Internet Banking for Small-Business Customers.

Problem:

We are a community bank, and some of our small-business customers are being lured away by large, nonbank competitors. In response, we are considering the option of offering online banking to our small-business customers. Is this a viable option for a small bank?

Solution:

Any forecaster of the future of the Internet knows that business-to-business communications, transactions and payments are major trends. The question is whether banks or their nonbank competitors will be the key players. Certainly when it comes to small businesses, the community banks that have traditionally been their closest partners can keep these profitable relationships by offering online financial services.

A recent survey says that 75 percent of small businesses have access to the Internet. While they use that access for procurement or to find information, increasingly they will be performing financial functions. Studies vary, but most agreed that more than 50 percent of small businesses will be banking online in three years. This means there is a tremendous potential market for online financial services. Currently small businesses that use online banking are an attractive market segment. Financial Institutions Consulting found that these businesses had larger demand deposits, higher loan balances, more accounts and more satisfaction. ("Online Small-Biz Customers: Valuable, But Don't Force It," American Banker, January 12, 2001)

As of now, 15 percent of small businesses bank online. According to Financial Institutions Consulting, almost 70 percent check account balances and over 40 percent order wire transfers. Lending online lags behind the other banking functions. The study found that only 15 percent of small businesses had applied for credit online. Brightwood Partners found in their study that 4 percent of businesses shopped for a loan online, and only 2 percent applied for a loan online.

Levels of online needs

First Manhattan Consulting Group sees a progression in small businesses' use of online services. First small businesses access their account online, checking balances, transferring money, etc. Then they want online bill presentment and payment. Next they want to make online purchases, then access to advisory and referral services. Finally they want enhanced marketing help. ("Luring Businesses with Internet-Based Services is No Slam-Dunk," Small Business Banker, July 2000).

Most small businesses would logically need to use standard banking services like paying bills, transferring money, checking account balances, etc., as well as cash management services and sweep accounts. The other, more advanced services are now being offered by some of the largest banks and their nonbank competitors.

Wells Fargo, a leader in small-business banking, for example, has set up a Small Business Resource Center on its website. Small businesses have a choice of traditional online banking services (deposit accounts, loans, payroll, etc.) or human resources (hire people, plan retirement, etc.) or marketing tools (help with press releases, sending direct mail, growing sales, etc.) or buying smart (computer hardware and software and office supplies.) They ask "What Does Your Business Need?" and they intend to provide it.

Citigroup, on the other hand, has created a separate website, www.bizzed.com, that offers the same range of services. Needless to say, American Express has a competitive site for small businesses that offers financial services as well as information to help small businesses succeed. For community banks there is eScout (www.escout.com), a "business-to-business e-commerce network," spun off from UMB Financial Corp. of Kansas City. EScout allows community banks to offer some of the same services as the largest banks. EScout partners can provide e-commerce advantages to their local communities, like buying goods and services over the Web. ("Internet Banking's Last Stand," Small Business Banker, November 2000; "Web Buying Service Signs Bank 'Salesmen'," Community Banking, American Banker's Special Reports, January 2001).

Everyone doesn't want online services

All small businesses, of course, aren't eager to use online financial services. Some have real concerns about privacy and security, as do many online shoppers. Small businesses also mentioned customer service as an issue in a Cyber Dialogue Inc. survey. ("Is Service What It Should Be? Many Entrepreneurs Say No," FutureBanker, September 2000) Satisfaction with customer service on the Internet decreased in the areas of response time, usefulness of information, relevance to needs and cost savings. Another problem is that small businesses don't necessary see the need for online banking. According to the survey, 39 percent of small businesses saw "no need, no benefit" to online financial services. They also felt that it would be a hassle to change their banking methods, and they just didn't have the time.

Banks can help their small-business customers speed their adoption of the Internet, and branch personnel can be a key part of this strategy. Small businesses, of course, are heavy branch users. While moving them to online banking would cut costs for banks, the branch will always serve as a competitive advantage--where the local business can meet face-to-face with the local banker. In the meantime, the branch staff can be the focus of where online banking can be sold to small-business customers. Branch personnel can convince these customers of the safety and security of online banking, as well as the advantages to the business itself of banking at the desktop anytime of day. Showing small-business owners that they can increase productivity, get greater control over their cash flow and have instant access to real-time information about their accounts should help sell online banking. ("E-Banking Corporate Style," independent Banker, February 2000). incentives for branch employees that sell these services could include cash or referral awards. ("Customizing Is the Key to Overcoming Small Companies' Web Resistance," American Banker, January 19, 2001). And since small-business customers need training to be able to use online banking services efficiently, the branch is where the training can occur on a one-to-one basis or in seminars.

A way to compete

Online banking, in fact can be a retention tool for a bank's small-business customers. Businesses that are Internet savvy will demand online services and will leave a bank that does not offer them these services. The question whether to move all or most small-business customers online is best answered through an evaluation of cost and revenue. If banks find it is cheaper for customers to bank online, should they offer this service free to entice customers online or should they charge for the service in order to enhance revenue? Each additional online service that the small-business customer uses should not only increase the chance of retaining him as a customer, it should increase revenue for the bank. These issues have to be weighed to ensure profitability for these services.

Community banks are now faced with vast changes in the business world that the Internet is making. If they choose to offer new online services to some of their best customers, i.e., small businesses, they can compete against other financial services firms that are enticing them away. They can also increase their revenue and expand their market. In this technologically changing world, small businesses continue to need the help of their local banker.

Financial professionals who have questions about any issues, such as the one above, can call the ABA/BMA Center for Banking Information (CBI) where they can talk about their needs with a research specialist. CBI offers both customized and prepackaged research solutions to banking-related questions at reasonable rates.