Lending to Small Businesses – Impact on Bank’s Profitability
Report Description
Small businesses operating in the U.S. currently number at 29 million; and a major portion of these require financial solutions such as cash and credit management, trade financing, payroll processing, and treasury services. Banks that successfully targeted the small business segment have earned higher net interest margin (NIM) and return on assets (ROA).
Banks trying to gain a competitive edge and a bigger share of the small business markets have to be cognizant of various behavioral, economic, regulatory, and technological challenges. Banks also need to design their product portfolio to match the specific requirements of small businesses and also determine the best channel to deliver their products.
Bankers are focusing on direct marketing t o meet the high financial challenges, i.e. the cost of serving small business owners . Acknowledging that the cost of serving new customers is almost 10 times the cost of serving existing customers, most small business bankers are now involved in up-selling and cross-selling of services to existing customers. The current economic environment has changed the landscape for small businesses. Banks also need to provide them the right product at attractive cost, and learn how to evolve their risk profile to accommodate a wider audience.
‘U.S. Small Business Banking Trends’ is a study of small businesses using banking products and the changing trends in small business banking. The study is designed to provide insights on the behavioral aspects of the small businesses towards the banking products offered by large as well as small banks.
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Strategy formulation
T his section seeks to provide a schematic of the marketplace under study; and to enable t he report user to determine their competitiveness and positioning in the market. Through our in-depth understanding of the financial services industry, we size the market, identify the trends and drivers, and develop the right framework for strategy formulation to help users maintain or enhance their market position.
Business Model
T his section seeks to identify the already existing business models; and to optimize these models in order to help FIs enter new and lucrative markets.
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Th is section seeks to profile the companies supporting the market under study. We profile the top vendors and analyze user perspectives to help you make the best decision for your financial institution. Every report includes in- depth reviews of the top vendors.
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Key questions answered
- How is the landscape of small business banking industry changing?
- What is the right channel or mix of channels that will drive conversion?
- Can the message position your offer better than your competition? How can the message help you keep existing customers and acquire new customers?
- Is there a vertical, demographic, or workflow benefit trait that identifies the small business owner as a potential customer? For example, one such construct may be on customer value and financial value.
- What process does the small business owner go through for selecting a banking product? Our unique process determines the trigger points to help you close every sale.
- Who are the industry leaders and what are they doing to retain their position?
- What are the major drivers and opportunities in the market?
- What is the competitive outlook, what are the major tools and services, who are the major players in the market segments?
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Lending to Small Businesses in U.S. – Impact on Bank’s Profitability
The U.S. has around 27 million small businesses, which collectively represent 99.7% of the total business establishments in the country. Banks focused on small businesses lending have performed better than peers in terms of profitability, return on assets, and return on equity.
Our research indicates that the net interest margin (NIM) of banks lending to small businesses tends to be 3-4 times higher than that of banks neglecting this segment. Large banks (i.e. those with asset size above $50 billion) have thus already begun tapping the opportunities in this segment, increasing their market share in small business lending from 51% in 2006 to 55% in 2008.
Deposits and loans form the most profitable of all bank offerings for small businesses. Banks are increasing their focus on deposits as these contribute 60%-70% to the small business banking unit’s profitability; and also help develop customer retention.
More than 44% small businesses use credit cards to meet their cash flow requirements. Following the increased use of credit cards among small businesses, leading banks have started offering 4 to 12 credit cards variants to improve their shares in small business banking market. Banks are also offering customized business credit cards to satisfy the needs of small businesses.
Bundling various banking products for small businesses also helps improve customer retention and deposits by enabling banks to act as an end-to-end provider of financial solutions. Banks are thus bundling high-demand products such as small business checking accounts and current accounts with low-demand products such as business insurance and payroll products and services.
The recent economic crisis limited the availability of loans/credit to small business owners, with leading banks such as Wells Fargo, Bank of America, and JP Morgan Chase witnessing a decline in small business lending in 2008 and 2009. However, these banks are now experiencing a sudden increase in the amount of loans for small businesses. Wells Fargo for instance lent $2.9 billion in new loans to small businesses in the first quarter of 2010.
However, the increasing failure rate of small businesses forms a key concern. The failure rate of SBA (small business administration) loans is also on a rise, increasing from 8.4% in 2007 to 12% in 2009. Our research indicates that banks can successfully address these issues by working along the four parameters, namely redefining role of lending officer, centralizing operations, implementing credit risk management systems, and using business intelligence/analysis tools.
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TABLE OF CONTENTS
EXECUTIVE SUMMARY
SEGMENTING THE SMALL BUSINESS MARKET
FOCUS ON DEPOSITS TO IMPROVE CUSTOMERDEFINED.
STRATEGIES TO IMPROVE DEPOSITS
BETTER PERFORMANCE OF BANKS FOCUSED ON SMALL BUSINESSES LENDING
STRATEGIES TO IMPROVE LENDING ERROR! BOOKMARK NOT DEFINED.
CREATING SUCCESSFUL BUSINESS MODEL FOR SMALL BUSINESS BANKING
1 INTRODUCTION
1.1 REPORT PURPOSE
1.1.1 REPORT CATALYST
1.2 REPORT STRUCTURE
1.3 RESEARCH OBJECTIVES
1.4 RESEARCH METHODOLOGY
2 DEFINING SMALL BUSINESSES
2.1 KEY FINDINGS ERROR! BOOKMARK
2.2 U.S. SMALL BUSINESS MARKET
2.3 DEMOGRAPHICS
2.3.1 BY ETHNICITY
2.3.2 BY GENDER
2.4 GEOGRAPHY
2.5 NUMBER OF EMPLOYEES
2.6 INDUSTRY
3 STRATEGY FORMULATION
3.1 KEY FINDINGS
3.2 BANKING NEEDS OF SMALL BUSINESSES
3.3 BANK STRATEGIES FOR SMALL BUSINESS NEEDS
3.4 CHALLENGES IN SERVING SMALL BUSINESSES
3.5 SMALL BUSINESS BANKING STRATEGIES
3.5.1 DEPOSIT PRODUCTS
3.5.2 STRATEGIES FOR ATTRACTING DEPOSITS
3.5.2.1 Simplified and innovative product set
3.5.2.2 Emphasis on product packaging
3.5.2.3 Competitive pricing for deposits
3.5.3 LENDING
3.5.3.1 Credit card products
3.5.4 OPERATIONAL STRATEGIES
3.5.4.1 Centralizing process to reduce operational costs
3.5.4.2 Segmenting strategies
3.6 SMALL BUSINESS SPENDING ON FINANCIAL PRODUCTS AND SERVICES
3.7 WINNING MODEL FOR SMALL BUSINESS BANKING
3.8 LENDING TO SMALL BUSINESSES
3.8.1 NIM, ROA AND ROE COMPARISON
3.8.2 BENCHMARKING LENDERS
3.8.2.1 Banks with asset size of more than $50 billion
3.8.2.2 Banks with asset size of $10 billion-$50 billion
3.8.2.3 Banks with asset size of $1 billion - $10 billion
4 KEY TRENDS IMPACTING DEMAND OF SMALL BUSINESS BANKING PRODUCTS
4.1 KEY FINDINGS
4.2 TRENDS SUPPORTING SMALL BUSINESS BANKING
4.2.1 99.7% OF BUSINESSES ARE SMALL & MEDIUM ENTERPRISES
4.2.2 IMPROVING ECONOMY TO HAVE A POSITIVE IMPACT
4.2.2.1 Increasing small business confidence index
4.2.2.2 Increased sales and profit expectations of small businesses
4.2.3 INCREASING GOVERNMENT SUPPORT TO IMPROVE CREDIT AVAILABILITY
4.2.4 GREATER SCOPE FOR UP-SELLING AND CROSS-SELLINGDEFINED.
4.2.5 INCREASING ADOPTION OF TECHNOLOGY AMONG SMALL BUSINESS OWNERS
4.2.6 UNDERBANKED SMALL BUSINESSES EMERGING TARGET FOR BANKS
4.2.7 SMALL BUSINESS LENDING EXPECTED TO INCREASE IN 2010
4.3 RESTRAINTS IN SMALL BUSINESS BANKING
4.3.1 INCREASINGS FAILURE RATE OF SMALL BUSINESSES
4.3.2 RISING TRENDS IN SMALL BUSINESS LOAN DEFAULT RATE
4.3.3 BREAKDOWN OF THE FINANCIAL MARKET
5 CASE STUDIES
5.1 KEY FINDINGS
5.2 WELLS FARGO
5.2.1 CHALLENGES IN LENDING TO SMALL BUSINESSES
5.2.2 STRATEGIES ADOPTED TO ADDRESS CHALLENGES
5.2.2.1 Segmenting the small business market
5.2.2.2 Identifying the target segment
5.2.2.3 Reaching the target segment
5.2.2.4 Community and relationship based lending for minority businesses
5.2.2.5 Developing a credit scoring model for small business lending
5.2.3 LENDING TO SMALL BUSINESSES DOUBLED IN FOUR YEARS
5.2.4 DEVELOPMENTS THAT HELPED INCREASE SMALL BUSINESS LENDING
5.2.5 CONCLUSION
5.3 SAFE CREDIT UNION
5.3.1 OBSACLES IN SAFE’S GROWTH PLAN
5.3.2 STRATEGIES TO OVERCOME THE CHALLENGES
5.3.3 ONLINE FINANCIAL MANAGEMENT SOLUTION
5.3.4 SAFE SELECTS FINANCE WORKS FROM DIGITAL INSIGHT
5.3.5 MEASURABLE OUTCOMES
5.3.6 CONCLUSION
6 VENDOR ANALYSIS
6.1 INTRODUCTION
6.2 ONLINE FINANCIAL MANAGEMENT BANKING TOOLS
6.3 KEY FEATURES
6.4 VENDOR BENCHMARKING
6.4.1 FUNCTIONAL BENCHMARKING
6.4.2 MARKET BENCHMARKING
6.4.3 COMMERCIAL BENCHMARKING
6.5 VENDOR PROFILING
6.5.1 INTUIT INC.
6.5.2 FISERV
6.5.2.1 Products and services
6.5.2.2 Recent developments
6.5.3 JWAALA
6.5.3.1 Products and services
6.5.3.2 Recent Developments
6.5.4 HARLAND FINANCIAL SOLUTIONS
6.5.4.1 Products and services
6.5.4.2 Recent developments
6.5.5 SI SOLUTIONS
6.5.5.1 Products and services
6.5.5.2 Recent Developments
6.5.6 YODLEE
6.5.6.1 Products and services
6.5.6.2 Recent developments
LIST OF TABLES
TABLE 1 BANKS AND DEVELOPMENTS
TABLE 2 BANKS AND PRODUCT BUNDLING
TABLE 3 BANKS AND NEW DEVELOPMENTS
TABLE 4 OPERATIONAL CHANGES INTRODUCED FOR IMPROVING SMALL BUSINESS LENDING
TABLE 5 COST COMPARISON FOR VARIOUS BANKING CHANNELS
TABLE 6 SOLUTIONS OFFERED BY KEY VENDORS
TABLE 7 FUNCTIONAL BENCHMARKING: ONLINE FINANCIAL MANAGEMENT TOOLS
TABLE 8 VENDOR SCORE: ONLINE FINANCIAL MANAGEMENT TOOLS
TABLE 9 COMMERCIAL BENCHMARKING: ONLINE FINANCIAL MANAGEMENT SOLUTIONS
TABLE 10 RECENT DEVELOPMENTS (2007-2010)
TABLE 11 RECENT DEVELOPMENTS (2007-2010)
TABLE 12 RECENT DEVELOPMENTS (2007-2010)
TABLE 13 RECENT DEVELOPMENTS (2007-2010)
LIST OF FIGURES
FIGURE 1 GROWTH OF SMALL BUSINESSES (MINORITY & NON MINORITY)
FIGURE 2 MINORITY OWNED BUSINESSES IN 2002
FIGURE 3 ARC LOANS TO SMALL BUSINESS OWNERS
FIGURE 4 GENDER BASED CLASSIFICATION OF SMALL BUSINESSES (2002)
FIGURE 5 GEOGRAPHICAL DISTRIBUTION OF SMALL BUSINESSES
FIGURE 6 MAJORITY OF SMALL BUSINESSES HAVE LESS THAN 10 EMPLOYEES (2007)
FIGURE 7 SMALL BUSINESSES SEGMENTATION BY INDUSTRY (2007)
FIGURE 8 SMALL BUSINESS BANKING PRODUCT NEEDS OVER THE BUSINESS LIFECYCLE
FIGURE 9 CHALLENGES FACED BY SMALL BUSINESS OWNERS DURING ECONOMIC CRISES
FIGURE 10 CURRENT CHALLENGES FACED BY SMALL BUSINESSES
FIGURE 11 KEY CHALLENGES & STRATEGIES
FIGURE 12 ADOPTION OF VARIOUS SMALL BUSINESS DEPOSIT PRODUCTS
FIGURE 13 USAGE TREND OF LENDING SOURCES AMONG SMALL BUSINESSES
FIGURE 14 IMPACT OF CENTRALIZATION OF PROCESSES ON CUSTOMER CONTACT TIME
FIGURE 15 SMALL BUSINESS SPENDING ON FINANCIAL PRODUCTS & SERVICES
FIGURE 16 WINNING MODEL FOR SMALL BUSINESS BANKING
FIGURE 17 SMALL BUSINESS LENDING SHARE, BY ASSET SIZE
FIGURE 18 NIM, ROA AND ROE COMPARISON FOR SMALL BUSINESS BANKS (2007)
FIGURE 19 BENCHMARKING LARGE LENDERS ON THE BASIS OF SMALL BUSINESS LENDING (ASSET SIZE > $50 BILLION)
FIGURE 20 BENCHMARKING MID SIZE LENDERS ON THE BASIS OF SMALL BUSINESS LENDING (ASSET SIZE $10 BILLION - $50 BILLION)
FIGURE 21 BENCHMARKING SMALL LENDERS ON THE BASIS OF SMALL BUSINESS LENDING (ASSET SIZE $1 BILLION - $10 BILLION)
FIGURE 22 SMALL BUSINESS GROWTH TRENDS
FIGURE 23 SMALL BUSINESS CONFIDENCE INDEX
FIGURE 24 SALES AND PROFIT EXPECTATIONS OF SMALL BUSINESSES
FIGURE 25 CROSS-SELL RATIO
FIGURE 26 UNDERBANKED SMALL BUSINESSES
FIGURE 27 SMALL BUSINESS BANKRUPTCY RATE
FIGURE 28 7(A) AND 504 LOAN APPROVAL TRENDS
FIGURE 29 MAPPING WELLS FARGO PERFORMANCE AGAINST INDUSTRY PERFORMANCE
FIGURE 30 COMPARISON OF VENDORS ON THE BASIS OF NUMBER OF CLIENTS
Growth opportunities and latent adjacency in Lending to Small Businesses