Small Business Entices Marketers

With over 5 million small businesses in America, banks are realizing the potential in this market.

When Karen Prest, an analyst at Newton, MA-based Meridien Research, started conducting her research on whether banks were delivering services for small businesses, she expected the results to give banks a failing grade.
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"I went in as a skeptic," she says. In April, Meridien released "Small Business Banking: Can Banks Deliver?" Expressing surprise, she says, "I was convinced by my own research. I saw how much banks are now focusing on small businesses. The study proved that small businesses are more and more in the limelight."

There was reason for her surprise. For years, there has been a lot of talk about banks going after the small-business marketplace. After all, it's a huge market. The U.S. Census Bureau defines a small business as one with fewer than 500 employees. Ralph Dangelmaier, president of Newton, MA-based Politzer & HANEY, estimates that there are between five and six million small businesses paying more than 10 million people. "It's a lucrative marketplace with a lot of opportunity not yet tapped," says Prest.

So, despite all the talk, there has been very little action—partly because banks haven't known how to serve the small business marketplace. "Banks have struggled with the small business market," says James Van Dyke, research director at Jupiter Media Metrix Inc., in San Francisco. "It's been easier to see profits in large businesses. And, segmentation has been a challenge."

But in the last two to three years, says Prest, "there's been a recognition that this is a separate segment, and technology is a part of this. Technology has enabled the banks to focus on small businesses." More accurately, it's the Internet and Web-based products that have refocused banks' targeting of small businesses.

"There's been a definite shift of banks focusing on small businesses," says Bryan Laws, director of business solutions at Calabasas, CA-based Digital Insight Corp. He attributes the shift to two reasons. First, the market shift took place when technology proved that services could be accomplished securely over the Internet. Second, he says it was "an epiphany by the financial institutions. They realized how underserved small businesses were. This was not news, but they realized that the business was viable, there's revenue involved, and additional business was available. Previously, banks thought it was too costly to serve the market."

The Internet plays a huge part in the focus shift because, says Laws, "the old dial-up software was confusing, not made for small businesses, and required a lot of tech support."

The experience of Politzer & HANEY, which provides Web-based cash management solutions to the financial services industry, is a case in point. The company has successfully provided DOS-based cash management products since the late 1980s, says Dangelmaier. Its Windows-based products were less successful. However, its Web-based products have been "very successful."

From the late 1980s to the mid-1990s, the company's products penetrated about 10,000 small businesses. In the three to four years since its Internet-based products have been on the market, that penetration has gone to 50,000 to 60,000. "One report last year estimated that of the six million small businesses, there's been a one percent penetration of small businesses using Web-based products, with penetration expected to climb to 20 to 30 percent," he added.

"Historically, banks looked at the costs of providing cash management as too expensive for the small business market. It wasn't worth it. It was hard to scale the products to small-business size," he explains. "With the Internet, the dynamics change. Businesses can go right to the Web site. There's no cost to place software. There's standard browser technology. The cost of distribution is low, and the vendors have tuned into this. There are hundreds of options for packaging the products, and we work with banks to help them package our cash management products for their customers."

Cash management products, however, are only one offering technology vendors are providing to financial institutions to serve the small-business market. "Research shows that if a small business has its payroll services through a bank, they tend to use more banking products—which generates more fees—and they tend to be more loyal to the bank," says Michael Alter, senior vice president of Chicago-based SurePayroll.

The company recently released a new application service provider (ASP)-based payroll service that, according to its developers, allows banks to quickly and easily offer online payroll services to their small business clients. Called Custom Payroll for Banks, the product is a private label, plug-and-play solution that allows banks to offer SurePayroll's service directly to their clients under the bank's brand name. Since less than 25% of small businesses outsource payroll, this is a service with a lot of opportunity for banks.

Alter cites other reasons for banks to offer payroll services to small businesses. "It changes the way a company does payroll and changes the way employees relate to their payroll. "An employee of a small business can go to the bank's Web site to see his payroll account, so he's actually going to the bank's Web site. The bank then knows all the small business' employees, know who has direct deposit, and can offer free checking," he says.

SurePayroll's new offering is based on technology that has been operational at Wells Fargo & Co. and a number of community banks for some time, Alter adds. "Payroll is one of the best kept secrets," says Bob Brown, senior vice president of business payroll services at Wells Fargo. "We've been in payroll services for over 40 years and most of the time focusing on small businesses. It's an entry point, it's a repetitive service, it links the business owner to his employees and it offers great cross-selling opportunities for the bank," he adds.

Of Wells Fargo's 1.5 million small business customers, about 20,000 use its payroll services, which for Brown means a "huge opportunity for growth."

"There's been a proliferation of competitors in payroll in the last two to three years brought about by the Internet," Brown notes. "These vendors have leveraged the Internet and banks are starting to use payroll as a lead product or to keep businesses. For a while, there was a cycle for banks getting out of payroll, but now they're back in. Banks are smarter about the (small business) segment and what customers they go after."

The National Bank of California has focused on the small business segment since its inception in 1982, says Barry W. Uzel, president and CEO of the $160-million-asset bank in Los Angeles. "We thought it was an underserved market." In April, the bank started offering SurePayroll's products to its customers. "We couldn't have provided it without a third party, and we expect it to be a very significant part of our business."

Banks who have begun to focus on the small business market have long-established competition to contend with. The American Express Co. established its first charge card for small businesses in the late 1980s, and has had a long history of serving that marketplace. Recently, American Express relaunched its business unit for small businesses, now called OPEN: The Small Business Network from American Express.

The rebranded product has enhanced most of its products and services with a focus on the Internet, says Tom Sclafani, spokesman for the product. Among these services are online card activation, online instant decisioning—with decisions within 60 seconds for small businesses—and online Financial Dashboard, which provides customers who are card members a snapshot of all their financial relationships with American Express on one screen.

Not everyone, however, believes that the relationship between banks and small businesses is that solid. Van Dyke says it's still "a challenge for banks to find the gold among the dirt. There are few small businesses willing to pay for more services," he says. And, he adds, he hasn't seen a wave of technology products coming to help banks serve the small business market. "The technology downturn has also had an impact on this. There's still a clearer case for profitability with offerings aimed to the mid- and large-business sector, and in the consumer sector. There is a small business segment, but it's harder to find."

Still, Meridien's recently released research shows that banks can choose a variety of strategies to better serve small businesses. These include: developing appropriate features within online banking applications; providing small business portals; organizing internally to reflect the needs of small businesses; repackaging existing product sets; and pursuing opportunities in international markets.

Jan Jaben Eilon is a writer based in Marietta, GA.

Copyright © 2002. Bank Technology News.