Competition Update: Attracting Small-Business Deposits

CU360
January 11, 2008 | COMMENTS

Small businesses can provide a fertile source of desirable clients because small-business owners often bring their personal business with them into the relationship.

What's not often recognized is that small businesses—defined as companies with annual revenues of less than $10 million—also provide a rich source of deposits. Historically, banks have gone after their lending business, even though 60% of small businesses never borrow at all. Too few institutions target small businesses for their deposits.

Financial institutions that recognize the value of small business deposits can take steps to protect the deposits they have and encroach on competitors, according to the Bank Administration Institute's Banking Strategies newsletter. Understanding the key profit dynamics of this business and how to take advantage of those opportunities can result in increased revenue.

Combining a strong product suite with a targeted and motivated sales force that has an effective incentive system can drive deposit growth. Developing an effective deposit focus requires product development, marketing, support, and staffing.

Five Tactics

The following five tactics can result in improved deposit performance with small business owners:

1. Assess and simplify the product set. The product set itself needs to be as simple as possible, both for the small business owner and the institution's staff.

Reviewing the product set to determine which products are critical to the customer and are most profitable has become a foundational requirement for deposit sales success. One Canadian bank, for example, recently reduced its deposit product types from 12 to four. Other banks have focused on streamlining processes to make account opening as easy as possible.

2. Emphasize product packages. Institutions that introduce targeted product packages meet a wider range of customer requirements related to deposits and loans, and they reduce account turnover.

Small businesses offer an opportunity to broaden your marketing aim beyond the business account to the personal needs of the business owner and the business' employees. In some cases, up to 40% or more of branch profitability results from the combined impact of business from the company, owner, and employees.

Increasingly, institutions focus on offering a set of personal and business capabilities rather than a single product. The best marketers now emphasize product packages or suites that can differentiate your institution and draw in deposit balances from both the business and the business owner.

3. Increase the effectiveness of the deposit sales effort. Despite the importance of deposits, personnel at most banks continue to emphasize loan sales. Most bankers are better schooled in loans than deposits and have experience selling them.

While it's not necessarily easier to sell a loan than a deposit, the process could be more straightforward and shorter. Loan decisions often occur around the need for a specific piece of equipment or anticipated cash flow requirement. Deposits tend to remain where they are unless some significant event occurs such as operational mistakes, poor service, or an attractive investment opportunity.

Creating a deposit-focused sales force places clear emphasis on this area and takes deposit sales out of the realm of the day-to-day to give it significant and specific emphasis. A deposit-only sales force can concentrate on this one initiative. At a minimum, piloting a deposit-only approach as a test makes sense for many institutions struggling to maintain current deposit levels or improve their deposit mix.

4. Segment the market. Many institutions tend to segment by industry, developing product packages that can be altered slightly to meet the needs of a specific segment. An institution, for example, might focus on a number of industries within small businesses including accountants, contractors, retailers, or restaurants. While the bank offers substantially the same product set to customers across these industries, its product emphasis changes depending on industry-specific needs. For contractors, it might emphasize equipment finance while merchant services and cash-management products will be the leading offer for retailers.

Deposit-rich industries merit a concentrated focus. This includes not-for-profits, property management, homeowner associations, and professional services firms—all of which generate significant levels of deposits while requiring minimal lending.

Opportunities exist to segment by industry, product, distribution channel, and company size and lifecycle. Picking a segmentation scheme and developing an implementation plan around it increases the likelihood of gaining traction with a chosen segment and avoiding the commoditization that increasingly affects business services today.

5. Align incentives to highlight the importance of deposits. Financial institutions' senior executives often say that deposit growth is critical and that capturing deposits should have the greatest emphasis. But is that the message conveyed by incentives and compensation plans? Oftentimes, management may communicate that they want deposits while, at the same time, providing higher compensation for loan sales.

Conversations reported with line bankers underscore an incentive gap, in which rewards don't emphasize the value of deposits. While commercial loan officers are not disincented to go after deposits, they're more likely incented to go after loans. Simplistic, but true: unless employees are paid to pursue deposits, they won't devote their best effort to that quest.