Where Does Small Business End and Commercial Begin

Transcription:

Stu Richards (00:09):

Thank you very much. So my name is Stu Richards. I'm the CEO of Braden. We are a research company that focuses on the small business audience. So we do a lot of work in financial services, helping clients to understand the mindset of small business owners and how to segment, how to go to market and all of those good things. I'm really excited to introduce this panel today, which is effectively a continuation of the panel that if you were here, you just heard, including Scott, one of the panel members. And the focus of our conversation, of course is on the question, where does small business end and commercial begin? And in the spirit of research, what I wanted to ask is, so for you who are bankers, please raise your hand if your bank defines small business by revenue.

(01:04):

Alright, a couple of hands go up and then please raise your hand if your bank defines small business some other way, like by assets, by products used. Okay, a few hands go up. Yeah, so we did some what in research is called convenience research, a small sample of actually you via American banker around the definition of small business. And it turned out roughly two out of five defined small business by assets by product, used by the loan amount. And the remainder defines small business by their revenue. And the range is varied wildly from zero at the small end, up to 20 million at the big end. And actually with that said, what I wanted to do is ask each of our panelists to introduce themselves, their institution, and how their institution defines small business. So Mark, we'll start with you.

Mark Pilotti (01:55):

Hey, good afternoon everybody. I'm Mark Pilotti, I'm with Capital One. I'm Head of Deposits and Marketing. And you mentioned a wide range. We'll keep the whole range. We define small business from zero to 20.

Scott Stearsman (02:08):

Good afternoon, Scott Stearsman. I'm with Truist Bank and we would've defined it differently 30 days ago. We actually just made a change. I think it was one of the questions we're going to hit a little bit later, but prior we would've defined small businesses zero to two at Truist, and then business banking would be two to 10 and commercial would start at 10 and above. 30 days ago, we made a decision to change that. Now small businesses is defined as zero to 10 million in revenue. We have a couple of dimensions on there around credit exposure, treasury management, et cetera, as we move in that zero to 10 space. But so essentially we've combined small businesses and business banking and made it small business zero to 10.

Nicholas DeWitt (02:50):

Hey, good afternoon, Nick DeWitt, M&T Bank, I run strategy for our business banking division. We're zero to 20 million on revenue and then total group credit of 5 million or less.

Stu Richards (03:02):

That's great. And Nick, you had asked the question at our prep session about defining where small business sits in the organization. So where at m and t? Is it in retail or commercial?

Nicholas DeWitt (03:14):

Yeah, it reports up through the consumer channel, but we partner both on the consumer and the commercial side just to add a little bit more complexity to the model.

Stu Richards (03:24):

And Scott.

Scott Stearsman (03:25):

On the consumer side as well. So small business, the zero to two prior was in consumer or retail and the business banking two to 10 was in commercial. So we made the change of moving the two to 10 small business and now that reports into consumer.

Mark Pilotti (03:39):

Great. Yeah, and I think we're in the similar boat. We're also in retail. I think the complicating factor for us is we take small business card and that's its own separate entity as well. So we could try to cut it as many ways as possible.

Stu Richards (03:49):

Great. And Mark, starting with you, how did Capital One arrive at the definition to the degree that the history there and how do you see that definition playing out across the organization?

Mark Pilotti (04:04):

Yeah, I'm not the local historian, so I think we really look at it as a shortcut to try to figure out the complexities relative to commercial. So our commercial bank generally significantly more sophisticated deposit products, more sophisticated loans, and we use the 20 million as a shortcut. And to be frank, it creates a lot of tension. It's a really maybe sloppy wave determining who belongs where. And so there is a lot of name by name. We'll go through and determine who belongs whereby the sophistication of the lending predominantly with 20 million being a relatively easy cutoff. So I think we do it more for simplicity. It's something we can easily obtain about a customer right off the bat and then use that to filter them to the right rms and business development folks. But at the end of the day, it's really about you work back from the customer and the needs that they have and that's how we try to filter them to the right home in the long run.

Stu Richards (04:58):

And Scott, redefining small business is not a trivial exercise. What drove Truist to make that change?

Scott Stearsman (05:04):

Yeah, exactly. When Mark said we worked backwards from the client, so we looked at the data and we said, how are our clients behaving? And so when you look at our clients, 85% of those clients in business banking we're going into a branch, yet they were sitting in commercial disconnected to the leader of branch, and you looked at digital engagement and the solutions that we were provided, credit exposure, and they acted behave just like a small business client. When you looked at a client from zero to 2 million in revenue and a client with 5 million in revenue, there wasn't that great of a difference, but yet we were making it organizationally tough to serve those clients. We had the business banking team and yet they didn't have a lot of interaction with the small business team. And we said, well, let's just take those bankers and the small business bankers and the branch and the digital team and the contact center and let's put those all together so that we can serve them the way those clients are interacting.

Stu Richards (05:57):

That's great. And Nick, same question.

Nicholas DeWitt (05:59):

Yeah, business banking was founded at m and t in the late eighties, so I didn't have access to anyone that was around back then, but we did make a jump from 10 million to 20 million in the last couple of years and we basically had three responses from our big metro areas. We had that you got to go higher than that, we can't sustain the 20 to 50 from the more dense areas. We had the you're playing in our space, please get out of it. And then in other areas sort of in the middle, the response was, yeah, that sounds about right. That feels right. So across the geography you see different reactions to whatever you set the number at. And that's such a dangerous game to play is setting a number and thinking that's it.

Stu Richards (06:41):

Yeah. And what would you say, I mean given the current definition, what do you think are the biggest pros and cons across the organization?

Nicholas DeWitt (06:49):

The biggest pros I would say would be it's wide enough to be able to scale, especially when you have to partner with different organizations and the product offerings. And similar to what Scott said, the behaviors and activities across that continuum are largely similar. The biggest cons I'd say is in the very small, what we would call micro business, the way you product or market or service, those are going to be different, especially on the early on stage. Then there's a part where they transfer over and act a lot more like the upper end or lower middle market. So you have to have some differentiation at certain points along the continuum.

Stu Richards (07:32):

Yep. And Mark, what would you say in terms of definitions, do you see pros and cons of the way Capital One is defining small business now?

Mark Pilotti (07:41):

Yeah, I would say it is so broad, and again to maybe I'm just echoing here, the wide range of servicing needs that these customers have, it's really a immense, and so some of our customers are showing up at the branches, some of them need that banker to hold their hand and give them the advice that they need. And for us, you're trying to meet the customer where they are. And so we're putting bankers on some customers, we're trying to digitally service others. We have a branch for some. And so I think that wide range leads to a lot of different servicing opportunities and opportunity. The traditional sense here, a lot of opportunities to meet the clients where they are. And it's really complicated to kind of sort that out. And I think for us, what we see is the product needs also widely differ. As you start pushing up to $20 million, you could be in a heavy treasury situation, it looks a lot different than somebody who walks into a branch and is just looking to open up their first checking account. And so I think that wide range, you're servicing a lot of different products and you're trying to meet customers at a wide range of places.

Stu Richards (08:41):

And Scott, have you seen the same, is there an impact on the product definition or product suite given the new definition of small business at tourist?

Mark Pilotti (08:51):

Too early to tell Stu at this point. I do think the challenge as we implement and execute this model is, and I said this in the prior session, is clients don't walk in and say, I'm a business banking client or I'm a commercial client. They don't think of themselves that way. We kind of put those labels on our clients and say, well, you make this much in revenue so you're this client. And so I think that's the challenge we have is to really say what are the needs of that client? Because what we're thinking about is we may have a client that makes $8 million in revenue but has been very stable and has very basic needs. And so where's the best place for that client to be served, both from the bank's resource standpoint but also for the client. And you may have a client who's 2 million in revenue but has grown 30, 40% in the past three years. And we want to say, well, hey, let's put a relationship manager with that client so that we can advise that life cycle, that business that's growing. And so that's where the real data and the analytics and insights come in is to say, let's dedicate those resources regardless on what the revenue is, but what's the client profitability, what's their growth rate? And then dedicate your RMS to that client versus credit exposure or revenue. And that's going to take some time for us to be able to implement that. That's the way we want to think about it.

Stu Richards (10:09):

Yeah. And you also mentioned in our prep call about the various go-to-market strategies, the car banker, I love that term, the branch or store banker and the virtual service. How are you finding the allocation of those resources working best with the new definition? I know it's early to say.

Scott Stearsman (10:27):

Yeah, we actually changed the archetype. So we had regional business bankers, they sat out in the regions and reported into commercial and they would get in the car, go visit the client. Well, I'm from Atlanta, it takes you a while to get from business to business. And so we essentially said, and you look at the client activity and the contact rate. And we said, well, what if we change that to more of a virtual model? And so now we've got a virtual team-based model in business banking, and they're in a pod and it's a team of bankers with service specialists that actually serve a portfolio of clients. And so if that banker's out, that client has a need, they can call in and they have a team of bankers versus just Scott Steerman is my banker and I can't get ahold of Scott or Scott won't call me back for two days. Well, we've got a team now that's actually managing those clients. And then on the two to five, it's more of your mass. So again, it's a virtual delivery model, but it's a much larger Salesforce. And then on the lower end, our branch managers, we have 2000 branches and our branch managers are largest small business Salesforce. And so constantly trying to develop their proficiency in small business, but having the capability of leveraging those other bankers to help them out.

Stu Richards (11:41):

Sure. Hey Nick, what's the go-to market strategy across the whole spectrum at m and t?

Nicholas DeWitt (11:47):

Yeah, sure. So we go to market together with retail and business. They have joint goals, joint incentive plans. They're really in partnership when they go out to market. And what's really nice is you truly have at least a team of two to start with. That can be an expensive model if you don't divide and conquer though. So they're able to have the support they need when they go out to a client and can speak many languages if they need to, depending on what the client needs are and what the next step is for them. So that's always really helpful. And then they have a team of professionals that also support them virtually. So depending on where they are, how dense the location is, they can have a variety of support mechanisms to back them up depending on what the client needs are and always starting from that center.

Stu Richards (12:39):

And Mark, you mentioned for Capital One, your focus is more on deposits than on lending. How does that affect the go-to-market strategy?

Mark Pilotti (12:47):

Well, our go-to-market strategy sounds a lot like Truist actually maybe minus the 2000 branches. I'm sure you all have seen a bunch of our marketing on banking reimagined and hopefully come get a cup of coffee at our cafe. They were mentioning that earlier. We have bankers who are in footprint, the car banker. We also have a virtual model. And I think we're starting to test and learn on that virtual model and try to figure out how far can you take that and do you really need to be face-to-face or can a virtual banker do a lot of the same stuff? And again, I think it kind of comes back to how do you meet the customer where they are. We've done a lot of primary research and ask customers, how do you pick your bank? And they're like, well, it's the branch around the corner.

(13:26):

I need the banker there. When was the last time you spoke to your banker? Never would you like your banker to call you Actually, no, I'm good. I'm good. Please know, I'll reach out if I need to. And so there's a little bit here of some customers want the banker and some customers don't. And so we're trying to figure out how do we use maybe data and insights and analytics a little bit better to make sure that we're targeting our virtual banker to the customer who is looking for somebody to be there reactively as opposed to proactively having somebody kind of stop in every six months or two months or whatever. So we look a lot like truist in that sense.

Stu Richards (13:59):

Okay. And then kind of an operational question, and Nick, this was yours. How do you migrate a growing small business from the small business team to the corporate or commercial team?

Nicholas DeWitt (14:14):

If I had a great answer, I wouldn't be sitting here.

(14:17):

No. In all seriousness, the beauty of having that relationship management model is if we do our job, the customer never knows that they transition from one business line to another. And that's the model we, or that's the outcome we're always trying to strive for. And what we try and do is connect the bankers with the client and have a transition meeting that's real tactically speaking. But what we try and do ahead of time is help the client, or sorry, help the bankers understand why a transition would be helpful for both the banker and the client. And that could be based on the number of touches that the customer expects, where they're going with their growth plans, our ability or inability to service them in the current channel they're in. And we try and take somewhat of a data-driven approach there, although not everything can be put on a spreadsheet.

(15:09):

And then when you actually go to effect the change, you should in theory have both bankers bought into the idea an understanding of what's happening with that business, why the transition is needed or necessary, and it should feel like a win. The one thing we haven't figured out from a data standpoint is in that transition it looks like someone has lost and someone has gained, and our systems are just not that sophisticated to capture that in a way that makes it really easy and simple. So we try and do it in tranches and then true up for it on some systemic basis.

Stu Richards (15:45):

Good. Scott, same question.

Scott Stearsman (15:46):

Yeah, I would echo the same thing Nick said. I mean, it's easier said than done. We do a lot of client planning and business lifecycle advisory to get that client to the right relationship manager in a place where their needs are best served. We're still working on aligning incentives and scorecards, so it really promotes the bankers to do that and execute it. And I say we've made progress in the alignment of incentives and scorecards, but we still have a way to go.

Mark Pilotti (16:12):

Yeah, mark. Yeah, we routinely refresh our portfolio and a delivery model on it looking at all of our clients and trying to figure out both do they belong in small business, do they belong in commercial? So where there's a constant ebb and flow across the commercial line, we also get inbound from retail of a bunch of consumer accounts where somebody's flagged like, oh, they're running a business out of this account and move them over. And then the delivery mechanisms within small business. So we move them from the banker to virtual or unmanaged to the branch, and we're constantly moving them back and forth based on, again, what does the customer need, what do they need at that part of their lifecycle? And can we really kind of sharp shoot that in conjunction with working with the actual bankers who've been on those customers who really understand their needs.

Stu Richards (16:49):

Great. Okay. We have a couple minutes left. I actually have one more question, but it's a biased question because a content shop in addition to resource, so I'd love to hear, starting with you Nick, how do you determine the optimal mix of, for example, educational or advisory content that's delivered either online or in webinars or live events or via bankers or in branch because quite a matrix and obviously from zero to 20 million very wildly in terms of their educational support needs. How does m and t approach that?

Nicholas DeWitt (17:23):

So we try and develop content that would serve 80 to 90% of the population that's in business banking. So you'd immediately be able to point them to places and spaces where they can self-serve and take advantage of that on their own. And then as we think about our branch teams, we've got about 1100 branch managers and about 300 rms, and then the sales leadership on top of all of that, how do we equip them with information, insights, education material that they can bring to clients that fit the topic? Not everything that we produce is relevant to every business, and so we really need the frontline teams to be able to understand that topic and help them find the right clients that would benefit from that. We also have a multitude of programs, educational programs that clients can elect into depending on where they're at, they tend to skew more towards the startup or they're just expanding maybe into their second employee. And these are things that help them transition out of their consumer model or consumer accounts into a more business friendly structure and or platform. So I guess at the end of the day, we're trying to find a way to efficiently and effectively deliver by a combination of self-serve and then also boots on the ground delivering content in a seamless way.

Mark Pilotti (18:55):

Scott, same question.

Scott Stearsman (18:56):

Yeah, I feel like we've thrown the kitchen sink. This one, we deliver digital insights, also resources for clients to go in and self consume for our small businesses. So white papers, other resources and content that we have out there. We do a quarterly webinar, which we opened it up to all of our small business clients to attend and we vary topics. Our last topic was around personal wellbeing for our small business owners, knowing they were going through a lot of stress with the economy through our branches. This year we've done over 1200 financial education seminars, so our branches invite small businesses in, they host financial education seminars around starting your business, managing your business, borrowing access to capital, et cetera. And then we're unlocking that to do that virtual as well. So instead of coming into a branch, you can join one of our virtual sessions. And then the other thing that we were just tapping into is a partnership with the SCORE foundation and leveraging the content that they have and the network that they have also with our bankers and feel like that's an opportunity for us to be able to scale this just beyond truist.

Mark Pilotti (20:05):

Yeah, we do something similar. We try to send a lot of content through our bankers, and so it's company specific information, industry specific information. It gives the banker a reason to have a touch point with the customer, with the client and really facilitate, facilitates a conversation, a one-on-one conversation. I think we do a lot of the generic stuff as well, putting stuff up on the website. It is just really hard when you're bombarding people with so much information around driving the engagement and when to hit them and not. And so that's kind been a really a challenge is how do you drive eyeballs to that. And then I think we do a lot of stuff. Again, back to the cafes, I'm maybe harping on that maybe a little bit too much here, but a lot of our community outreach does come through the cafes and so we're engaging with local foundations or incubators to drive small businesses into the cafes, try to drive that more community feel. And so we're kind reaching out to the community that way to drive education through the cafes.

Stu Richards (20:55):

Great. Any questions? Angela? Did we cover everything for you? All good. Good. Any questions for these guys? It's a great panel. Big voice. Yes, absolutely.

Audience Member 1 (21:14):

So you've done where the small business end commercial begin, but what about where does business commercial end at wealth management begin given the importance of below the 63-year-old business owner who's now transitioning and huge opportunity or otherwise get it right?

Stu Richards (21:33):

Great question. And are any volunteers?

Scott Stearsman (21:37):

Well, I would just say to the wealth question, we are still building out commercial and the middle market, et cetera, that's in our wholesale, but intentionally we've put the wealth business in the wholesale to align with commercial knowing that that's your largest pipeline for that clientele versus a lot, I think other institutions have maybe wealth with consumer. We've had that in the past, but recognizing that's a big opportunity for growth for the retail premier on the not sort of the mass affluent now that still sits in consumer because it is more like the small business. So we've tried to align those two together.

Nicholas DeWitt (22:14):

It sits along the entire continuum. We have on the lower end fas sitting in branches. And so a lot of things evolve around the branch. And then as you move more upstream, you have fas not sitting in branches that are well connected to our business bankers or our commercial rms. The places and spaces that do it best are when they have joint meetings or they have round tables together where they're thinking about each other.

Mark Pilotti (22:42):

For us it's going to be a little bit of a different story. We don't really do wealth management at Capital One. And so what we see is to the panel earlier we were talking about disintermediation. We see a lot of our customers really breaking apart some of these relationships and going a lot of different providers. And so I don't know that we've necessarily feel the need to bring wealth management there because for us we just couldn't figure out a way to scale it and do it in a way that we wanted to have the best product in the market. So for us it's you got to bring your best foot forward and we weren't there on that. And so we feel really comfortable that that relationship gets disintermediated and somebody else can really step in.

Audience Member 2 (23:20):

Thank you. I think actually Mark, one of the things you said right there I think will apply to this question, but for each of your individual institutions, I'm assuming there's going to be a little bit of a nuance difference to this, but the way you look at a business, whether it's 1,000,005 million 25 50, 250, is there a story or an anecdote or something that you would speak to that explains the real difference in how you're delivering and the needs of those folks that makes them so distinct that we're talking about why you would classify them differently?

Mark Pilotti (23:59):

Somebody had a great example earlier in the big room around commercial clients will negotiate like every covenant in a deal and everything is bespoke. Their treasury products are bespoke, their loans are bespoke, everything is bespoke and it requires just a whole different level of specialization and customization for those clients. That looks wildly different than what we do in the small business space. And so the gearing ratios and how you talk about how many clients an RM can handle in the commercial space, the level of sophistication on the products, the specialists you need to put around it, it's just a wildly different delivery model and that level of sophistication, I don't know that we couldn't scale that in small business, nor do I think that the clients necessarily need it.

Nicholas DeWitt (24:44):

Yeah, I'd go one step further with that and also say it depends on their expectations as well. Depending on where they sit in the organization, there's certain routines that we have our bankers do and that model might upset them or they don't want to hear from their bankers as often as we might connect with them or bring them ideas. So it really depends on their expectations and what they want. That's a great call on the differentiation between the needs. And then also the other part is the platform and the complexity of a client. Where will they fit best on our platforms? We have multiple across the continuum, so it's weighing all of that out.

Scott Stearsman (25:28):

Similar response, it was when we looked at the data, how were those clients behaving? What were they, who were they interacting with? That just caused us to realign and serve those clients that behaved the same as a 2 million or an 8 million client. When they're visiting your branches, they're calling into our care center and digital engaged. We said, well, let's bring these resources together and serve them that way to the comment that was made earlier. There's an opportunity for us to standardize and simplify for those clients as well. And that's the path we're on now.

Stu Richards (26:06):

Any other questions? Awesome. Well, thank you very much. Oh, I'm sorry. One more question.

Audience Member 3 (26:13):

We're talking about, there's a few different ways to look at it in the revenue piece, but are there any specific triggers that make you think finding needs to move between lines of business or is it more of a general relationship type thing.

Scott Stearsman (26:27):

For us, if they trigger certain credit exposure, that'll move them from more of your retail small business business banking into commercial SBA treasury complexity, some of those other needs will bring in other bankers and resources and then position that client as best serve.

Nicholas DeWitt (26:46):

Yeah, very similar response. Some specifics there would be line monitoring, so anything where you have to have more sophistication or hands-on would move more upstream. And then when you start to get into international trade or more global needs or desires, that's going to be best suited outside of the small business shop.

Mark Pilotti (27:10):

Yeah, we're the same product features around the lines and as well as the treasury management features. When you get to more sophisticated end, you need a lot more support around those customers.

Audience Member 4 (27:21):

What happens when they have a sophisticated need, but they fall within the revenue segment, what do you do then? Do you service them or you send them off to another bank?

Scott Stearsman (27:33):

Well, that's why we expanded our revenue segment zero to 10. So before we had the zero to two, two to 10, and we would trip those internal wires that we set up. And so by expanding that, you can bring in the resources and capabilities to be able to serve that client once it gets above the 10 and the credit exposure we'd bring in a commercial banker.

Mark Pilotti (27:52):

Yeah. Ideally we would grow, the client would grow through our support channel as well. I don't know that we're in a position where we'd ask them to go to another bank. You'd move them up to commercial or down, depending on the needs and the sophistication. So hopefully we're able to service the continuum. So your

Audience Member 4 (28:07):

Other vertical would technically be able to handle it even though it falls still within a business banking revenue size.

Nicholas DeWitt (28:15):

Correct. We'd find a way. Yeah.

Mark Pilotti (28:16):

Yeah.

Scott Stearsman (28:18):

But back to the aligning the scorecards and the incentives to be able to promote what's best for the client.

Mark Pilotti (28:24):

There's always some friction in the people element to that.

Stu Richards (28:26):

Great. Alright, well thank you everyone. I want to thank our panelists. This was fantastic. I appreciate it.