To Better Serve Small Business, Define Their Needs

With profitability from retail lines of businesses under pressure, many institutions are reviewing their strategies for addressing the small business market. For regional and community institutions, which often serve communities where small businesses play an outsized role in economic development, effectively reaching small business is an imperative. These are a couple of reasons why we've dedicated an entire track to small business and commercial banking at Fiserv Forum, with over 14 educational sessions.

Fiserv also announced two new consulting initiatives, one focused on helping regional and community institutions increase their share of the small business market, and another focused on improving the efficiency and profitability of their commercial and small business lending products and processes. In the Solutions Center, clients can also get hands-on access to products like SpotPayâ„¢, our FI-centric mobile payments solution for small businesses.

We're focusing a tremendous amount of energy and research into small business for clients, including hosting focus groups of small businesses to understand their financial needs and identify areas where they feel underserved. In addition, our user experience team has conducted field research and in-depth conversations with small businesses and financial institutions that serve small businesses. We've gleaned a number of insights from these initiatives, and one of the fundamental issues we've identified goes to the very root of how institutions understand and market to them: segmentation.

The most popular view in the banking industry is to classify small businesses by sales or revenue. The advantage of this approach is that it's easy. You just plug the customer into the appropriate services based on their revenue, and let them do the work in terms of knowing what future products they'll need to grow their business. A challenge with this approach is that no two small businesses are alike. The financial needs of a landscaping business that brings in $1.8 million in annual revenue will be very different from a software company that brings in the same amount. This approach also reduces the role of the financial institution into that of an order taker, rather than a partner.

An alternative approach is to segment by industries, such as services, retail or manufacturing. This provides an immediate advantage as compared to just looking at revenue size alone, because the institution can automatically target and promote product sets that make sense for the industry and their unique geography. For example, a bank in Detroit may have a higher percentage of manufacturing companies that support the auto industry within the footprint. That translates to credit for equipment needs and more electronic invoicing and payment. On the other hand, a bank in Las Vegas will be surrounded by business focused on tourism and entertainment, which means products focused on cash handling, payroll, and fraud management.

This two-dimensional approach factoring in size and industry is better in that you're anticipating your customer's needs and building product sets for them rather than waiting for them to come to you. However, their needs won't remain static. If you want to maximize the relationship, and retain their business over time, there's a three-dimensional approach, lifecycle segmentation, which factors in what stage the company is at in its development, and how those needs might change over time. As a company passes through each of the phases below, their financial needs become markedly different.

Small Business Lifecycle

Lifecycle segmentation is much more effective and requires an investment in staff who can partner with businesses to assess their needs and match them to the right mix of products based on all three dimensions. The payoff for that investment could be substantial, both in terms of revenue and retention. According to J.D. Power and Associates 2012 U.S. Small Business Banking Satisfaction Study, when a small business is assigned an account manager that completely understands their business, their satisfaction rating is 140 points higher than if no account manager is assigned.

Segmentation is a critical component of developing strategies to address small business. And the work isn't done there. A financial institution must then layout which products fit which segments and define a competitive pricing strategy. The advantage of the lifecycle approach is that you can put all the work involved in understanding their business into a bundled product and pricing strategy. Offering product bundles means you are designing a solution that fits their industry at their precise stage of growth. And it's priced by the value you deliver to the business, rather than negotiated by each individual product. Ultimately, delivering a bundle based on an understanding of their needs means you retain more of their business, and their loyalty, over a longer period of time.

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