Getting big in small business banking


November 2016

Small businesses contribute roughly 5-10% of total revenues to banks per year on average. With such a substantial revenue pool one would imagine banks would be falling over themselves to service this segment. But most see the small business market as unprofitable and costly to serve, in other words, as an obligation rather than an attractive business in a bank's portfolio.

Yet, our research and client work shows that the small business segment is worth winning. Not only do small businesses have a number of high-value unmet needs but there are also many concrete factors that have left many banks' small business divisions much less profitable than they could be. They include relatively weak digitization, inadequate segmentation, poor sales alignment, inconsistent pricing practices and lack of predictive credit risk modeling based on account data. By addressing those issues, banks stand to improve revenues by 20-25%, reduce cost-to-serve by 5-10% and sharply improve their non-performing loan (NPL) ratios.

Fintechs and digital attackers, of course, are well aware of this potential; over 50% of cumulative Fintech investment since 2000 has been focused on corporate banking . Their high levels of digitization and automation allow them to offer payments, lending and other services faster and with a better customer experience than traditional models. And their online savvy often results in a richer, more personalized experience.

But big banks bring advantages that fintechs can’t match. That includes existing client relationships with strong relationship manager, access to cheap and stable deposit funding, and the scale.

Keywords : SME/Corporate