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Getting big in small business banking 2116

Getting big in small business banking

Small businesses contribute roughly 5-10% of total revenues to banks per year on average. With such a substantial revenue pool, one would imagine banks would be clamoring to win this segment. But most see the market as unprofitable and costly to serve, a segment they’re obliged to service, rather than as an attractive business in its own right.

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Yet, our research and client work show that the small business segment is worth winning. Not only do small businesses have a number of high-value unmet needs and thus significant potential for revenue growth, many of the factors constraining profitability are correctible.

They include relatively weak digitization, inadequate segmentation, poor sales alignment, inconsistent pricing practices and insufficient predictive credit risk modeling. By addressing these issues, banks stand to improve revenues, reduce cost-to-serve and sharply improve their non-performing loan ratios.

Digital attackers, of course, are well aware of this potential. Since 2000, over 50% of cumulative fintech investment has been directed toward corporate banking. Their high levels of digitization and automation give them a distinct advantage, allowing them to speed payments, lending and other services and provide a more personalized customer experience than traditional models.

But big banks bring advantages that fintechs can’t match. That includes a large base of existing clients, strong client relationships, access to cheap and stable deposit funding, and significant operational resources. Established banks have a major opportunity to gain share and profits within the small business market. This article highlights four concrete steps that institutions can – and should – take to significantly improve small business banking performance.

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