Small businesses, big opportunities

When banks hunt for new revenue, consumers and big businesses get plenty of attention. But operators of small or micro businesses are an untapped gold mine that may be hiding in plain sight.

Business formations skyrocketed across the United States between 2017 and 2022, according to data from BrightQuery, a BAI partner that tracks public and private companies. The number of sole proprietors grew from 26.1 million to 36.8 million, an increase of more than 40%, as more people took a chance and started companies or side hustles. When it comes to businesses with between two and 500 employees, the number actually dropped ever so slightly to 5.8 million from 5.9 million.

If you need more convincing about potential, consider these stats: The number of companies with annual revenue under $100,000 climbed from 25.9 million in 2017 to 36.6 million in 2022. This increase more than offset a slight drop in the number of companies reporting revenue between $1 million and $20 million to 1.76 million in 2022 from 1.81 million in 2017, according to BrightQuery.

According to the recently released BAI Banking Outlook: Small Business Banking Priorities and Insights, net promoter scores are the lowest (19) for businesses with less than $1 million in sales. This also correlates with data from the report that indicates that those businesses reporting sales under $1 million received product and service recommendations just 2.8 times a month, compared with 4.1 times a month for those reporting sales between $10 million and $20 million.

Small business owners get personal

The large majority of small business operators use the same bank for personal accounts, yet many banks do not fully recognize their potential. In fact, 58% of small business accounts started as a personal deposit relationship.

More than 70% of business owners want to originate digitally, and often the only easy way to do that is with a personal account, as banks have lagged on digital originations for businesses with multiple complexities, including the upcoming CFPB Section 1071 rules that will require banking institutions to collect and report data on lending to small businesses, defined as enterprises with gross revenue under $5 million.

Small-business operators dread having to do the financial part of running their company, but they may not be big enough for accountants and other specialists to handle the numbers side. They are shopkeepers, restaurant owners and salon operators, and their focus is on keeping their business going. Just 60% of the smallest businesses need a bank branch or office near their business, compared with 72% of their larger peers with sales between $10 million and $20 million.

What do they want from their banking relationships? Businesses with sales under $1 million want 24/7 customer service, faster payments and a clear way to use an app. By paying attention to these smaller players, banks have a chance to build a relationship that can grow far more profitable over time.

Small businesses also indicate that they do not use their main provider for merchant services, with “cost and better technology” being the top reasons for using other merchant service providers. This ability to accept payments is a key consideration for early-stage businesses, and as that business grows, not having that relationship already in place can represent a significant missed opportunity for banking institutions.

These possible customers have other specific concerns and needs as well. Those with sales under $1 million want tools to customize their experience, the ability to make use of the data to improve recommendations and an improved omnichannel experience. That’s different from companies with sales between $5 million and $10 million, which only want to make better use of data to improve recommendations, according to the BAI Banking Outlook.

The future is cautiously bright

As they grow, 67% of small businesses expect their financial situation to be better a year from now, 37% expect their profit margin to increase and 31% expect to need loans for growth or expansion in the next 12 months. In general, they are more worried about inflation and politics: only 41% of the smallest businesses think that inflation will be better a year from now, compared with 68% of those with annual sales between $5 million and $20 million. One-third think that the political climate will be better 12 months from now, compared to 61% of businesses with sales between $5 million and $10 million.

When it comes to business, bigger doesn’t always mean better. It is too easy to overlook the small players—those who are new or have found a niche that isn’t necessarily bringing in millions of dollars in sales per year. But by giving these operators attention and by tailoring offerings to their needs, banks have a great opportunity to develop an enduring relationship that can become far more fruitful over time.

Isio Nelson is the head of client engagement for BAI’s research department.

We provide insights to help shape and fine-tune your customer acquisition strategy and tactics in the BAI Executive Report, “Meeting the challenge of new customer acquisition.”