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Small Business

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RESEARCH SUMMARY

United States Small Business Administration
Office of Advocacy
RS 145
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Small Businesses and Large Banks

by P. Michael Laub

1994. 115p. State and Federal Associates, Inc., 101 King Street, Suite 600,
Alexandria, VA 22314
under contract no. SBA-7647-OA-92

Purpose Small businesses and banks depend on one another for much of their success. Small Businesses rely on banks to provide depository and check processing services, lend money, help establish retirement plans, manage payroll, and meet other daily needs. Banks, on the other hand, need small business customers because they offer significant profit potential and because small businesses tend to be steady, high-volume users of their branch system. Furthermore, banks are oriented, by their history and by current regulatory policy, toward the communities in which they have offices.

These mutual needs create an important relationship between small
businesses and banks that has been buffeted by market and regulatory
forces in the past. The banking industry has also been changing rapidly;
during the 1980s, the industry changed fundamentally when state governments
began to permit interstate banking. Today, virtually every major metropolitan
area is served by banks that are controlled by holding companies from outside
the area. In addition, banks' competitive boundaries are changing. As large
banking organizations are forming they bring more sophisticated competitive
boundaries are changing. As large banking organizations are forming they
bring more sophisticated competition to many markets. This, in turn, causes
smaller banks to sharpen the focus of their strategies on community ties.

Non-bank competitors are also developing ways to penetrate the small
business market for financial services. In a sense, large banks are on the
middle ground. Small independent banks emphasize their single community
ties and focus on a niche where they can be strong competitors. Non-bank
competitors, who have more tenuous community ties, concentrate on niches
where the profit opportunities are high and community orientation is much less
important to customers. In the face of this change, it is important to understand
how large banks relate to small businesses.

This project attempted to look at several questions concerning large banks'
approaches to small businesses to gain a better understanding of this
relationship. These questions are: How are small business needs perceived
by banks? How are large banks organized to meet those needs? How do
banks market their services to small business? How do banks deliver those
services? What do banks expect to gain from meeting those needs? How is
the rapid evolution of the financial services industry affecting approaches to
the small business market? What are the policy implications of the answers to
these questions?

Scope and Methodology

The objective of this project was to compile and analyze information describing how large banks relate to small businesses in light of the numerous and far-reaching changes in regulations, technology and competition. The research methodology combined traditional data and literature review with extensive personal interviews with individuals responsible for various aspects of the small business programs of 13 large banks across the country. The banking companies interviewed ranged in asset size from as low as $4 billion to $100 billion. The 13 banks were spread throughout the United States from California to New England to the Southeast. An agreement was reached with the 13 banks to allow interviews of a range of bank personnel responsible for all aspects of the banks' small business programs. The interview process took approximately two days on site; more than 50 separate interviews were conducted. In each institution, individuals interviewed included those responsible for overall direction and policies of the small business program, small business marketing specialists, loan officers, branch officers and specialists in government lending programs. This project represents the opinions of representatives of 13 large banking institutions and not a statistical sample of all small business lenders. The information gathered from the interviews should not be extrapolated to the regional or national population of small firm lenders. The findings of this report are those of the authors alone and are not necessarily those of the U.S. Small Business Administration.

Highlights

* Small business is a key market for large banks. Neither large nor small banks dominate lending to small businesses in the United States.

* Technological changes brought about intense competition in various markets as large banks competed for deposit services, mutual funds captured a huge share of the banking market, and small banks offered new services to those customers who formerly could obtain them only from large banks.

* Banks are restructuring their organizations so that they can serve this market more efficiently. New approaches are being developed that use technology to help centralize decision-making and view employees who spend time with the small business customer as the manager and developer of a multi-faceted financial services relationship.

* To market their services to small business, banks are emphasizing "relationship managers" who are interested in cross-selling products to customers so that they build the relationship. The branch system is still critical to the small business customer because the branch handles the constant stream of routine cash and check processing requirements of small business. Credit products are being "sold" by relationship managers or branch managers, but the decision-making is moving to centralized, volume-oriented centers of activity.

* Banks are being driven toward the small business market for two reasons, both stemming from profits. First, costs must be reduced in order to achieve the full profit potential. Reorganization and changes in delivery systems result from trying to reduce the costs of serving this market. Second, good margins remain in the small business market that are as attractive as those of middle-market and corporate lending in past years. Banks want to hold on to this market.

* Banks in the most competitive markets tend to be further along in reorganizing for efficiency. These banks use technology, centralizing credit analysis and underwriting. They also pay more attention to their sales force, people whose primary responsibility is to sell products to small business customers. These banks also have a high level of commitment to the small business market and its profit potential.

Viewed narrowly, the answers to questions posed in the study simply describe how large banks and small businesses relate to each other. More important, however, is what these answers suggest to bank management, small business advocates and small business owners. It is clear that these answers suggest changes in the way large banks' small business efforts will be managed and how small business advocates must interact with large banks.

Ordering Information

The complete report is available from:
National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield, VA 22161
(703) 487-4650
(703) 487-4639
(TDD) Order number: PB94-195161n
Cost: Pending


*Last Modified 6-11-01