Bank Growth Strategies

Targeting small businesses

Small business banking is a highly profitable business for banks. 

And yet, in many financial institutions, small business banking is a by-product of a consumer banking retail franchise and a commercial banking relationship managed franchise. 

Rarely do banks have a product and service suite custom-fit to their small business customers (many reading this will know the struggles of adapting a consumer checking or a commercial banking portal and set of commercial treasury solutions to the needs of small business customers).

An examination of the facts suggests potential in investing in the small business franchise: 

  • The small business segment1 represents 99.7% of all employer firms, 49% of private-sector employment, and 43% of private-sector payroll 
  • Collectively, small businesses contribute ~$10 BN of post-tax economic profit to the banking sector, with the average small business contributing double that of the average consumer household 
  • The concentration of value to banks in a small set of small businesses, and in a small set of products, presents an opportunity for break-out strategy and profit growth 

In our paper, “Strategic Growth through High Value Small Business Targeting” we look deeply at the topic of how banks might generate substantial growth through targeted strategies with the most valuable small business customers. While small businesses as a group are quite diverse, successfully banking them requires narrowing focus rather than broadening.  These questions help narrow that focus: 

How to think about segmenting small businesses? 

Three basic segments (micro, business-to-consumer, and business-to-business) with different needs and different bank solutions 

Which customers create the most value? 

23% of customers generate essentially all economic value in the sector, and those customers have well-defined characteristics 

Which products generate the most value for the bank? 

Checking, card and merchant services contribute the vast majority of the economic value created for banks 

How can a bank identify the high value customers? 

By looking at the transaction data of your existing customers, and targeting high value sectors for prospects 

How best to go after the high value customers? 

Develop targeted analytics and outreach programs, and equip the salesforce with the tools and products/services to win with target segments

Our detailed paper, “Strategic Growth through High Value Small Business Targeting”, discussing our recommendation is yours for the asking.  

1 Most papers on small business banking would start by defining the segment. We avoid that topic here as every bank, every government and every vendor defines the segment differently. Statistics cited in this paper from third parties will use slightly different definitions, but true apples-to-apples comparison is impossible. That said, any scale survey will reveal that the vast majority of small businesses, and the vast majority of banking profit in the segment comes from companies with less than 100 employees, less than $5 MM in revenues, and without a professional/full time finance officer.