Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Chana Schoenberger (00:10):
So this is going to be a fun conversation. I get to introduce one of my favorite colleagues, Janet King, who is the Vice President of research here at Arizent. Janet is the person in charge of all of our research. So she has this crack team of statistical experts who actually go out and ask people questions. So as journalists, we're always really excited by data because it tells us what's actually going on. So Janet and I are going to discuss this very cool study that she just did on small business banking.
Janet King (00:47):
Excellent. Do we have a clicker? We have a clicker. Excellent. Thank you. I know we're a little bit off schedule, so we're going to do our best to consolidate. But being a typical researcher, I have way too many slides and, so we will do our best. But as Chana said, we're here today to share some insights from research that we conducted at American Banker on the future of small business banking. This is research that we conducted late in the third quarter of this year and we had 128 banking leaders respond from retail banks and credit unions of various sizes. And to qualify to complete the survey, everyone that participated had to have direct active involvement in or deep knowledge of their bank, small business banking activities. So qualified audience, roughly half were VP level or higher. The balance for mostly Director and Manager level roles and it represents the opinions of bankers across every type and size of bank. And our goal really is to hopefully leave you with some peer-based insights that you can use to inform your own strategies.
(01:53):
Okay, so let's dig in here. One of the things we wanted to understand is really how important small business banking is as a strategic priority for institutions. And what we found really was that two out of three bankers are telling us that it's a critical or high priority. Only 5% said that it's a low priority. And as the size of the bank grows, the percentage who really tell us it's a top priority also continues to grow. So we really understand that a lot of banks, obviously everyone here is really prioritizing small business banking is a really important area of their business. But what we really wanted to understand is where are they placing that focus? And this is where I want to get your opinion because as you can see on this slide, banks are really juggling a number of small business banking goals. But the top goal is just increasing the number of small business customers that they are servicing. And after that, you see a lot of things that we've been talking about this morning, like growing the deposit base and enhancing those small business relationships. So Chana for you, I'm curious, understand what do you think about that and some of the other areas of focus that are highlighted on this slide? Because we see customer acquisition come up time and time again in all of our research, whether it's retail banking or business banking. Yes.
Chana Schoenberger (03:11):
Okay. So the interesting thing about small businesses, and I feel like both Ben and Brian made this point several times in their talks just now, which is that small businesses are people. So when a person comes in and that person is the Owner or Manager of a small business, typically it's family owned. And so you've got a wealth conversation. And we hear this a lot in, I used to run financial planning, which is our wealth management magazine. And the reason why there are so many banks with wealth management arms is to get closer to this synergy. Everybody knows this not secret. So there's the wealth thing, there's the personal banking thing, and it's sort of a more mass market version of the reason why investment banks and private banks are tied so closely together because you want the CEO of a very large company to become your private bank client.
(04:01):
So when you do his IPO, you can then have him put the shares in your brokerage and then you're going to invest it for him. So the exact same thing is true of small businesses. If somebody owns a small business in a small town or a small business in a city or anything, they have all kinds of needs that you as a bank can deal with for them. They may need a mortgage, they may need a personal loan, they may need equipment financing depending on what their business is, plus all the personal things that you can do for them. And once you get them through your doors, you guys are extremely good at getting your hooks in them and making sure that they know all the other very cool things that your bank can do. And some of it is cool innovative stuff and some of it is just ordinary meat and potatoes. You've been doing this for 400 years and you know how.
Janet King (04:47):
Yeah. And of course all of that comes with its own challenges. I mean we had a good question during the keynote that's kind of related to one of the things we found, which was at the top of the list of challenges of things that bankers say are very or moderately challenging when they're sort of trying to run their small business banking initiatives is competition from against other banking options. And we all know that banks have faced that kind of competitive pressure from fintech's and retailers and big tech for some time. And in fact Miriam Cross, one of our very own reporters from American Banker just last week had a great piece talking about the lightest advances by big tech into banking. So what do you think are some of the things banks need to watch here?
Chana Schoenberger (05:32):
So I mean big tech, and again, I think it was Ben who talked about this. Yeah, I would be concerned about big tech. They have a lot of money, they have a lot of smart and innovative people and they're coming for you. I think that banks have a number of things that tech companies don't have, starting with bank charters which give you access to things like FDIC insurance and that's nothing to sneeze at who was here in March and remembers what it was like to explain to your customers what FDIC insurance was. And then you sort of see them relax when they realize that it's going to be okay for most people. So that's definitely a thing. I think the other thing that Big Tech has, especially in small tech has to some extent is digital reach. So everyone's familiar with the phenomenon of customers and of course small business owners are just customers.
(06:21):
People are now used to a digital level of app Ization of everything. When I want to, if I want to go to dinner tonight, I'm going to get an Uber. It will take me 10 seconds to go on my phone and get an Uber. And I don't actually care who provides that service to me. I expect a certain level of ease of use and streamlined app services and I just want a car to show up. I don't care how it does. So the same is true of money. Small business bank customers are looking for just ease of use. And this is something our last two speakers talked about. They're not interested in products, they just want their problems solved. So tech has shown that although they don't really know anything about finance, they know a ton about what they call customer delight, making people happy, gamifying everything, and they're extremely good at that. So that's the main thing I'd be worried about as a banker.
Janet King (07:15):
And there's so many examples we see in that we do this big piece of research every year on humanizing the customer experience and banking, which is more focused on retail than business banking, but it has some really good insights about that, just about how retailers and social media companies and stuff, I've really set the bar for a lot of those ways that we try to delight customers. So it kind of raises the question of are we doing enough to support small business banking needs? And the data would suggest that we might be making it too hard, especially in some places. So for some services like lending. So what you see on this chart is that three out of four bankers that we surveyed cite the barrier to entry for small business customers is either moderate or high for things like commercial mortgages and lending and lines of credit, which means that we're expecting them to provide quite a few requirements, make a fairly substantial time investment or there's cost on that. And if we look at it, we can see that those barriers to entry along with other factors might really be limiting the ability of some banks to meet those small business banking needs. Right, particularly around lending commercial mortgages and payments. And with payments specifically, it's about delivering payment services that are both affordable and convenient as you can see on here broken out. So what are your thoughts on that, Chana? And what do you think banks should be thinking about to make it easier for their small business customers to do business with them?
Chana Schoenberger (08:48):
So payments are a really interesting area that we cover extensively. We have a whole reporting team that just talks about payments. If you care about this, you should come to our payments forum event, which is in the spring. It's going to be great where we just talked about payments for three days. The cool thing about payments is they've gotten much easier and much faster as you know over the last three years, same day ACH Fed. Now there are a number of different rails. There are a lot of tech companies that have gotten involved in payments. It's much easier. Everything from Venmo to Zelle to even PayPal. Customers are very used to doing it. Small businesses are now used to taking payment from customers in a variety of ways. Recently I've noticed that nobody seems to even have the little square machines anymore. Now all they have is their phones. So if you go to say a farmer's market, the farmer at the cashier will just give you a phone and you tap your Apple watch right on his phone and you've just bought your kale. So that's awesome. So customers are small, business customers are very interested in getting these sorts of services from their banks because and end as seamlessly as possible.
Janet King (09:58):
And so the payments thing is interesting to drill down to. And so we looked at that because it comes up as a pain point. It came up last year in fact when we surveyed small business owners instead of banks, payments was one of their big issues with their relationship. So we wanted to look at what payments technologies are banks most often using to support small businesses. And same day, ACH and Zelle to your point, are the ones that are most commonly used. But this is an area where community banks and credit unions are specifically struggling the most, more I think so than national and regional banks. We saw that all the large and mid-scale banks are pretty much using some sort of payments technologies, but one in six community banks aren't using anything at all. So what kind of advice would you have for smaller banks who are looking to accelerate adoption of payments tech?
Chana Schoenberger (10:47):
So it's interesting because at some point in the last few months, I spoke to a community banker and she was telling me, I was asking her, what do you think we should be doing more of here at American Banker? What do you think we should be writing about? And she said, you know I go to your events and I get the feeling sometimes that you guys think that everybody is on a digital transformation journey. And guess what? A lot of community banks and by extension credit unions have not even started that journey. Like not at all. And we see this by the number of community banks and credit unions that don't have a social media presence that might have a website, but they are basically not on LinkedIn. They're certainly not on Twitter, they're definitely not on Instagram and they don't even know what tiktok is unless they have teenagers themselves.
(11:31):
So there's a long way to go. And the problem of course is that the small business owners and certainly their own customers, very much expect rapid payment options. And in this world of inflation where tons of small businesses are now posting signs that say extra 4% or extra 5% for credit card payments, people are either going to start paying in cash, which is an efficiency problem. Nobody wants to go back to the days when cash was the number one thing or you're going to have to give them some sort of a very fast and inexpensive payment rail to use.
Janet King (12:09):
Absolutely. Which it's a great transition because to this next slide which is about resourcing, and we wanted to understand to your point, what percent of banks feel like they have the right people, the right policies, the right tech in place to overcome those challenges and really effectively serve their small business customers? And what we found is that while the majority of bankers are somewhat confident that they have the right resources in place, only a minority really felt they definitively did. And that reality spans many aspects of the business from underwriting and other risks to offering competitive terms for deposits and building those meaningful relationships with customers. So what advice would you have for all the bankers in the room who are looking for you know to try to build a business case for investing and resourcing to support these small business banking initiatives? What can we do?
Chana Schoenberger (13:02):
So I loved what Brian was seeing before, which was sort of a cheat sheet for how to convince the higher ups at your bank or yourself if you're the CEO, why small business is really everything. That made a ton of sense because it's about considering how small business customers can go into all different parts of your business. And especially if you're a smaller bank and you don't do say international payments or anything like that, small business can be a wedge to move into those things.
Janet King (13:35):
Absolutely. So let's talk about best practices then other things that we can do. So what are some of the things that we can all do to better serve those customers? And there's a variety of best practices that can be deployed, but let's start with employing dedicated small business bankers because that's a practice that we found out that nine out of 10 banks are already doing that and they seem to be delivering real value. You can see in this chart that the vast majority of the bankers that we spoke to said that those small business bankers are effective at developing personal relationships, keeping existing small business account holders satisfied, helping to accelerate cross sell and also for landing new customers, which we know is one of the key challenges is growing that base of business. So how have we seen that role evolve over time?
Chana Schoenberger (14:26):
So when you think of a small business banker, you think of a guy on Main Street in a storefront in a branch who is active in the local fraternal organizations. Maybe he belongs to the golf club, he's very social, he knows everyone in town. He's the guy who's arranging the sponsorship for the local little league team. And that's a model that works really well. It's always worked. It will probably continue to work as long as humans have any sort of face-to-face contact, they're always going to trust someone that they know in person. But now of course we have the digital world, and so it is, again, this is something that we see in wealth management as well. So especially with something like financial advice, it is very obvious that the top financial advisors will always have the best platforms and they aren't going to really have trouble attracting assets.
(15:15):
The very bottom are they really should get another job, maybe go sell used cars or something, and then all the people in the middle are going to have to scramble to attract businesses from outside their catchment zone and they're going to have to do that digitally. So small business bankers are really the same way. People who aren't good in it, they need to get out. People who are excellent at it have plenty of clients. It's the people in the middle who can really benefit from, in addition to the in-person approach, taking a more digital approach, maybe using things like social media, maybe creating more sort of informational sessions or creating videos. I know a lot of this marketing is a little difficult for banks because of course you have the compliance issues, but there are lots of compliant ways to market now that work.
Janet King (16:04):
Perfect. So let's talk tech. We'll have Penny up here tomorrow I'm sure. Yes. But she's right there. Investing in the right technology solutions obviously can really accelerate growth and banks are making investments in a number of areas. This is something that we look at across a lot of our research at American Banker and at the top of the list right now are things aimed at creating or improving mobile banking apps, enhancing security and fraud detection, increasing automation and modernizing core banking systems, right? No big surprises there. It's probably been the things that have been on the menu for a while, but we do see some differences in investment based on the type and size of banks. And you can see it on this chart here. So we see regional banks most likely are making investments in core upgrades among all the banks, whereas larger national and some regional banks are more likely to be accelerating their migration to the cloud and also making investments in artificial intelligence and machine learning. So any surprises there for you?
Chana Schoenberger (17:09):
So not really. I feel like a lot of the larger banks have already done their core migrations and they're already in a place where their cores will support APIs and everything modern that they want to do. The AI ML idea is obviously, as many people have said, we're not the first ones to say this completely sweeping the industry. And in every survey bankers will tell you that they're expecting AI to sort of take over all sorts of routine and mundane tasks very soon if they haven't already. So it's not surprising that the banks with the largest tech budgets are going directly to that because that's how you get efficiency. The core migration thing is interesting because obviously if you don't have a core that lets you do more modern things, you just simply cannot do them. So I would expect to see that's where they're going to spend their money.
Janet King (17:58):
Absolutely. And someone was talking about automation earlier, maybe it was both of the earlier speakers that were talking about that, but automation obviously can be such a key tool for removing friction from both the customer experience and the employee experience. It can deliver a lot of efficiencies, but what we're seeing is that only a minority are really automating many aspects of the small business banking process. And so what do you think might be holding us back there?
Chana Schoenberger (18:26):
I think it's probably an over-reliance on the idea that small business banking is personal, handshaking, lions and elks sort of stuff. And of course it is, but there's no reason why that can't also be digital and all the stuff that's not shaking the CEO's hand, a lot of that can be automated and probably should be if you can afford it.
Janet King (18:46):
Great. Alright, so let's wrap this up by looking at what else is in the toolkit because there are a couple of things beyond traditional services that I think banks are starting to dabble in that are kind of interesting. So things like providing financial literacy tools for small business owners, offering additional supports for women and or disadvantaged business owners, connecting small business owners with their peers. The last Comerica is already doing that in a lot of different ways, which was really interesting to me after having done this. And then providing financial benchmarks and analysis for small business owners so they can run their businesses more efficiently and figure out their path to growth and whatnot. And you can see from this slide that only about a quarter to a half of banks are trying those things. So what are your thoughts on that? Can you point to any examples outside of what we've already heard today where banks are really doing this well?
Chana Schoenberger (19:38):
Yeah, no, it's super interesting because when you think about something like a co-working space, I guess the sort of classic example of this on the retail side would be something like the Capital One cafe where you literally can walk in there and they will hand you a coffee and the idea is that you will hang out there, which will give you sort of a warm and fuzzy feeling about their bank, but also it will put you in proximity to a banker who you can ask questions. And that makes tons and tons of sense. If the job of a small business banker is to solve the client's problem, you have to be in proximity to the client to hear what their problem is. And you have to do it before anyone else gets to hear what their problem is because that's it.
Janet King (20:17):
Absolutely. So any final thoughts before we wrap this up?
Chana Schoenberger (20:22):
I mean, I would just reiterate, I think this research really shows what the last two speakers said and what we're going to hear for the rest of the week here, which is that small business banking is banking people and thinking of a small business, CEO or an owner as a person who has a variety of needs that the bank can fulfill as opposed to a business that needs lending is probably the most logical way to think about it. And if you start there, there's just so many places you could go.
Janet King (20:51):
Perfect. And this report and the full report actually dropped today on American bankers. So you can go there to download it and see all of the data in much more detail than what we had time for today.
Chana Schoenberger (21:01):
Right at the top of our site there's a tab that says research, and then you get all of the cool stuff that Janet's team does.
Janet King (21:07):
Thank you.