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2006 4th Quarter:

Keeping Your Small Business Customers Happy

What Do They Really Want From You?

In a world where small is the new big (witness the explosive growth of ever-shrinking cell phones, portable music players and computer laptops), it is not surprising that small business means big bucks. According to the U.S. Small Business Administration, small businesses make up 99.7 percent of all companies. They employ half of all private-sector employees and generate 60 to 80 percent of new jobs annually.

Although they may differ greatly in terms of actual size and industry, one thing they all have in common is a need to build longterm, mutually satisfying relationships with financial institutions such as yours. So why are these entrepreneurs—as well as the bankers who want their accounts—behaving more like the perennially misunderstood opposite sex described in John Gray’s bestselling book, Men Are From Mars,W omen Are From Venus? Part of the problem may be that banks and credit unions just can’t seem to figure out exactly what it is their small business customers really want from them.

The Middle Child Syndrome

“In some ways, small business accountholders are the banking industry’s stereotypical forgotten middle children,” said Kathryn Foley, vice president of segment marketing, Harland Printed Products. “They tend to get lost between the attention dedicated to either the goliath commercial accounts or the mass market consumer accounts. Because of this, financial institutions may lose sight of what these entrepreneurs really need.”

And that will be the financial institution’s loss, because knowing what makes small business owners tick can spell the difference between a happy customer and an unhappy one who takes his or her banking elsewhere. Bankers might be very surprised at the mindset of entrepreneurs, if they would only take a closer look.

What they need, according to Foley, is for banks and credit unions to understand that they have their own unique needs, separate from commercial clients and consumer accounts. This starts with the challenges they grapple with daily. Whether it is the rising cost of fuel, which impacts all aspects of a business, or skyrocketing health insurance premiums, which make it cost-prohibitive to offer coverage to employees (who consequently may leave for greener pastures), keeping a keen eye on expenses is a defining characteristic of small business owners.

Resistance to Electronic Banking

“Banks and credit unions may not be able to solve, these sorts of problems,” said Foley, “but even so, simply understanding the issues goes a long way in building trust.” There is one challenge that financial institutions are tailor-made to solve, however, and that is to help small businesses navigate the growing world of online banking, a place many entrepreneurs are loath to explore.

“It’s almost counterintuitive to think that entrepreneurs, who by nature tend to be risk-takers, would be averse to new technology,” said Foley. “But the fact is, when it comes to managing finances, the vast majority of them prefer a traditional checkbook.”

A telephone survey of 650 owners or executives of small businesses in manufacturing, wholesaling, retailing and service industries bears this out. Conducted in August and September 2005 by Synergistics Research Corp., the survey found that while every business used a checking account, electronic money management was not nearly as popular. Fewer than one-third utilized payroll or merchant processing, and a mere 23 percent made use of direct deposit.

Perhaps even more telling is that, when asked which payment methods they expected to keep using, only checks and credit cards came out ahead. A whopping 30 percent gave a thumbs-down to debit cards (compared with 7 percent who would use them more). Likewise, auto pre-pay was roundly dismissed by a more than 10-to-1 margin (34 percent would use it less compared with only 3 percent who would use it more), and more than twice as many respondents gave the boot to online bill payment (18 percent would use it less compared with 7 percent who would use it more).

It is worth noting that more than 90 percent of those surveyed by Synergistics ran companies with annual sales of less than $1 million. Nearly half had sales under $100,000 per year. Similarly, only about one in ten had more than 21 employees, and nearly half employed five or fewer people. While the actual size of a “small business” can vary depending on the industry, the Small Business Administration defines a small business as one that is independently owned and operated and is not dominant in its field. The Office of Advocacy defines it as an independent operation with fewer than 500 employees. So these survey respondents fell well within the definition of “small.”

The Big Issue for Small Business: Security

The reason for this resistance to electronic banking mainly has to do with very real concerns about fraud protection. Large companies, for example, have access to a cadre of experienced information technology personnel who can build myriad safety controls into their computerized bill payment systems. Small businesses cannot afford that luxury. So they tend to create their internal controls around pen-and-paper processes. Indeed, the survey found that nearly half (46 percent) of small business operators cited checks as the most secure payment method. How many of them felt that optimistically about online bill payment and debit cards? Not many—a mere 5 percent and 3 percent, respectively.

“Small business owners have been largely left to their own devices,” said Foley. “They’re understandably resistant to high-tech banking because they don’t have the time or resources to understand the technology, train staff or change their processes.”

On the other side of the coin are consumers, who have embraced online banking with open arms, much to the delight of financial institutions. But consumers are extended certain government protections against unauthorized transactions. These same protections are not yet uniformly offered to small businesses.

“There aren’t many entrepreneurs who feel confident enough to start using electronic bill payment, particularly if that means giving a bookkeeping employee access to their accounts,” said Foley. “They feel much more secure with a traditional checkbook.”

Not Just a Banker—Be a Small Business Consultant

First and foremost, financial institutions need to be sympathetic to the dilemma that electronic banking poses to the typical small business owner. With that in mind, they can be realistic about what their small business customers will and will not do when it comes to moving their finances online. Institutions that can help small businesses in this way will be seen as more than just bankers; they essentially become consultants to their small business accounts, enabling these accountholders to do what they really want to do, which is spend more time building their business.

The institutions that can make banking simpler are the ones that will keep these accountholders happy. The answer lies in providing real working solutions— ones that take into account the specific needs of that entrepreneur—not merely offering cookie-cutter services that they think will work, like debit cards or online bill pay. For example, it may be worth it to provide a service such as “remote deposit capture,” which enables entrepreneurs to scan checks and upload them for deposit right from their business location, saving them the hassle of a trip to the bank. Financial institutions can utilize intelligence-gathering tools, such as satisfaction surveys and demographic profiling, to help them better tailor their services to small businesses.

“It’s like a marriage,” said Foley. “Just like the spouses from Mars and Venus who need to better understand each other, bankers need to appreciate and respect the concerns of their small business accountholders.” Indeed, in terms of growing those small business relationships, that’s a big step in the right direction.