MarketsandMarkets: Lending to Small Businesses – Impact on Bank’s Profitability

Small and medium enterprises represent around 99.7% of the total business establishments in the U.S, and contribute 40% to the country’s GDP. In 2009, twenty nine million small businesses operated in the U.S. Small businesses allocate 6 to 10% of their total spending to financial products and services such as cash and credit management, trade financing, payroll processing and treasury services. It is observed that banks that successfully target the small business segment earn better net interest margin (NIM) and return on asset (ROA) compared to those who do not cater to the small business segment.

Browse in-depth ToC of U.S. Small Business Banking Trends

Economic crises in the U.S. impacted availability of loans/credit to small business owners and 2008 and 2009 witnessed a decline in lending to small businesses. However, leading banks such as Bank of America, Wells Fargo, JP Morgan Chase and others are now showing a great deal of interest in lending and, thus, driving up the amount of loans to the small businesses. In the first quarter of 2010, Wells Fargo’s new loans to small businesses amounted to $2.9 billion.

Also, a key strategy of the banks is to encourage deposits from the small business owners to improve customer retention and cross selling. Wells Fargo, Bank of America, Key Corp, U.S. Bank and several others offer bundled personal banking products with business banking products to achieve better cross sell ratios.

Small business banking offers huge opportunities for banks, however, a recent trend indicating increased failure rate of small businesses is a matter of concern for the banks lending to small businesses. Moreover, loan failure rate for small businesses increased to 12% in 2009 from 8.4% in 2007. To improve profitability, from dealing with small businesses, our study suggests that the banks need to centralize their operations, redefine the role of lending officers and deploy credit risk management and business intelligence/analysis tools efficiently.

U.S. Small Business Banking Trends is a study of banking products used by the small businesses and the changing trends in small business banking. The study is designed to provide insights on the behavior and attitude of the small businesses towards the banking products offered by large as well as small banks.

Key Findings from the Report

  • In 2009, small businesses spent around $469 billion on financial products and services; this figure is expected to reach $592 billion by 2014, growing at a CAGR of 4.8% from 2009 – 2014.
  • An analysis of a sample of banks revealed that NIM of banks that provide loans to small businesses is 3-4 times higher than the NIM of banks that either do not lend or are less focused towards lending to small businesses.
  • A survey indicated that around 44% of the small business owners prefer to use credit cards for funding business cash flows and 27% opt for bank loans.
    Banks provide customized credit card along with reward points and cash back offers to increase client base and encourage frequent use of credit cards.
  • A recent survey of small business owners indicated that around 7% of the small business owners use payroll services, 11% use Automated Clearing House (ACH) transfers and around 8% use RDC.
  • Banks targeting small businesses have implemented enhanced credit risk management systems and business intelligence/analytic tools to identify profitable and non-profitable small businesses.
  • In order to improve customer retention and new client acquisition, large banks (asset size more than $50 billion) have devised a one-stop solution provider model under which they offer additional services such as HR services, business insurance and healthcare insurance for both employer and the employees.
  • Customer retention is a key focus area for banks. Product bundling is a major strategy banks are adopting to improve cross-selling apart from competitive pricing and secured deposits. Banks that employed product bundling strategies achieved a cross sell of around 3 to 3.5 products per customer.
  • A key concern for banks lending to small businesses is the increasing rate of small business bankruptcy from 2006, and sharp increase in the loan default rate for Small Business Administration (SBA)-backed loans from 2007.

Scope of the study

Strategy formulation
This section addresses key issues and opportunities in the small business banking industry along with its current and future trends. The report provides a detailed analysis of the various small business banking products, such as online banking, merchant services, lending services, investing and insurance services, and HR solutions, to help identify usage, need and competitive strength of these products. The section also analyzes and discusses in great detail key banks serving small businesses and their market share.

Business model
The section discusses various market entry strategies followed by successful small, medium and large banks in the small business banking industry. It also reviews and analyzes case studies of small business banking and various pricing and product strategies adopted by the key players.

Vendor Analysis
To help banks select the most competitive service provider, this study provides an in-depth analysis of the vendors providing services to banks to help them serve small businesses. The section has benchmarked vendors across product complexity, features, prices, returns and customization to present the best choice for a service partner (vendors) to banks.

About MarketsandMarkets
MarketsandMarkets (M&M) is a global market research and consulting company based in the U.S. We publish strategic advisory reports and serve as a business intelligence partner to Fortune 500 companies across the globe. MarketsandMarkets also provides multi-client reports, company profiles, databases, and custom research services.

M&M Banking and Financial Services Practice recognizes the challenges that financial institutions face while bringing the right products to market. Our reports and consulting practice provides a unique perspective allowing financial institutions to understand and strategize to achieve their product goals. Through a mix of case studies, primary research, and business modeling we provide a 360° view to identify how our clients can create, capture, and retain the value of their products and outthink the competition.

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