High-Performance Business Banking

The long-term rewards for winning the business banking customer are among the most significant available to all financial institutions. As a result, institutions large and small are focusing on what promises to be the single most important competitive battle of the 21st century.

Business banking customers can be a valuable source of lasting, highly profitable relationships. Obviously the business customer can provide deposits and loans, as well as utilize core banking services. Often, untapped potential exists in further developing and expanding relationships with business owners, their families, and employees. The powerful combination presents one of the most unique opportunities to build long-term value for the successful financial institution.

The Business Banking Opportunity

The primary focus of business banking is on the micro-market, which includes companies with annual sales under $1 million of which there are 22 million nationwide, and small businesses with annual sales of $1 million to $10 million, of which there are 2 million throughout the United States.

No matter the size, however, each business is unique and important to its owner. In all likelihood, no business owner has ever referred to his or her company as “my microbusiness.” And while occasionally, owners might make a reference to their “small business” if they are modest, rarely, if ever, would someone refer to his or her “middle-market company.” The bottom line is every owner regards his or her business as being of unique importance, regardless of size.

Competitive Intelligence

Business banking is ultimately about being responsive to the needs of the business owner or, as the business grows, the business manager who works with the owner or the owner’s family. While business banking is a straightforward, relationship business, there is wide variance in the quality of execution by financial service providers. Intensifying competition and mounting pricing pressures require average and weaker providers to step up their performance or risk losing their customer base to predatory competitors.

Business banking, particularly with regard to micro and small businesses, is shaping up as the next major competitive battlefield. Traditionally, this market has been dominated by community-focused banks that have been very successful in winning the loyalty of these business customers. As consolidation has taken place, the pace of growth has quickened.
While the business banking customer should be loyal to their banking provider, customer attrition is a major problem for larger banks. Annual attrition of 15%-20% of a banks business banking customer base is common. Until banks learn to manage relationship quality of across a broad customer base without diluting the quality of individual relationships, attrition rates will continue at high levels. This creates hug opportunities for banks seeking to grow their business banking franchises.

The Business Customer: valuable and Easily Targeted

Business banking customers are always among the most valuable assets of the bank. Quite simply, they are a long-term source of stable earnings and growth for many banks, especially community-focused banks, regardless of size. As a result, today virtually every bank is targeting small business as an important source of future growth.
The profit potential per customer is substantial, with one good small business customer often providing $10,000 per year in profit contribution. This business is also very sustainable, as many small businesses stay with their banks for decades.

Most important from a growth viewpoint, the small-business banking relationship can expand to include the needs of the owner’s family and the company’s employees. In some institutions, satisfied small business owners are being effectively developed into a source of referrals and “word of mouth” advertising. As Bob McGoffin, a long-time associate of mine, says, “Your good customers should be your best salespeople.”

The bottom line is that one good small-business customer has a measurable impact on the bank’s earnings and growth. One hundred good small-business customers, therefore, can have a significant impact. For example, if one such customer can contribute $10,000 to the bank’s profits, 100 can contribute $1 million a year in pre-tax profits. That $1 million in pre-tax profits equates to approx $660,000 in after-tax earnings. From a valuation perspective, placing a 15 x price-to-earnings multiple on those earnings means they are worth approximately $10,000,000 to the shareholdersu00e2u20ac”or $100,000 each.

The good news is that small business customers are very valuable. The bad news is that they are easily targeted through a variety of information sources. A major change in the market is that some very aggressive competitors are using newly available, highly focused competitive intelligence tools to go directly after the most attractive business opportunitiesu00e2u20ac”using a rifle-shot rather than a shot-gun approach.

The Best Business Bankers

At the end for the day, business banking is all about people. The business banker who has a strong relationship with the business customer built on responsiveness, knowledge, and trust is an exceptionally valuable asset to the bank. Financially strong competitors trying to quickly buy their way into the market can easily target the best business bankers. As a result, retention of talented bankers is becoming a critical competitive issue.

Greenwich Associates research clearly illustrates the significant power of the individual business banking officer, compared to the institution’s brand. We are all familiar with instances where the name of an individual bank officer is the more powerful brand in the customer’s mindu00e2u20ac”after all, the bank may have gone through several name changes. In-depth research by Greenwich Associates shows that 40% of business owners indicated that in the event their banker switched banks, they would likely follow.

The Return On Investment

The key to maximizing the return on investment from high-performance business banking is to focus on the following priorities:

1. Competitive intelligence on the business banking marketplaceu00e2u20ac”Competitive intelligence on individual banks and their business customers is the foundation for increasing business banking growth and profits. Accurate knowledge of what competing banks are doing in your market as well as what the megabanks are doing that’s new is critically important to maintaining and building customer relationships. Not knowing what’s about to happen from a competitive viewpoint in your market often means lost time lost customers, and ultimately, lost profits as the bank prepares a response.

2. Retention of individual business customersu00e2u20ac”The value of retaining each individual business customer, as well as the cost of losing each individual business customer, is extremely high. For example, losing a business customer who contributes $10,000 a year in incremental income clearly puts into perspective the need to keep such relationships. Obviously, losing 10 of these relationships would impact the bottom line by $100,000, and so on.

3. Expansion of existing business customer relationshipsu00e2u20ac”There are three major opportunities, any one of which can lead to a significant increase in the bottom line per business customer, potentially exceeding $10,000. These opportunities are providing more banking services to the business customer, getting more of the business owners’ and managers’ personal and family banking relationship, and offering group banking for the business’s employees and their families.

4. Acquisition of new business customersu00e2u20ac”Capitalizing on competitive intelligence and increasing the capability of your business bankers, coupled with having the right mix of products, services, and relationship pricing, can yield dramatic bottom -line results. Effectively utilizing referrals and word-of-mouth advertising from enthusiastic business banking customers in effect dramatically leverages the bottom line impact.

5. Incorporate the best practices of successful business bankersu00e2u20ac”Utilizing proven best practices provides the following returns: These best practices, by definition, work and deliver the desired results; the bank then avoids adopting practices that, while logical on the surface, may well have been shown to be ineffective in other institutions. It is no surprise that winning builds morale more than losing morale.

6. Select the right combination of new products and servicesu00e2u20ac”There are three overriding benefits to making the right decisions regarding new products and services. First, the right combination creates an immediate, positive bottom-line impact. Second, consistently selecting the right products and services resonates with the business customer in terms of the bank’s credibility. Third, long-term, profitable growth will be built on carefully selecting what to offer, how to price it, how to go to market, how to sell it, and when to support it.

7. Quickly and effectively respond to changing market dynamicsu00e2u20ac”Time lost in responding often means long-term growth and profitability will be negatively affected. Frequently, potential gains in growth and profits to be made from capitalizing on changing market dynamics may slip away, sometimes foreveru00e2u20ac”especially in terms of acquiring new business customer relationships. For example, responding quickly and effectively to the acquisition of a competitor as soon as the deal is announced often means establishing market momentum by taking away good business customers and excellent bank employees who may be apprehensive about coming changes. Likewise, quickly responding to new products and services being introduced the by the competition usually means less business lost to their new initiatives.

8. Attract the best business bankers to your banku00e2u20ac”Attracting star players has three immediate rewards. First, they bring profitable business-customer relationships with them. Second, they bring new market knowledge. Third, high performers attract other well-qualified business bankers. The bottom line is that from a career planning standpoint, the best business bankers want to form a relationship with the banks that are going to be the long-term winners.

9. Learn from the best business bankersu00e2u20ac”The key is to listen, to learn, and to share. The late Charles Murphy, a very thoughtful and thought-provoking friend, used to say, “Fools learn from experience. Wise men learn from the experience of others.” We all learn from experience from time to time, but gaining knowledge from the experience of others provides a unique opportunity to quickly and easily absorb the lessons from their successes, as well as their failures, and to incorporate their practical knowledge into our own. Taking advantage of opportunities to listen, learn, and share with the best business bankers provides a major source of new ideas, and the opportunity to test one’s own ideas. The benefits can be immense.

10. Stay Alertu00e2u20ac”The world of business banking, especially micro- and small-business banking, is about to go through huge competitive changes. The long-term winners will be determined by those who make the right decisions.

The Winners

The winners of the competitive battle for the business customer will build significant lasting value for their shareholders. Community banks start with a competitive advantage in terms of their long-term business banker/business customer relationships. A number of the major banks and large regionals, however, are starting to counter this relationship by offering a broad array of services and, most important, by focusing on building business banking relationships.
The most important new force in the market will be highly focused and extremely knowledgeable community banks that will be taking business banking customers not only from the major banks and large regionals, but also from other community banks as well.

Business customers will be consolidating their banking business as well as their personal and family banking business into fewer institutions for better pricing and services. The winners will be those high-performance business banks that capture the whole relationship utilizing accurate knowledge, well-thought-out decisions, and an excellent strategy.