Banking on Small Business

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
Source: In-Stat/MDR
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