Small Business Banking Changing Landscape

Abstract

NEW RESEARCH REPORT BY MERCATOR ADVISORY GROUP

Banks are realizing small businesses are a rich source of deposits and profits for banks. They represent the largest business segment with 27 million businesses. This report explores ways for banks to attract and protect their small business customers from aggressive banks and nonbank predators?

Small business market as defined by the SBA is businesses with less than 500 employees. However, a company with 5 employees looks and acts completely differently than a 400 employee company. To be successful in this space banks need to look closer. For example, Small Office and Home Office (SOHO) sometimes fall under the bank' s radar lost in retail banking. SOHO make up the vast majority of small business total, 19 million SOHO compared to 8 million small businesses.

SOHO businesses can be small doctor or dentist offices, an independent CPA, consultants, architects, or start-up companies just getting going. These businesses are very important to banks because their banking relationships haven' t matured. Identifying SOHO businesses is a key challenge since most operate with regular checking accounts. SOHO' s can easily be serviced at local bank branches. Banks should have the advantage in capturing the rest of their relationship. But like traditional small businesses SOHO' s are interested in reliable services that save time and money. As a small business matures they require more financial services making it difficult for them to leave the bank.

Industry segmentation enables banks to identify and concentrate on small business niche markets that provide the greatest paycheck. Some banks are customizing banking solutions for specific small business niche market segments. For example elective surgery can be very expensive. One way banks can help is by offering doctors a patient financing solution guaranteeing their payment and allows the patient a choice of payment plans, spreading payments over a period of time, 12 to 24 months. This makes the procedure affordable and doctors do not have to finance their patients.

The small business community is worried that the mortgage crisis will spill over to small business financing making it harder for their local banks to offer credit lines. For growing small businesses this means looking at alternative financing. Small business will be attracted to banking services like payroll help small business reduce operation costs by freeing up resources. Insurance products and affordable health benefits for employees help businesses during tight credit times.

Sarsha Adrian, Senior Research Analyst, in Mercator Advisory Group' s Corporate Banking practice and author of this report, comments; "the small business market is very diverse, to help understand small business this report breaks down the small business market by SOHO and businesses over 5 employees. Retiring baby boomers starting their second careers look to their banks for advice and services. Small medical or dental practices are another example of SOHO businesses that can develop into deposit relationships."

Table of Contents

1. INTRODUCTION

2. SMALL BUSINESS LANDSCAPE

3. SMALL BUSINESS ECONOMIC TRENDS

4. SMALL BUSINESS MARKET STRATEGIES

• DEPOSIT SHIFT

5. ATTRACTION STRATEGIES

• TRANSFER BUSINESS OWNERSHIP PROGRAM
• STARTUP BUSINESS PROGRAM
• SMALL BUSINESS DEPOSITS PROGRAM
• INDUSTRY TARGETED PRIVATE PROGRAMS
• AFFINITY MARKETING PROGRAMS
• CPA & CLIENT PROGRAM
• WOMEN OWNED BUSINESS PROGRAMS
• SBA PROGRAMS
• SMALL BUSINESS FLEXIBLE FINANCING
  • Payroll services for small businesses makes sense
  • Health Savings Accounts

6. CONCLUSION

List of Exhibits

• FIGURE 1. U.S. CENSUS 2004 SMALL BUSINESSES
• FIGURE 2. SMALL BUSINESS DEMOGRAPHICS
• FIGURE 3. INDUSTRY SEGMENTS REPRESENTED IN NFIB SURVEY
• FIGURE 4. NFIB SURVEY RECOGNIZED MOST IMPORTANT SMALL BUSINESS PROBLEM
• FIGURE 5. INDUSTRY SEGMENTATION CHART
• FIGURE 6. BEST OF BREED TARGET MARKET NICHE
• FIGURE 7. ING DIRECT BEST OF BREED DEPOSIT STRATEGY
• FIGURE 8. CHASE HEALTH ADVANCE
• FIGURE 9. BANKING FOR WOMEN OWNED BUSINESSES
• FIGURE 10. BANK OF RI SMALL BUSINESS FRIENDLY
• FIGURE 11. FLEXIBLE FINANCING FOR SMALL BUSINESS
• FIGURE 12. PNC SMALL BUSINESS PAYROLL