Volume 11; No. 1; Winter/Spring
Your Microbusiness Opportunity
By Charles B. Wendel, President, Financial Institutions Consulting,
Each year, Financial Institutions Consulting (FIC) and American
Banker survey small businesses on their perceptions and use of financial
service institutions. The 1998 survey focused on microbusinesses, defined
for this study as businesses with revenues below $1 million. While surveys
of this type yield static data, they often uncover emerging trends. The
following is a brief excerpt of the studyàs findings, which focused on
how financial institutions can achieve greater success when working with
Government and internal bank data show that businesses below $1 million
in revenues comprise approximately 90% of all small businesses. According
to Oxxford Information Technology, approximately 20 million microbusi-nesses
currently operate in the United States. FIC estimates that typical bank-related
revenue from an individual microbusiness ranges from $1,000 to $5,000
per annum. While revenues from individual companies seem small, FIC estimates
that this segment represents a $25-$36 billion*
opportunity for banks and other financial services providers. For banks
to generate acceptable returns, however, they have little option but to
develop cookie cutter products that focus on the micro- segment of the
small business market.
Streamlining processes, standardizing products and services, and creating
effective marketing strategies are the keys to success in dealing with
this business segment. However, there are a number of other factors that
contribute to increased market share and profitability. The following
are a few of the identified factors:
- Banks must capture greater share-of-wallet from current customers.
They can do this by developing a streamlined, one-stop-shop approach
to services and products. Cross-selling both commercial and consumer
products will build this segmentàs profitability, and will benefit customers
through the value of relationship pricing.
- Banks have clearly lost the leasing business to nonbank financial
service providers. Other product lines may be threatened. Nonbanks have
successfully partnered with computer, telecommunications and office
equipment manufacturers to provide vendor financing, a trend that has
already reduced profits for traditional lenders. Survey results indicate
that of the mi-crobusinesses who plan to use finan-cing in the next
year, 45% will use nonbank credit versus 27% in 1997. Counter-measures
are definitely called for. One option might be to develop a direct-mail
leasing product and work with vendors to capture more of the end-useràs
- Although currently insignificant, PC banking is growing in importance.
Microbusiness owners currently rely on branch banking, but most expect
to increase their use of PC banking in the next few years. More effective
marketing of PC bankingàs capabilities and its benefits will help expand
usage, and could also provide an inexpensive channel for cross-selling
bank products and services.
- Banks must do a better job of educating their customers. In addition
to educating customers about the benefits of PC banking, banks should
ensure that their customers are aware of other bank products they might
find useful. For example, when small businesses were asked if they would
buy insurance from a bank, 74% said they would not. The principal reason?
Banks donàt sell insurance. While banks often offer
the nontraditional products that all businesses require,
they have done a poor job of getting the message out. Ultimately, many
banks may need to repackage their small business product offerings and
refocus sales and marketing strategies to increase wallet-share and
deepen market penetration. Only after banks fully analyze the microbusiness
segment and the impact its characteristics have on profitability, can
management develop an effective strategy. Each player--whether bank
or nonbank, large or small institution--must recognize its deficiencies
and acknowledge its strengths in order to take advantage of the significant
opportunity this attractive segment offers.
1 This estimate is per annum and does not include
the use of personal credit cards to finance business needs.
Financial Institutions Consulting, Inc. is a New York-based management
consulting firm that focuses on strategic issues for banks and nonbanks.
For more information on the microbusiness study or other FIC services,
please call (212) 252-6700 or visit its web site at www.ficinc.com.