Banks and Small Business: Finding the “Just Right” Fit Isn’t Easy
Banks need business customers because business accounts provide more profitability than consumer accounts. By volume, there are more small businesses in the US than mid-size or enterprise businesses, which you would think would be a good thing for the banks – more business customers, right? It seems not so much.
For many banks, the problem is that they don’t appear to really know how to service – or even identify – these small business customers. The majority of small businesses in the US don’t have employees, so direct deposit and payroll solutions aren’t something they are looking for. Many of these small businesses operate from the business owner’s home rather than an office, and don’t generate the revenues (=deposits) that bigger businesses do.
To a bank, most small businesses look like consumers. These small businesses are treated like consumers – are offered consumer-level services and are not educated on what business banking services might be able to do for them. In reality, the banks really don’t have much to say to these small business owners, because the services offered by the banks are simply not a great fit. There are studies which suggest that the small business market is fairly evenly divided, with approximately 50% using consumer banking services rather than those designed for business use. Given the inability of the banks to even identify those consumer banking customers who are actually small businesses, I would suggest that the percentage is even higher.
There are three primary elements tied to banking which should be better-positioned to assist small business owners in leveraging their banking relationships to the benefit of the business and not just the bank. If the financial institutions can find a way to meet these three essential needs for smaller businesses, they would likely find that more small businesses would embrace business banking services, resulting in greater profitability for the bank.
Use of electronic payments services represents a growing trend in small businesses and needs to be better-addressed by the financial institutions rather than purely retail providers. Small businesses are increasingly using the Internet and online technologies to service their various business needs, and payments processing is among the top sellers. Providing SOLO/SOHO and other small businesses with the ability to process payments at any time and from anywhere has become a big driver for this type of solution. The popularity of Pay Pal, Intuit GoPayment and Square payment solutions is a testament to the need for such services in the small business market, yet the broadest use continues to be within retail providers rather than directly via the financial institutions.
Security and access controls to account and transaction information (frequently referred to as “entitlements” attached to business accounts) are hugely valuable for small businesses. Most small business owners engage bookkeeping or accounting professionals at some point, and the process of accounting for the business activities is improved dramatically when those professionals are able to access the information directly from the financial institution. Unfortunately, it is only with the more expensive business class accounts that most banks provide the means for account holders to grant access to account and/or transaction information for accountants and bookkeepers, financial advisors, etc. Allowing small businesses to benefit from this type of security and control of their accounts is tremendous, yet the overall costs of the associated business banking solutions are often simply too great for the small business to bear. The result is either a lack of privacy, security and control, where the business owner must grant unfettered access to account information to a 3rd party bookkeeper or accountant, or the business owner simply continues to pay for manual bookkeeping transaction entry.
Most small businesses operate on cash, and expense and cash management is essential to maintaining operations. Consumer banking solutions may offer limited capabilities for expense and cash reporting, but the services offered through many business banking portals would be far more beneficial for the business, reflecting trends and providing more insight relating to business financial activities and business behavior. Unfortunately, many of these services designed for business customers are oriented towards the larger organization, and are far too complicated or expensive to provide real value to the owner of a small business.
Small businesses fuel the economy, yet remain a largely untapped market in terms of business banking and other services. Small businesses run “under the radar” of many service providers because they have not reached the point where the obviously available business services (e.g, the more profitable banking solutions) seem attractive to them. Banks need to recognize that serving the small business customer well – providing the services which help small businesses grow into bigger businesses – is ultimately the key to acquiring new customers for whom the big banking solutions fit.
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