit, lending, and leasing programs; open accounts (including free checking); take loan and credit applications; and issue debit cards.

"Until now, we reached small business owners and managers online, by phone, and in brick-and-mortar environments," says FleetBoston's James Schepker. "At Staples, we're in immediate proximity to many more every day. And for them, it's convenient. They're coming to Staples anyway, so instead of an extra trip to the bank, they can stop at our module, talk about issues, and get answers right away."

So far, there are FSBZ's in 10 Staples stores in Massachusetts, New Jersey, and Pennsylvania. Whether more are opened depends on results over six months. "It's an experiment," Schepker told JCK, "but the response is very positive and generating new business for us."

Number of U.S. Small Businesses Through 2006

Year	5-9	10-19	20-49	50-99
	Number of Employees
2002	1,129,694	661,694	382,777	120,895
2003	1,173,573	687,867	392,347	123,918
2004	1,219,530	715,290	404,117	127,635
2005	1,267,675	744,029	418,261	131,784
2006	1,318,124	774,154	433,946	136,396
Source: In-Stat/MDR

An Array of Services

Credit and loans. Depending on the bank, a small business can now obtain unsecured loans up $50,000 (and at lower rates) and lines of credit up to $50,000 or even $100,000. Banking competition is a big reason. So is new technology.

New automated "credit scoring" systems let banks make quick decisions using databases of small business credit histories (including financials and personal characteristics of a business owner). Reducing the time, paperwork, procedures, and costs of small business lending and credit programs makes them more economically viable for the bank.

"The process is simplified to a single-page application and is also doable on the bank's Web site," says James Schepker, vice president, small business, for FleetBoston. "And the [review] time itself is greatly shortened, so small-business owners get approvals more quickly." The "Quick Credit" program for small business at U.S. Bank, for example, answers leasing requests in four hours, loans within 24 hours, and lines of credits within a day or two.

Getting carded. Two credit products offered through banks are catching on: small-business credit cards and debit cards. Small-business credit cards, says Keith Leggett, senior economist for the American Banking Association, are like regular credit cards. They're pre-approved lines of credit a small business can draw on anytime it needs to, rather than apply for loans. A debit card is used like a credit card for business transactions, but the money is deducted immediately from the operating account.

Account messaging. This service regularly updates small business customers about their accounts, usually by fax or e-mail. The "FYI Alerts" at Charter One Bank, located in Ohio, Illinois, Michigan, New York, Massachusetts, and Vermont, have just expanded to include mobile phones, pagers, and PDAs. "The messages are event-triggered and customized to what each small-business customer wants to know about his accounts, how he wants to get the Alerts, and even if Alerts should be forwarded, such as payroll information to his bookkeeper," says senior vice president Michael Dobbins.

Joint accounts. More banks, especially large ones, allow small companies to combine or link online business and personal accounts, enabling them to transfer money between accounts, view balances, and monitor activity.

Specialists. More banks now have staff trained specifically to work with small businesses and are adding dedicated phone lines for small-business owners to communicate with their relationship managers.

Digital imaging. This involves scanning and online posting for customer review of checks, deposit slips, and similar paperwork. "It makes it very easy for them to regularly review statements and checks, and reconcile accounts," says Taylor Vaughn, senior vice president of First Tennessee. "We still send their monthly statements, but now with the Web and imaging, they can check and reconcile accounts daily."

Paying bills via e-payment. This business-to-business feature enables small businesses to pay vendors online. "A jeweler sets up his vendor accounts online and provides the invoice number, when and how much to pay, and a discount, if any," says Lou Portcelli, Internet banking manager for Whitney National Bank, a southeastern bank chain based in New Orleans. "We process the information and send the payment from the jeweler's account to the vender electronically, if the vendor is 'e-bill enabled,' such as utility companies, or traditionally by mail if they're not." The program also can be set up to automatically make recurring monthly payments.

Payroll. More banks offer payroll services for small business or act as intermediaries for firms offering payroll services. These include processing payroll (i.e., calculating wages and deductions, preparing checks and employee earnings statements, maintaining necessary paperwork), timely filing of required tax reports, and direct deposits for employees. "The time a small-business owner, whether with one employee or 100, saves on payroll tasks can be used instead to run and build the business," says Stone of U.S. Bank.

Retirement and benefits. More regional and community banks are offering—or helping to choose, design, and administer—employee retirement plans for small businesses. The Economic Growth and Tax Relief Reconciliation Act of 2001 made retirement plans more attractive for small businesses—many of which have none—and encouraged more local banks to offer such services, says Bill Reid, president of the Independent Community Banks Association (ICBA) Financial Services Corp. The 2001 law lets a small business owner "put significant amounts of money aside in tax-deferred plans and make enough tax savings to pay for employee contributions to retirement plans," he says. It also has brought more big banks (and non-banks like insurers and brokerages) into the small-business market, using retirement plan management, says Reid, as "a door opener."

Banks also are offering small businesses other benefits for their workers, such as insurance and personal banking programs—including online accounts, free checking, and credit cards—at no cost to the business.

Check verification. This is in development, says ABA's Leggett. "It will let retailers immediately verify the credibility of a [customer's] check at the time of a transaction, much like they do now with credit cards, using bank-provided devices," he says, "rather than having the check bounce later, and the retailer bear the costs."

U.S. Small-Business Profile

There were roughly 2.3 million U.S. small businesses (with five to 99 employees) in 2002, up from 2.1 million in 2001. That figure represents about a fifth of all U.S. businesses, half of which have fewer than 10 employees, according to a July 2002 study on the U.S. small business market by In-Stat/MDR, a unit of Reed Business Information.

Despite the "challenging economic climate," says Kneko Burney, director of business infrastructure and services at the research firm, "the small business market continues to be one of the most dynamic and interesting market opportunities available today." By 2006, says In-Stat/MDR, the number of small business firms and organizations should rise to about 2.7 million (employing roughly 42 million workers), with "relatively strong [annual] growth rates of around 4%" through then.