A small business owner's views of the financial health of their business has a huge impact on how they interact with their bank today -- sales and service channel preferences, the products they use, the problems they experience, and more. And small business financial health strongly influences their willingness to do business with the bank in the future or seek alternative providers.
This presentation will address options for banks to use proactive relationship management, technology and digital tools, and risk mitigation solutions to help small business clients address today's leading financial stressors.
What you'll learn
- Understanding cash flow and knowing how much money is needed and when to meet financial obligations.
- Having a plan and a reserve available to handle cash shortfalls.
- Understanding how to improve the business' credit score and creditworthiness.
- Improving access to affordable capital funding and timely credit to meet business needs.
Transcription:
Paul McAdam (00:11):
So very happy to be your speaker just prior to lunch. My name is Paul McAdam. I work for JD Power. I manage our small business banking satisfaction studies in the US and Canada. And I'm going to be speaking today about information that we're pulling from our 2024 small business banking satisfaction study about the financial health of small businesses and how they're feeling, are they feeling better, feeling worse, different? We're going to talk about that and very importantly, what to do about it, right? So that's what I'm going to talk about today. The agenda is, as I mentioned, we're going to talk about the financial health profiles of small businesses, both the positives and some of the pressures they're feeling. And we're going to spend a little bit of time talking about small businesses who feel that they're financially healthy versus those who feel unhealthy and some of what they're looking for in terms of advice, guidance, personalization.
(01:11):
And then we're going to talk, I'm going to also talk about some specific experiences that drive satisfaction, gain experiences relating to the financial health of the business, that these are experiences that tie into products, communication, digital channels in-person interactions. And what I can tell you just right off the top, I know we often get the question of like, well, does any of this matter? Does this lift satisfaction? Does this lift NPS? What does it do? Yes, yes, and yes. What we see is when small businesses feel that they're receiving a certain level of support, the banks are helping them to understand their creditworthiness. The banks are helping them and giving them tools to understand income versus expenses and cashflow and oh yeah, personal guidance too, right? When small businesses receive these services, satisfaction shoots way up, as does likelihood to reuse the bank, likelihood to not switch net promoter score. Small businesses are more likely to consolidate relationships with a single provider if they feel they're receiving this level of support. So the ROI is there, and I'll give you a few more specific examples as we get into it. Okay.
(02:29):
Let me just tell you quickly about the fact base, the database that we're working with here. This is from our annual study. We field this study every year. We've been doing this for 17 years now. We field over the summer months, may to August. In this most recent round, we've surveyed nearly 7,000 small businesses in the us. Our definition of small businesses does match what we hear from the larger banks. And our study does focus on the 21 largest banks in the country. And what we find is that they generally define small business going up to about 20 million in revenue. And then we go down to 50,000 to make sure we're getting in the micros and the startups and the sole proprietors. We do ground our survey respondents to indicate the bank that they use as their primary checking account provider. So we are not necessarily looking at credit card lending.
(03:29):
I mean these companies have those relationships with most of you, but it's the primary checking provider. And I guess final point for the clients in the room in coming out real quick, October 24th is when you'll get the data and the press release with the rank chart and all of that is coming out in the 29th. Last year it was Capital One in number one ranked position in our study followed by US Bank and Chase. So good to see two of the speakers this morning, did very well in our most recent study. Alright, so let's get into it. Let's start by looking at small businesses, outlook on the economy and on their businesses financial outlook. As you can see, we've got a pretty good trend line here, going back to 2009 during the years of the Great Recession, you can see some pretty low marks here.
(04:24):
This is a 10 point scale, right? Has your outlook become more negative or positive as a result of recent economic events, negative or positive? And as you can see, after we came out of the great recession, sort of steadily rising scores, peaking right before the pandemic in 2019. And then of course we had this thing called COVID-19 big drop in 2020, perceptions of the health of the outlook for the business, outlook for the economy. Of course, in 2021, things popped back a little bit. Small businesses feeling better. Certainly PPP had a lot to do with that. By our 2021 survey, we had a good penetration of small businesses who utilized PPP. But then as you can see with inflation, things just really dipped back down in 2022. And we've had more of a gradual climb here since then. And it is interesting when you look at these results on the far right side, the most recent year of 2024 for the business's outlook for themselves, the outlook for the business we're essentially back at sort of 20 17, 20 18 levels, outlook for the economy, 2016 levels.
(05:45):
So we're coming back, but still the pandemic and rising costs through inflation had a lot to do with the decline we saw. So that's just generally how small businesses feel about the economy, feel about their business. And last couple of years it is coming back a little bit. Why is that? Inflation is still a pretty serious problem, but has moderated a bit. We asked small businesses, how do you feel about inflation, increased costs for material and labor for your business? And as you can see, 53% say that this is a severe or a major problem having a severe or major impact on their business. So that's a big deal half. But it is moderating somewhat as you can see, issues regarding supply chain shortages of material supplies, et cetera. Getting better challenges with the labor force, hiring, retaining employees, getting better, but still three of 10 small businesses indicating that these are still major, major issues that they're dealing with.
(07:06):
Alright, so we asked about the availability of credit. Just what do you think your bank, how available is credit from your primary bank? You can see here pretty good news. The excellent ratings have come up a bit the last couple of years essentially pulling from, essentially pulling from the good and pulling from the portion who say fair or poor. But as we sit today, roughly nine and 10 small businesses feel that there's good or excellent availability of credit. And I'll just remind everybody that this was fielded over the summer. So this was before interest rate cuts. So we would imagine that these perceptions, availability of credit and whatnot will improve as we go forward. And when we measure this again in the summer of 2025, alright, that's availability of credit.
(08:05):
Well, are they applying for loans? Have you applied for a loan or a line of credit with your primary bank in the last 12 months? You could see that there's some interesting things going on here. Back several years ago in 2018, we had 77% saying no. And that kind of trended down for a few years. And in recent years it's trended back up where we have more small businesses indicating that they're not planning to apply for credit from the primary bank in the next year. You could see down at the bottom we ask, well, if you applied, were you approved or declined? And the approval percentage has drifted down 5% or so in recent years. And some of that could be because there was maybe a peak in 2021 with PPP. But small businesses seem to be reporting a little bit tighter credit conditions.
(09:10):
But I think what's really going on, we asked small businesses, are you planning to apply for credit within the next year with your primary bank? And here we see that the percent saying they do not expect to apply has remained pretty steady. I mean it's at 50%, but we do see that a slight uptick here in the blue in small businesses saying, you know what? I plan to utilize existing lines rather than applying for new. These aren't big, big swings in these numbers, but down at the bottom you can see the percentage saying they expect to apply for a new loan has drifted down some down to 17% in the 2024 period.
(10:03):
Okay? So that's how small businesses feel about economic conditions, availability of credit. So these are the questions we ask them to really gauge overall financial health of the business. We obtain these questions from the financial health network. So we're using their questions, we're doing our own JD power segmentation and analysis on the data, but these are questions that were established four or five years ago from Financial health Network and this year, 2024 versus 2023, we see a lot of green here. Let's walk. So let's walk through these one by one. The ability to pay all or most bills on time, that's the biggest climber here. Three percentage point gain of the small businesses increasingly feeling that the business has insurance that's providing enough support in case of an emergency. So that's positive. A little bit of an increase in small businesses feeling that they have a plan in case of a cash shortfall.
(11:11):
Part of that could be because of the one that's immediately following. We have an uptick by a couple percent in small businesses indicating that they have no debt or they feel they have a manageable amount of debt. So makes handling cash shortfall a little bit easier if you have availability of credit, having a plan to address common business risks, right? Loss of a key customer, hard defined employees, hurricane, I mean a whole range of things, but small businesses are feeling a little better about that. And very, very slight improvement on ratings on the availability of affordable funding and availability of credit. So we see a couple metrics here that did not go up year over year knowing how much money is needed when needed and when to meet financial obligations. So yeah, this gets into budgeting, forecasting, cashflow tools. So this is an area where we'll talk a bit more about this is a key opportunity and one obviously that the industry is working on through digital technology and doing a good job at that.
(12:26):
But it's definitely kind of a pressure point, not really improving cash available to cover four months of operating expenses. So that emergency fund that having savings in reserve, that one hasn't improved. And as you can see, the only one that's in red is we do have an increased number of small businesses feeling that the credit worthiness isn't quite as good as it used to be. Sort of a decline. And this is all self-assessed of course, but feeling that they have good or excellent credit. So that's really the only real pressure point there is the feelings about credit worthiness. Everything else is kind of holding steady or moving up a bit in the most recent numbers that we gathered.
(13:20):
So where are our small businesses? So we take these 10 questions I just showed you. We do a segmentation and what we see is that 54% of small businesses feel that they're financially healthy. The easiest way to kind of think about this is they're in a strong cash position. So income exceeds expenses, they have savings, cushion paying bills on time, so feeling good about cash and they have access to capital and credit. So that's financially healthy, strong cash, strong capital and credit. And then they feel good about insurance and some of the other things I told you about on the prior slide. So that's financially healthy, 54% and as you can see, held steady in this most recent year has ticked up a couple of percent. If we go back four years, then we have small businesses that we call vulnerable. So these are the small businesses who are in a weak cash position feel that they don't have strong access to credit and capital.
(14:28):
So these are the small businesses that probably won't be with us for much longer. They're definitely not doing well, not feeling good about the future of the business. And you can see that's really held steady here in recent years. Then we have capital constrained small businesses. So these are small businesses that feel good on the cash side, savings and so forth, but they have low access to funding and credit. The big reason why that 16% is capital constrained, they have poor credit ratings. So it's really more an issue of their credit worthiness that is making them capital constrained and they're at 16%. And then you can see cash constrained. So these are probably the riskiest of the small businesses that we have here in this segmentation. They're kind of low on cash, but they're fully leveraged, right? They have loans, they have access to capital or credit.
(15:31):
And as you can see, this is the group that has diminished in size in recent years, which might tie back to some of those small businesses not necessarily applying for loans as much as they used to and utilizing existing lines and so forth. What I can tell you is that for the financially healthy small businesses, when they feel that they are receiving a high level of financial health support, they utilize their lines of credit more so they have higher lines of credit and they utilize them more. What we see on that capital constrained group, when they feel very good and have high satisfaction with the levels of financial health support, they bring more deposits to the bank. So those are a couple more tangible beyond advocacy and so forth, metrics that we can point to that drive to the ROI of this.
(16:37):
Alright, so we have our point of view on what financial health means and how we measure it. And as some of you may know, the OCC recently came out with guidance In June, they published a paper how banks can measure and support customer financial health outcomes. Now this is oriented towards consumers, right? It's not specifically oriented towards businesses, but we just think it's a really good idea to sort of take these ideas that people in your retail bank, many of them are probably starting to think about and think about how we can apply this in the world of small businesses. Because when we look in our survey data among small business owners, 84% of them tell us they have a personal account with their bank. Over 90% of them tell us it's a checking account, six in 10 tell us they have a personal credit card.
(17:31):
So small business retail, so much crossover that we do suggest that you take a look at this and start to think about it because what the OCC is suggesting is that the way to think about the financial health of a consumer is their stability, the ability to use the financial products and services that are available to 'em, to affordably get done what they need to get done right? Meet their regular financial obligations, paying bills, mortgages, so forth. Financial health also encompasses this idea of resiliency. Can the consumer, can the small business withstand a financial shock, right? Do they have a savings reserve? Do they have access to credit? And then the just overall level of security, having those long-term resources available to having positive net worth so that there's that underlying level of stability. And the OCC has actually even suggested metrics that the industry should really start to think about and track.
(18:46):
So they're suggesting that we think about and how do we track positive cashflow? The idea that income inflows exceed outflows. They're suggesting that the way to look at this is go into the data and figure out is this positive each calendar month or at least something like two out of the last three, four out of the last five, something like that. So that's the set of metrics that we can start to think about using, using our data. A liquidity buffer, right? Total amount available on liquid accounts, checking savings of anything that's available on a revolving line. So for consumers, they're suggesting at least a thousand available at all times. For a small business, obviously that would need to be a bigger number, but this idea of a liquidity buffer is important. And then just on time payments, checking the payment loan histories, are they on time? Credit scores declining, decreasing. These are the types of metrics that the industry can start to really cue into as well as survey oriented things that are the types of things that we do and others can do.
(20:09):
So let's start to talk now about what small businesses are telling us they want. So here we're looking at financially healthy small businesses that 54% I showed you a few slides ago. And then we have 46% that we're calling unhealthy. And we ask them, what types of advice or guidance would you like to receive from your bank? And I guess the first thing you see that jumps off the page is ways to produce fees, right? Who doesn't like that? But we see this coming through so clearly in all of our research right now, whether it's business banking, retail banking, credit card, as you can all can appreciate sensitivity towards fees is an all time high. So when we ask customers what types of advice they might want to receive, this makes a lot of sense. But as you look down the list, you can start to see some of the patterns, understanding how to use the bank's technology to get things done to benefit my business financially healthy customers are a little more interested in that. Of course, investment related revise having an in-depth financial review, whereas the financially unhealthy customers, no surprise, they're a lot more tuned into borrowing and credit related advice, lowering payments, consolidating debt. So we see that the overall financial standing and financial health outlook definitely has some impact on the types of advice folks are interested in obtaining.
(21:43):
We also ask, these are just sort of what would you like types of questions, but how would you like your primary bank to personalize your business banking experience? And again, help me avoid fees number one. And as you go down the list here, you see inform me when a different product would better fit my needs. I mean, who doesn't want that? You've got my back, you're helping me out that builds trust. Send me account alerts, help me avoid those fees. And I think as just a general observation on alerts, if we could, if I could wave the magic wand, I would say let's stop having alerts be opt-in. There probably are some alerts that if we could just wave the wand, we should activate an overdraft late loan payment. I mean, customers would like to just be alerted of these things without necessarily needing to sign up.
(22:41):
But as you look through the list here, you see a similar pattern where the financially unhealthy customers obviously more tuned into the reducing fees topic, whereas the healthier really do like this idea of, Hey, you know me, you're advising me. Help me out. There's something out When there's a product or service that will do better for my business, periodically call me provide that advice. We saw in the prior slide, they tend to receiving advice a little bit more. So these are sort of the overall perceptions and desires in terms of advice and personalization. And just to summarize them quickly, fees is top of mind. Obviously that certainly ties into the idea of alerts. Small businesses are wanting advice, they're looking for personal attention in terms of tell me how I can save money. Tell me how to be more efficient with the bank's technology. Give me tips to help improve the financial situation of the business.
(23:52):
Like the reducing taxes that I showed you that was up high on the list a couple slides ago. Those really resonate. They're very tuned into offers and promotions that are relevant to my business. And I think that's because all of us, sometimes we receive offers and promotions that aren't relevant, we already have the product or it's just not a clear fit. There's also a lot of frustration among customers of seeing new customers get benefits, whereas existing customers don't necessarily benefit from promotions and offers. So that's something to keep in mind. And then as I've mentioned a couple times, helping me out, tell me when there's something better. Give me advice around that. And when you reflect back on those prior two pages, I do think it's interesting that these higher level topics of provide advice, help me do better with the products you have, help me avoid fees.
(24:47):
Those were showing up as being a bit more prevalent than some of the more traditional product oriented types of advice around borrowing credit investing. Not to say those are unimportant, but these are the types of things that are a bit more top of mind day to day you might say. Whereas some of the other ones are more episodic or event-based in terms of services they might want to receive. Okay, this has come up three or four times here on help me avoid fees. And what we advise clients is this really needs to be thought about in a comprehensive manner.
(25:31):
I mean, I counted there are at least 10 different fee types that a small businesses may pay, right? Everything on checking to merchant services to credit relationships. And on down the line, think about how to kind of coordinate that message so that there's consistency across channels so that fees are being fully explained. Make it easy to find information about fees. Customers love that. They hate it when they have to dig and when things are hard to find. And the other thing is definitely try to proactively communicate how to avoid fees. Bank of America does pretty well on this. Monthly statements for small businesses. They tell customers, you avoided fees in this most recent month and here's why you had these balance levels or you met transaction requirements or whatever it is. But they actually tell people on their monthly statements how they avoided fees. Savings and credit advice is always very important if customers can figure out how to avoid fees, that helps them to be in a better position to save money.
(26:42):
Banks are obviously offering tools to provide savings, guidance, and this just goes a long way towards boosting satisfaction and trust. And then helping small businesses understand their credit worthiness is the logical next step. Help them understand what the qualifications are, what steps they may need to take to build their credit worthiness and credit rating. So in terms of some specific experiences that drive financial health oriented experiences that drive satisfaction gain, what I'm going to do now is walk you through a dozen or so of them. What we see is that simply proactively communicating with a small business about topics that are relevant to them, boost satisfaction and specifically this is email newsletters. This is kind of mass market stuff, but should be targeted obviously. But if small businesses receive information that they feel is proactive and relevant, satisfaction goes up, satisfaction obviously would go up when they receive advice.
(27:51):
And when all of this information is tailored to their needs, satisfaction goes up the most, oh, I should say we work from a thousand point satisfaction scale. So that's what these point gains mean. So let's just take that 162 that you see on tailored communication. So in a thousand point scale, 162 is about 16 percentage points. So that's a way to think about when you see these numbers. That's a 16 percentage point lift when they feel that the communication is tailored, helping small businesses save time and money when they receive advice or information on spending and savings, guidance, satisfaction goes up when they feel the bank has helped them to understand their credit worthiness satisfaction goes up. As you can see in this list, the big boosts are explaining fees and ensuring that the small businesses completely understand fees. Critically important. We also see that some specific digital tools make a big difference spending analysis categorization on the website.
(29:08):
So that's spending by category, for example, type of spend, sales and revenue types of categorization by product, by customer, that type of thing. What we see is that when small businesses use these services, satisfaction jumps. And we do see generally speaking, that these services are a bit more sophisticated today on the web versus app. And that small businesses are using these services more on the web than on the app. And that's why these are specifically designated website here, not app incidents of use is really what's driving this more than anything. Receiving tailored recommendations when they're visiting the website. So the messaging, the alerts, the tools that are helping them make decisions. And then although tools use digital tools use isn't quite as robust today on the app as it is online. If small businesses completely understand the mobile app satisfaction goes way up. And then finally, from an in-person standpoint, conversations with branch staff, knowledgeable relationship managers definitely make a difference.
(30:32):
We see that if the small business feels that a branch staff person could be a teller, a personal banker, gives them some information that helps them with their financial needs, that gives us a boost. And obviously if there's a sense that the RM is a partner who's going to help the company grow, if the RM understands their risk tolerance, this makes a big difference. And you may be thinking, that's great, Paul, sort of captain obvious on those two. But here's the thing, only half of small businesses feel that they're getting those today. A relationship manager who's a partner, who helps the company grow, who understands the business risk tolerance. So still definitely quite a bit of runway for the industry to do better here. So these are a set of metrics we suggest you think about, maybe start tracking to help understand avenues to improve perceptions of the financial health support you're providing to businesses.
(31:34):
And just to kind of quickly summarize what the small businesses are saying in our research advice and guidance, be it digital or in-person obviously helps. And by the way, on the in-person, on the in-person side, what we see is that whether the advice is received from a business banker, a lending person, a payments person, a branch manager, it's all the same. It's all the same to the small business, right? As long as they have a contact and they're receiving advice from that contact. So it's not like the credit person gets you a higher lift than the branch manager is what I'm saying in terms of the resonance and the satisfaction boost when that advice is received. I've talked a lot about helping small businesses understand and avoid fees. Clearly important. Talked about helping small businesses understand their level of spending so that they can more easily and understand how to build savings and have that liquidity and improve credit worthiness down the road.
(32:41):
Digital tools make a big difference here in terms of giving tools so the small business can understand their revenue situation, their expense situation, cashflow, et cetera. Understanding the app and then as I mentioned just a moment ago, having those personal contacts that really know the business and are perceived to be a partner in the business's growth. These are really the key points that summarizing the research that we wanted to convey to you today and for clients. We'll look for our information next week and you can all take a look at our rank chart that comes out on October 29th to see how this year's rank chart stacks up in this study. Right? Thanks very much.