winning small business customers an integrated branch

RESEARCH

Executive Research Report APRIL 2013

Inside:• Centerpiece of the Relationship: The Branch

• Share of Wallet Opportunity

• Focus on Customer Interaction and Personal Service

• Customized Support Services

• Willingness to Consolidate

• Uncovering Opportunity: Loans for Small Businesses

• Mastering Customer Interaction: ARGO Case Study

Winning Small Business Customers An Integrated Branch-Centric Approach

BASED ON INSIGHTS FROM THE

BAI Research Study: Small Business Demand for Banking Services

SPONSORED BY

TA B L E O F C O N T E N T S

E X E C U T I V E S U M M A R Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 3

S M A L L B U S I N E S S P R O F I L E : S T U D Y PA R T I C I PA N T S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 4

B A N K E X E C U T I V E P E R S P E C T I V E : W H E R E S M A L L B U S I N E S S E S B A N K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 5

C E N T E R P I E C E O F T H E R E L AT I O N S H I P : T H E B R A N C H . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 6

D R I L L D O W N : C U S T O M E R S AT I S F A C T I O N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 7

R O O M F O R I M P R O V E M E N T: S H A R E O F W A L L E T O P P O R T U N I T Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 8

M A R K E T D I F F E R E N T I AT O R : F O C U S O N C U S T O M E R I N T E R A C T I O N

A N D P E R S O N A L S E R V I C E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 9

D O O R O P E N E R : C U S T O M I Z E D S U P P O R T S E R V I C E S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0

W I L L I N G N E S S T O C O N S O L I D AT E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1

U N C O V E R I N G O P P O R T U N I T Y: L O A N S F O R S M A L L B U S I N E S S E S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2

T R E N D S A N D TA K E - A W AY S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3

S T U D Y M E T H O D O L O G Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3

A R G O C A S E S T U D Y: G E N E R AT I N G B U S I N E S S L O A N A P P L I C AT I O N S

T H R O U G H T H E B R A N C H N E T W O R K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4

BAI is pleased to present findings and analysis on a recently completed study of small businesses and their financial needs and activities, sponsored by ARGO. The research and actionable insights presented in this report will help bank executives identify opportunities for building new small business relationships while preserving and expanding existing ones.

Inside the Minds of Small Business Owners

This recently completed study uncovers crucial preferences, attitudes and trends for bank executives to be aware of as they shape strategies to expand and more effectively serve the small business segment.

B A N K E X E C U T I V E P E R S P E C T I V E

RESEARCH

PAGE 3

As financial institutions look to create deeper and sustainable relationships with potentially profitable customer segments, small businesses are receiving increased attention. In fact, the top business strategy for banks in 2013 is loan growth, specifically targeting small business owners for loans, as revealed in insights from the 2012 BAI Solutions Demand Pulse research study of retail banking executives.

Yet, how well do institutions know the small business segment, and what these customers want and expect when it comes to banking services? While bank executives and small businesses generally agree on what financial institutions are good at providing, there is room for improvement. There are still several disconnects between bankers’ and small businesses’ views in crucial areas – from the loan products being offered to giving advice and helping manage cash flow. To better understand the drivers of these disconnects and other key issues, in late 2012, BAI Research launched the study: Small Business Demand for Banking Services. The research uncovered crucial preferences, attitudes and trends that bank executives need to be aware of as they shape strategies to expand and more effectively serve the small business segment.

E X E C U T I V E S U M M A R Y

• Conduct 60% to 70% of banking activities in the branch

• Prefer in-person or phone conversations with their bank

• Strongly prefer paper checks to any other payment method

• Desire lower cost methods for low volume remote deposit capture as well as for bank emails of daily EFT and ACH activity

• Are loyal to their primary financial institution — generally working with only one or two institutions

• Agree by a majority that personal service is more important than financial expertise

• Are not very impressed with their financial institution’s performance on additional support services, such as giving advice and helping manage cash flow

• ...And less than 20% say their primary financial institution proactively recommends financial solutions

The BAI Research Study: Small Business Demand for Banking Services, sponsored by ARGO, revealed that the small businesses surveyed:

Winning Small Business Customers: An Integrated, Branch-Centric Approach

When asked about where their institutions will allocate the most investment dollars over the next 12 to 24 months, bank executives cited asset growth and quality along with technology upgrades. Furthermore, these institutions plan to improve asset growth and quality through the acquisition of new, high quality customers and focused efforts on specific customer segments.

Source: 2012 BAI Solutions Demand Pulse Research (Survey of Retail Banking Executives)

T O P B A N K I N V E S T M E N T A R E A S

Methods to Improve Asset Growth and Quality

Bring in new customers of higher quality 74%

Focus efforts on specific customer segments 57%

Increase share of wallet among customers 55%

Additional frontline training 28%

Entering new markets 26%

Developing innovative new products 13%

Technology upgrades

Asset growth & quality

Retail performance

Regulation & compliance

Overall strategy

Brand positioning

Business process improvement

Market & competitive intelligence

49%

49%

41%

39%

30%

28%

27%

14%

Winning Small Business Customers:An Integrated, Branch-Centric Approach

PA R T I C I PA N T S N A P S H O T

Small Business Profile: Study Participants Participants in the Small Business Demand for Banking Services study included owners and high-level employees from more than 1,500 small businesses in the United States. The study was comprised of an online survey and included qualitative in-depth interviews from a panel of respondents. More information on the methodology is presented at the end of this report.

Locations of small businesses who responded to the survey

More than 1,500 small businesses, fairly evenly distributed across three annual revenue categories, participated in the survey throughout the United States.

$100K to $1M

$1M to $5M

$5M to $10M

Note: The break out of study participants by industry is based on SIC codes.

S M A L L B U S I N E S S I N D U S T R I E S

$100K to $1M

$5M to $10M

$1M to $5M

Other: 12%

Automotive: 6%

Business Services: 27%

Health Services: 22%

Engr, Accy, Research, Mgmt, and Related

Services: 20%

Membership Organizations: 7%

Legal Services: 6%

50%

40%

30%

20%

10%

0%10 0

62 1

35 5

108 7

4

1519

1014 1413

18

6

1315 15

48

28

22

Services Retail Trade Manufacturing Construction WholesaleTrade

Finance,Insurance,

and Real Estate

Transportation, Communications; Electric, Gas, and Sanitary Services

Agriculture, Forestry,

and Fishing

Mining

Top Services Industries

Of the 48% of small businesses with annual revenue of $100,000 to $1 million in the services industries, Business Services makes up the largest group with Legal Services and Automotive among the smallest.

SMALL BUSINESS ANNUAL REVENUE


B A N K E X E C U T I V E P E R S P E C T I V E

PA R T I C I PA N T S N A P S H O T

PAGE 5

Individual banks differ on their definition of what constitutes a small business customer, but according to the 2012 BAI Solutions Demand Pulse survey of retail banking executives, businesses with under $10 million in annual revenue and a $1 million loan cap, were most often cited as being a typical “small business.” These limits also align with the three revenue sub segments used in this study of small businesses, which is the focus of this whitepaper — $100,000 to $1 million, $1 million to $5 million, and $5 million to $10 million.

That same survey of banking executives showed there are differences in how financial institutions view the small business segment, depending on the size of the institution.


S I Z E M AT T E R S : H O W F I N A N C I A L I N S T I T U T I O N S D E F I N E S M A L L B U S I N E S S E S

W H E R E S M A L L B U S I N E S S E S B A N K

Small institution is defined as less than $2.5 billion in assets, and large institution as $2.5 billion in assets and above.

Source: 2012 BAI Solutions Demand Pulse Research (Survey of Retail Banking Executives)

40%

30%

20%

10%

0%

3632

1

Lrg. NationalBank

>$100B in Assets

4 3 1

CreditUnion

2 1 1

Other

32

2428

1

RegionalBank

$15B-$100B in Assets

2934 37

1

CommunityBank<$15B

in Assets

37

Primary Financial Institutions by Type

Of the businesses that participated in the study, those in the smallest sub segment by annual revenue tended to bank at large national financial institutions whereas businesses in the other two sub segments preferred community banks.

Length of Time with Same Financial Institution

Regardless of size of annual revenue, businesses that participated in the study had generally been with their primary bank for more than 15 years.

ANNUAL REVENUE

Under $1,000,000TOTAL LOAN POTENTIAL

Under $1,000,000

Smaller institutions are more likely than larger institutions to have some sort of loan potential limit for small business customers.

How Small Institutions Define “Small Business”

ANNUAL REVENUE

Under $5,000,000TOTAL LOAN POTENTIAL

Under $1,000,000

Larger institutions are likely to have a higher annual revenue limit than smaller institutions for the business customers they consider “small.”

How Large Institutions Define “Small Business”

$100K to $1M $5M to $10M$1M to $5M


Tenure with Primary

Bank:15.4 Years

Tenure with Primary

Bank:15.4 Years

Tenure with Primary

Bank:15.9 Years

Because most small business customers do much of their banking activities in the branches, financial institutions with an integrated, branch-centric strategy can retain and attract these small businesses.

• Traditional Banking Style Small businesses conduct most of their banking activities in the branch. Their heavy reliance on the branch, personal service and manual processes, such as check processing, can drive down profitability as these small business customers consume more of the bank’s resources.

Action Step: Optimize branch facilities to cost effectively service small businesses with technology, such as branch image capture, and through more-informed frontline employees with better tools and technology at their fingertips.

• Preference for Paper Checks More than half of the small businesses surveyed said their most preferred payment method is paper check, most likely due to established internal processes, paper trail and the tie into accounting systems. For this same reason, check usage will persist, at least in the near future, as it is so ingrained in small business payment and bookkeeping processes. These customers generally shy away from the expense of remote deposit capture (RDC) at the merchant site.

Action Step: Accept this segment’s preference for checks and turn it into an advantage by expediting processing at the teller line and being able to balance deposits at the point of transaction.

• Tech Resistant Only 20% of small businesses surveyed prefer online banking to in-person banking, and there is little expressed interest in mobile — with only a 1/4 of those surveyed stating they are comfortable conducting transactions on a mobile device.

Action Step: As this segment is generally not interested in mobile, at least at this point, consider updating other processes and technologies to better meet customer preferences and for a greater return on investment.

• Fee Sensitivity Approximately 40% say fees are a main consideration when choosing a financial institution. Yet a look at sub segments shows fees are less of a consideration for larger businesses, which will pay for added value and more of an issue for smaller businesses.

Action Step: Improve fee strategies with better fee modeling through a deeper understanding of which fees are being collected, which ones are being waived and other activity.

PAGE 6

Small business banking is a profitable, highly competitive market and expanding this segment is a high priority for most banks, particularly as they seek more loan volume. Given the importance of the branch to this key target market, financial institutions that can provide superior service to small business owners at the branch level can achieve a market advantage.

This segment’s attraction to the branch, personal service and paper checks, among other preferences, can provide opportunities for banks to grow the relationship and become their primary financial institution. A closer look at the study findings reveals some action steps banks can take to gain greater share of market as well as increase loan volume and customer retention.

Centerpiece of the Relationship: The Branch

Critical Finding

Small business owners conduct 60% to 70% of their banking activities at the branch, and their most preferred payment method is paper check.

Credit Card: 14%

Cash: 8%Debit Card: 3%

Electronic Funds Transfer (EFT): 13%

Online Bill Pay: 9%

Paper Check: 52%

Overall, roughly half of small businesses surveyed say the best payment method for them is paper checks.

It should be noted that less than 1/2 of 1% of study respondents indicated that Mobile Bill Pay was the best method for payment.

BEST PAYMENT METHOD FOR SMALL BUSINESSES


S T U D Y F I N D I N G S

C L O S E R L O O K : C O U R T I N G T H E S M A L L B U S I N E S S S E G M E N T

• Loyal, Satisfied Customers Most small businesses surveyed have been in business for 20 years or more, and with the same primary financial institution for 15 years and longer. They also work with less than two financial institutions on average, and less than one-third of small businesses would switch for more innovative product or service offerings. However, they would switch if a bank could provide everything they need. Additionally, 75% of small businesses are satisfied with their primary financial institution. They also are generally satisfied with the online banking and deposit products their banks offer them. However, these businesses also feel there is room for improvement in some areas, especially loan products.

Action Step: As banks look to win new clients, this segment’s unwillingness to switch providers will be a factor to address in developing strategies. There is an opportunity here for banks that can provide all the products, services and support these customers want. Along with that, banks must continue to strengthen relationships with existing customers by providing tools and capabilities to help branch staff better engage and service them. This can include everything from better training to profiling tools.

• Unmet Loan Needs Small businesses typically turn first to their primary financial institution when there is a need for additional funds. However, some small businesses look outside of their bank either because of necessity or simplicity. When it came to satisfaction with their primary financial institution offering loan products that meet their needs, small businesses generally gave lower marks than in other areas, such as deposits and online banking.

Action Step: Consider ways to improve and take manual processing out of the loan workflow. Automated processes allow banks to originate, underwrite, decision and close loans more efficiently, greatly simplifying and speeding up the process for borrowers.

Thinking Strategically • Improve branch facilities to capture this market segment

• Facilitate processing of large check deposits in the branch

• Use the contact center to attract and retain small business owners

• Offer the right products at the right time in the branch

• Use the branch channel to its full advantage for face-to-face interaction with small business customers

• Provide tools and technology to help branch employees better engage business owners in substantive discussions


D R I L L D O W N : C U S T O M E R S AT I S F A C T I O N

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

3.5 3.6 3.7

3.3 3.2 3.3 3.4 3.4

3.0 3.1

2.6 2.7 2.8

3.1 3.13.23.4 3.5

Provides them with online banking

operations that meet their needs

Offers deposit products that meet

their needs

Provides them with innovative online

tools to help manage all aspects of their finances

Offers loan products that meet

their needs

Provides them with mobile banking

options that meet their needs

Offers investment products that

meet their needs

Satisfaction with Products Offered to Small Business Segment

AVERAGE STAR RATING — OUT OF 5 STARS

Takeaway: Small businesses are generally satisfied with the online banking and deposit products banks offer them, but feel there is room for improvement in some areas, especially loans and investment products – creating an opportunity to strengthen existing relationships and bring in new ones.

$100K to $1M $5M to $10M$1M to $5M


• Unmet Investment Needs Similar to their views on loan offerings, small businesses report room for improvement when it comes to their bank offering investment products that meet their needs. In fact, this area scored the lowest marks as shown by the chart on page 7. Investment products, along with loan offerings, are two areas where banks can create market differentiators by better meeting the needs of this segment.

Action Step: Equip frontline staff with better tools to know which types of investment products to offer customers, helping to grow share of wallet.

• Personal Finances More than half consider their primary financial institution to be the primary both for their business and personal accounts, making the relationship stickier and less open to changing primary financial institutions. At the same time, these primary institutions may be overlooking opportunities to extend the existing relationship.

Action Step: Give bankers a full 360 degree view of the customer relationship, including all current products, plus a history of past product offerings with the customers’ response in a transactional history, allowing bank employees to avoid repeating offers and instead suggest products that more closely suit customer needs.

Room for Improvement: Share of Wallet Opportunity

When asked about deposit balances held at their primary financial institution, small businesses across all three revenue categories were fairly consistent in their responses. A significant amount of their overall total deposit balances – ranging from 62% to 72% – is held at their primary bank. While these are strong numbers, there is still opportunity for growth. Additionally, the study reveals significant openings to capture greater share of wallet when it comes to loans and investments. The smallest sub segment, for example, maintains only 42% of their entire loan balance at their primary bank. Likewise, across all three sub segments, the percent of overall investment balance held at their primary bank, is 13% or lower. As financial institutions can better identify and address customer needs, they can take advantage of opportunities to promote more products. This is particularly true in areas where customers see room for improvement as in loan and investment offerings. Other financial institutions with smaller shares of overall deposit balances are no doubt looking to grow those relationships too.

80%

60%

40%

20%

0%

62

42

12

70

51

13

7264

11

Deposits Loans Investments


C L O S E R L O O K : C O M PA R I S O N S B Y S U B S E G M E N T

$100K to $1M $5M to $10M$1M to $5M


INVESTMENTS LOANSDEPOSITS

TYPE OF ACCOUNT

Share of Wallet by Account Type

Balances by Size of Business Annual Revenue

Perhaps not surprisingly, balances across all three sub segments rise as the size of the small business’ annual revenue increases.

$100K TO $1M IN ANNUAL REVENUE

Deposits: $44,300

Loans: $106,745

Investments: $84,630

$5M TO $10M IN ANNUAL REVENUE

Deposits: $415,000

Loans: $720,090


$1M TO $5M IN ANNUAL REVENUE

Deposits: $171,112

Loans: $309,515


The largest small businesses maintain the highest share of wallet at their primary bank, except when it comes to investments, which is low across all three sub segments – creating an opening to grow existing relationships or pursue new ones.

Market Differentiator: Focus on Customer Interaction and Personal Service

The branch is central to small business relationships, across all three annual revenue sub segments. In fact, about half of small business owners state that going to the branch is important, and very few of them prefer online to in-person. The primary point of contact within the branch varies depending on the size of the business. While larger businesses typically have a dedicated small business professional, the smaller businesses work with frontline staff most often. Overall, the businesses in the study, regardless of revenue size, view personal service as more important than financial expertise. While many chose their current bank out of convenience, they also cited stability and an added personal touch as reasons.


I N F O C U S : S M A L L B U S I N E S S E S A N D P R I M A R Y B A N K R E L AT I O N S H I P

90%80%70%60%50%40%30%20%10%0%

86 90 90

Keep business & personal expenses

separate

56 6054

Personal service is more important than

financial expertise

53 57

43

Going to a branch is important

19 17 18

Expect contact from my bank at least

monthly

1821 22

Prefer online banking to in-person

Takeaway: On average, over half of small business respondents prefer personal service over expertise. Additionally, half indicate that going to a branch is important and very few prefer online to the in-person experience.

CHART INDICATES THE PERCENTAGE OF RESPONDENTS WHO COMPLETELY OR STRONGLY AGREED WITH THE STATEMENTS BELOW

$100K to $1M $5M to $10M$1M to $5M

SMALL BUSINESS ANNUAL REVENUEHow Small Businesses Interact with Their Bank

50%

40%

30%

20%

10%

0%

32

16

41

Single small business professional

(relationship mgr)

45

14

24

Any of the frontline staff

2832

23

Branch Manager

105 5

Team of small business professionals

5 710

Other

Takeaway: Smaller businesses work with the frontline staff most often, while larger businesses have a dedicated small business contact at their bank.

$100K to $1M $5M to $10M$1M to $5M

SMALL BUSINESS ANNUAL REVENUEStaffing Model: Primary Bank Contact

Door Opener: Customized Support Services

The small businesses in the study overall are not impressed with the level of services they currently receive from their primary bank. This creates opportunity for banks to better serve existing customers and draw new ones in the door. While having a single point of contact within the financial institution earned high marks, small businesses generally gave lower marks when it came to getting help managing cash flow and their balance sheets, among other activities.

PAGE 10

D E E P E R D I V E : S AT I S F A C T I O N W I T H A D D I T I O N A L S E R V I C E S

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

3.33.5 3.7

2.9 3.0 3.1

2.6 2.5 2.6 2.6 2.5 2.62.6 2.7 2.72.9

2.82.93.0 3.0

3.2

Provides them with a single point of contact withinyour institution

Gives advice Helps with their administrative

efforts

Helps them be more efficient (save

them time and money)

Helps them manage cash

flow

Helps them manage their

balance sheets

Provides customized support based on the industry they

occupy


How Small Businesses Rate the Services They Receive

$100K to $1M $5M to $10M$1M to $5M


AVERAGE STAR RATING — OUT OF 5 STARS

“Remote Deposit for low volume users.”

- $1M to $5M

“Personal meetings with me as President of the business to plan business activities that relate to banking.”

- $1M to $5M

“It would be nice if they offered classes for small business owners about what is available in small business loans, how to choose the best credit card processor, etc.”

- $100K to $1M

“Venture capital introductions, or even their own venture capital fund. Can’t do everything with bank debt or equity on hand, so need to access other equity on occasion.”

- $5M to $10M

“Offer Venture Capital investment networking social.”

- $1M to $5M

“Send a daily e-mail showing the ACH receipt information for our accounts. Make deposits containing a large number of checks faster. They need better communications with commercial customers.”

- $5M to $10M

Small Business Wish ListMost small business customers feel their banks provide all the services they need, but those who are seeking additional services are looking for their banks to act as facilitators. As shown by their comments below, this can mean anything from offering education classes on small businesses and how they work with financial institutions to enabling venture capital investment networking.


Willingness to Consolidate

The high degree of loyalty among small businesses makes it challenging for them to switch institutions. As previously discussed, many of the participants in the study have been in business for over 20 years and with their primary institution for 15 or more years. And they typically work with an average of only one or two institutions. Plus, 75% of them are satisfied with their primary financial institution. However, small businesses are open to consolidating their accounts with one institution if it can provide all that they need or give them a reward for doing so. Fewer of these customers would consolidate for innovation. Based on these insights, by demonstrating capabilities that are clearly superior to competitors, banks can successfully grow their small business portfolio. This can be achieved through better products and services at the branch level. Additionally, as shown in the chart below, primary banks are missing the opportunity to proactively suggest financial products to these customers, which is something they want.

Improve Customer Engagement

Give branch staff tools and capabilities to better engage and service small business customers:

• By having a full view of relationship at the start of the conversation through better integration of servicing systems and data marts

• By knowing what prior product offers were made at both the branch and through the contact center and the customer’s response — to avoid redundancy

• With training and enabling technology to help the banker ask business related questions — demonstrating business knowledge while helping to identify the right product for the customer

O N T H E M O V E : S W I T C H I N G B A N K S

60%

50%

40%

30%

20%

10%

0%

49

55 55

Willing to consolidate all my money in one

institution if they can provide all I need

5155

51

Willing to consolidate all my money in one

institution if they give me a reward to do so

41

4952

Wide selection of financial products

is important

2930 31

Would switch to a new financial institution if it

offered innovative products/services

1618 19

My primary financial institution proactively

suggests financial products to me

Takeaway: Roughly half of small businesses are willing to consolidate with one financial institution if they can provide all that the small business needs or if they are given a reward to do so, but fewer would consolidate for innovation.

$100K to $1M $5M to $10M$1M to $5M

SMALL BUSINESS ANNUAL REVENUEWillingness to Switch Institutions


Uncovering Opportunity: Loans for Small Businesses

As financial institutions pursue their top strategy of loan growth in this segment, there is some disconnect between what banks offer and what small businesses need in terms of loans. Despite this gap, small businesses typically turn first to their primary financial institution when there is a need for additional funds. However, some small businesses look outside of their bank either because of necessity or simplicity.

“I really don’t know where I will seek a loan. This whole process of obtaining money has been SO painful and difficult; I will try to forgo financing unless absolutely necessary. The process of getting an initial loan has been so difficult; I will probably do anything I can to not have to get another loan.”

- $100K to $1M

“Our bank. For the past eight years they have been our only source of funds. We have a strong relationship and they know our business well enough that they can give us the most favorable rates. By virtue of the close relationship, they are in the best position to offer us the most favorable rates.”

- $5M to $10M “From friends and associates. They don’t require the paperwork and don’t have the regulation requirements.”

- $1M to $5M

Where Will You Go for Your Next Business Loan?

P E R C E P T I O N G A P

B A N K E X E C U T I V E S V S S M A L L B U S I N E S S O W N E R S

1.0

0.5

0.0

-0.5

-1.0

Provides them with online banking options that meet

their needs

Offers depositproducts that

meet their needs

Provides them with innovative

online tools to help manage all aspects

of their finances

Offers loan productsthat meet their

needs

Provides themwith mobile bankingoptions that meet

their needs

Offers investmentproducts that

meet their needs

0.1

0.30.4

-0.5

-0.1 -0.1

Bank executives and the small business owners who took part in the study generally have similar perceptions about bank products offered, however small businesses are somewhat lower on their perception when it comes to bank loan offerings. This disconnect will need to be addressed as financial institutions move forward with plans to grow loan portfolios in this segment.


Small business banking is a profitable market with strong competition among banks focusing on this segment, particularly when it comes to increasing their loan portfolio. Financial institutions that can demonstrate clearly superior service and capabilities can differentiate themselves in the eyes of small business owners. As shown in the study, small business owners conduct 60% to 70% of their banking activities in the branch. They also are fairly traditional, preferring in-person or phone conversations with their bank, rather than online banking.

Given the importance of the branch to this segment, banks with an integrated, branch-centric strategy can achieve a market advantage. Overall, the businesses in the study, regardless of annual revenue size, view personal service as more important than financial expertise. While many chose their current bank out of convenience, they also cited stability and an added personal touch as reasons.

As banks look to win new small business customers, this segment’s unwillingness to switch providers will be a factor to address in developing strategies. These customers tend to be loyal to their primary financial institution – generally working with only one or two banks. However, small businesses are receptive to consolidating at one bank if it can provide all the products, services and support the customers want. Additionally, the findings show that most small business owners are not overly impressed with the level of business acumen found at their local branch. By providing personal, knowledgeable service at the branch level, banks can be better positioned to grow both share of wallet and share of market.

Large Sample Survey

20 minute, 3-page paper and pencil survey, facilitated by Barlow Research Associates, Inc. Collected high-level employee or owner responses from small businesses in each of the following categories of annual revenues:

S T U D Y M E T H O D O L O G Y

• $100K to $1M: 546 respondents

• $1M to $5M: 536 respondents

• $5M to $10M: 457 respondents

Qualitative In-depth Interviews

Barlow Research Associates, Inc. also conducted a Delphi Panel with 36 participants from the quantitative survey - 12 from each of the three revenue categories shown above.

The Delphi Panel was asked three to four open-ended questions every two weeks for a total of eight weeks.

T R E N D S A N D TA K E - A W AY S


A R G O C A S E S T U D Y

G E N E R AT I N G B U S I N E S S L O A N A P P L I C AT I O N S T H R O U G H T H E B R A N C H N E T W O R K

A leading super regional bank was facing real challenges getting branch employees to originate business loans. First, their employees had difficulty navigating the bank’s loan origination solution, especially for business loans. Some employees only originated a few loans per year, and the lack of an intuitive system to help guide them through the process made them unsure of their ability to help the customer. Next, when they did manage to originate a loan the lack of readily available information about the application made it difficult to answer simple questions about the status of the loan. Finally, the retail bankers were unsure of how to talk to a small business owner about their business lending needs. The result was hesitancy on the bankers’ part to offer business loans to customers and therefore fewer loans were generated. Simply stated the employees naturally gravitated away from those products where they were unsure of themselves and lacked the confidence to help their customer.

The bank turned to ARGO for help. ARGO provided a Business Lending solution that offers a simple, repeatable origination process making navigation easy. It then prompts the user with systematically generated check lists, conditions to close, and required data and forms, taking the guesswork out of originating a business loan. The system tells the user what they need from the customer and guides them to the next step in the process. Keeping the customer posted on the status of their loan request is easy with status updates delivered to the employee’s desktop, eliminating the need to call central loan operations for information. Finally, the ARGO solution provides intelligent customer profiling functionality to help guide the banker through a discussion with their small business customer, making the banker comfortable in engaging their customer.

Following the installation of ARGO Business Lending the results were very positive. First, the bank experienced a material increase in business loan application volume from the branch network resulting in increased bookings and an expansion of the business loan portfolio. Additionally, because the branch bankers were more engaged with their small business customers, the bank experienced an increase in business deposits as the small business owners brought more of their business to the bank from other institutions. The bank is winning in this highly profitable market segment because it gave its retail bankers the right tools and the confidence to help their customers.

Mastering Customer Interaction

GOAL

Getting branch employees to originate more business loans

CHALLENGES

• Difficulty navigating loan origination process

• Lack of an intuitive system

• Inability to answer simple questions on status of loan

• Unsure of how to talk with small business owners about their lending needs

SOLUTION

• Simple, repeatable origination process makes navigation easy

• Systematically generated check lists to take out the guess work

• Easy to keep customer informed with loan request status updates

• Customer profiling functionality guides the banker in engaging customer

RESULTS

• Material increase in business loan application volume

• Growth in bookings and expansion of business loan portfolio

• Increase in business deposits due to improved customer engagement


FOCUS ON SMALL BUSINESS LENDING: SOLVING CHALLENGES THROUGHOUT THE CREDIT CYCLE

Improving Customer Interaction

As shown by the case study, financial institutions can master the customer interaction side of the equation. The right tools and training can simplify tasks for bank employees, such as tracking activity, setting appointments, managing referrals, campaigns and goals, and knowing the overall relationship of the customer at a glance – from loans, deposits and service requests in process to pre-approved offers and response to previous offers.

Actionable, Real-Time View

There is functionality that cuts across the entire credit cycle, from customer management to post closing. An intelligent, fully embedded, and highly configurable workflow, for example, is the backbone of any loan origination solution. Banks need the ability to route and prioritize work based on any quantifiable attribute. They also need to be able to govern the overall process by granular service level agreements while having an actionable, real time view into the entire credit process. And they need to be able to make changes to any of this without having to call IT — that is, configuration by a business analyst, not a programmer.

Universal Functionality

Origination

Credit Analysis & Underwriting

Processing, Closing,

Post-Closing Account

Management

Client Relationship Management

Moving Deeper into the Credit Cycle

But the challenges for retail bankers go well beyond managing the client relationship. There are challenges throughout the entire credit cycle — from origination, through credit analysis and underwriting, through processing, closing and post-closing account management activities, such as tracking trailing documentation and setting ticklers for renewals and reviews.

© 2013 CONFIDENTIAL. The insights and research methodologies described in this white paper are the intellectual property of BAI and shall not be reproduced or shared directly or indirectly with any other market research or consulting firm, without the express written permission of BAI.

ARGO transforms business processes for banks, credit unions, lenders, and healthcare providers through software innovation. Founded in 1980, ARGO has grown into a recognized solutions partner of choice for eight of the nation’s top ten financial institutions. More than half of the top 50 U.S. financial institutions trust ARGO solutions for their mission-critical operations. ARGO solutions process more than 55 million transactions each day in 35,000 financial centers nationwide. Providing best-practices solutions and exceptional support, ARGO harnesses our technology into scalable solutions for teller payments, lending, and sales and service. ARGO Lending Solutions provide integrated prospecting, sales, loan origination, and customer management capabilities for consumer, indirect, small business, and commercial loans.

For more information, visit argodata.com.

BAI is the financial services industry’s partner for breakthrough information and intelligence needed to innovate and stay relevant in an evolving marketplace. For more than 80 years, we have focused on advancing the industry by offering unbiased education and research. Our offerings are as diverse as the industry, and include premier events such as BAI Retail Delivery Conference & Expo, ground-breaking research and performance metrics, professional learning and development programs, and in-depth editorial coverage through BAI Banking Strategies. Visit www.BAI.org for more information. BAI is Bank Administration Institute and BAI Center.

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Phone: (312) 553-4600www.BAI.org

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Phone: (972) 866-3300 www.argodata.com


RESEARCH

winning small business customers an integrated branch

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