Nurture small business customer service by meeting unique needs

A version of this article first appeared in BAI’s June Executive Report: Elevating customer service across the enterprise. You’ll find insightful coverage in the issue on SMB customer care, investing in call center talent and customer-focused SaaS that’s designed for the financial sector, plus much more.

The 32 million small businesses across the U.S. must balance risks that will get new ideas, products or premium services out into the world at the same time they deliver reliable offerings that keep the lights on. They do this plus manage cash flow, rent, insurance, payroll, tax prep and a long list of necessary back-office demands that have little to do with why they went into business in the first place.

It takes agility and access to capital, especially for those wanting to grow or needing to smooth out seasonal hot and cold sales periods. And foremost, it requires a banking partner that’s just as nimble. That’s especially true in an economic environment shaped by uncertain interest-rate timing that has put a crimp on lending, and as inflation dampens wider spending.

At the end of the day, a small and medium-sized business (SMB) customer has financial needs much like any banking customer. They want ease, flexibility, assurances, the latest digital offerings and advice. But for banks and credit unions, SMBs historically required high-touch relationships that were costly to administer, with a hard-to-prove ROI.

Many banks believe that is changing, assisted by fintech partners to boost SMB-specific digital offerings in some cases. Some banks have flagged small businesses as a must-get market segment. They see opportunity for cross-selling and long-term deposit relationships now that an increasing number of consumer banking customers no longer are loyal to one institution and instead tap more than one source for their financial needs.

Chris Hendrickson, senior vice president, small business strategy and transformation leader at Comerica Bank, said during a BAI webinar earlier this year that his bank has made SMB growth a priority.

“Coming out of the pandemic and… with small businesses generating about half of U.S. GDP, we really felt the impact [of small business lending] in the communities,” he said during that presentation. “So we listened to our customers. They needed access to capital, and they wanted dedicated service. They wanted somebody who was going to offer them more than just a tool, more than just a place to park money or to get money.”

Hendrickson said Comerica hired over 100 small business bankers so that SMB customers “have an expert to actually talk to, and then we equip them with the tools to be successful.”

How small is small?

Sometimes small businesses are very small. The gig economy, driven by contract work, is expanding three times faster than the full-time, traditional workforce. This sector, along with side hustles, for which nine-to-five professionals might turn high-skill hobbies or consulting prowess into another income stream, as well as a desire among many workers for less corporate rigidity, are all factors fueling an already strong small business presence in the U.S. With this in mind, banks are getting smarter about efficiencies, treating SMB customers and individual retail customers more similarly.

They often are the same person.

Roughly 86% of small business owners use the same financial services provider for their personal and commercial banking needs, according to the BAI Banking Outlook. Of those combination relationships, a dominant 65% had their genesis in personal deposits, followed by 25% formed via business deposits. About 6% began with a personal loan and 4% with a business loan.

The top influence on why a small business owner selected a particular bank or credit union, according to that research? Level of trust for advice. And that’s true regardless of the size of institution.

The second most popular reason a bank earned primary status was also consistent across bank size: that bank is home base for the checking account with the highest balance or greatest number of transactions. Other popular reasons were varied, though not as prominently favoring one factor over another, including convenience, range of product and service offerings, and payment volume. Respondents also stressed that if they were seeking a new bank for their SMB needs, they care now more than ever about how that bank assists in running the small business.

According to Hendrickson, Comerica “gave small businesses back what they desired most, which was time to run their business. [That involves speeding up] credit decisioning, migrating to DocuSign. And it involves making everything easy to navigate for your bankers and for your internal staff as well. We have high-touch training.”

Doug Brown, chief product officer, digital first banking, for digital commerce platform NCR Voyix, says banks and credit unions can find an underserved segment within gig workers and other SMBs.

“Gig workers, with their unique financial intricacies and limitations, present another opportunity for banks to provide more narrowly tailored support. They face specific issues like saving for retirement without a traditional 401(k), medical coverage and taxes,” Brown said, writing recently for BAI Banking Strategies. ”Budgeting and cash flow management are especially critical to these individuals as their income is likely to vary over time.”

Offering advisory and consultative services can help financial institutions establish loyalty and trust among this underserved segment, says Brown.

And there’s a potential payoff for banks, too. What’s especially clear from the 2024 BAI Banking Outlook is this: the institution considered a business/personal customer’s main financial services provider holds over two-thirds of their deposit balance.

Not without risk

For Will Tumulty, CEO of Rapid Finance, a platform-as-a-service (PaaS) fintech, banks have struggled to close the market gap, especially on the lending side, when it comes to engaging with SMBs. Although he does see data optimization and other technology narrowing this shortfall.

“Banks have a lot of products already that they can repurpose for serving the small business customer. The issue is, particularly on the capital portion of the lending side, there’s a gap in the way that banks operate,” he said. “On the commercial side, banks are used to deploying capital in large chunks, usually at least a million dollars or more.”

The challenge, he says, lies with banks relying on putting deposits to work as loans via a historical infrastructure. “You have a loan officer involved. You have an underwriter involved. You have credit committees involved. And then you have to monitor loans. That is also costly. And so you need to put your money to work in big chunks because you have to make enough margin on that loan to cover all of those costs beyond the interest you pay to your depositors,” he said. “It’s been difficult to make the economics work until only the last 15 years or so, when in some cases fintech and banking have combined to fill this gap.”

Filling that gap with evolving technology includes allowing banks to better track and project business health, like cash flow, since some businesses such as a barber or a florist have little to no assets and are strictly a cash-flow operation. Some banks also opt for a fintech partner to spread out credit risk, combining, for instance, on a revolving line of credit or a leasing arrangement that might not meet a bank’s credit committee threshold.

Banks can lead

Tumulty and Brown stress how adaptable many banking products are to SMB needs, and they think banks and fintech can play a key role in advancing how SMBs operate.

“I think most of the features that are available today for consumer checking accounts are the same things that small businesses need: direct deposit, online bill pay… and then when we get to the receivables side, we talk about things like remote deposit capture, which is sometimes available to consumers and sometimes not, but is a pretty well understood technology at this point,” Tumulty says.

“Most SMBs think the first thing is to get my business checking account open. And it may not actually be a business checking account. It may just be another checking account that this bank consumer uses for their business,” he says. “The important thing is that those funds and those expenses are segregated.”

Brown thinks banks can nudge SMBs further along the digital path.

“Education and awareness play a crucial role in driving the adoption of digital payments among small businesses and gig workers. While many still rely on traditional payment methods like checks, the benefits of digital payments, which include security, convenience and enhanced financial control, are undeniable,” he says. “Banks can and should play a critical role in this education, helping small businesses and gig workers strategically and efficiently adopt the methods that work best for their unique needs.”

And both fintech executives are already thinking bigger, with more significant impact on the horizon.

“The banks that embrace the strategies and technologies necessary to support small businesses and gig workers will thrive in the rapidly changing banking and payments landscape while also contributing to the growth of local economies,” Brown says.

Tumulty believes banks will waste time if they wait for the perfect economic conditions to think about expanding SMB services.

“Put a small team on it. Talk to fintechs. It’s not going to cost you that much,” he says. “And if you do make that investment now, two years before your competitors, then when the economy turns and rates come back down and SMB growth is going gangbusters, you will not have missed the wave.”

Rachel Koning Beals is Senior Editor for BAI.