Aug 092012

Community Banks and Small Business.  A marriage made in heaven… or so many Community Bankers would have you believe.  This may have been the case in the past, but does it still hold true in today’s environment?

A recent BAI Banking Strategies article – Small Business Still the Charm – attempted to make the case that, Small Business is just waiting for Community Banks to come calling.  The article is an interview with Richard Dailey, CEO of the 3-branch, $215 million-asset Apollo Bank in Miami, who asserts that Community Banks focused on small business customers can still do well.

While we don’t doubt that Mr. Daily, Apollo Bank and a handful of others may find success, Small Business banking is not as simple as some may believe; and may require significant planning before most of the 6,500 Community Banks deploy additional resources to pursue this segment.  We suggest that there are at least 4 reasons for this:

Weak Economy

Not too many need convincing that the economy is not doing well, with many Small Businesses struggling.  Most of us will also agree that Community Banks and Credit Unions are not exactly “risk takers” (contrary to the notion of banking) thus further diminishing the potential opportunity to bank Small Businesses whose risk profile is typically outside the “norms” of most Banks’ lending standards and credit committees.

Not only is the “supply” – the availability of credit – constrained, but so is the demand.  A new report from PayNet found that many small businesses are more hesitant to take out loans, with borrowing slowing down every month since the beginning of this year and Wells Fargo Bank reported that its quarterly survey of small business owners turned down for the first time this year, erasing most of the gains achieved earlier this year.

Indeed, it is not clear that there is a significant demand from qualified Small Business borrowers.  Unfortunately, this is true today, and most likely for the next few years… at least if you believe the economic forecasts from the Fed and others.


Location, Location, Location

Community Banks are limited in their ability to reach enough and perhaps the right kind of Small Business owner by the virtue of a self-inflicted contraint of banking within a small radius of their Branches.  Thus, as ‘Location, Location, Location’ is paramount for residential real-estate, the same applies to breadth of opportunities available to Community Banks (and Credit Unions).

We wrote about this a while ago in our post – Can your Bank survive? It may depend on your location.  However, there are pockets of (relative) economic growth in the country and there are pockets in the country where Small Business is flourishing.

So, if your Bank or Credit Union is located in a geography that has a large number of Small Businesses, you may be in luck.  You are in luck if your geographic footprint includes many Small Businesses that have characteristics that will pass internal credit guidelines (and those of your friendly regulator).  You are in luck if your Bank or Credit Union is able to compete and win the deal considering that many (if not all) of your competitors are similarly hungry for Small Business loan business.


Technology or a teller’s smile?

More and more Small Business expects not only great rates, low fees and limited covenants on their loan facilities, but also ‘modern’ technology and great service.  Most Small Business owners demand online Banking capability for the vast majority of their day to day transactions, yet few Community Banks (and Credit Unions) have deployed such capabilities.


Competition is intense.  Competition for profitable customers, including Small Business, is fierce with Community Banks, Credit Unions, Regional, Super-Regional and Mega-Banks all fighting to grow their C&I portfolio.  Exacerbating the challenge many non-Bank entrants are now stealing market-share that rightfully belongs to Community Banks.


So, you are in luck if your Bank is fortunate to be located in a geography with a strong local economy and many successful high-performing Small Businesses, if your Bank has already deployed a robust suite of online banking products aimed at Small Business, and if your Bank is lucky enough to face limited competition.  For the remaining 99.9%, next step should include a careful planning session that answers questions including

– What industries are represented by Small Businesses within our coverage area?

– Who is our competition and how do we differentiate ourselves?  What unique quality, capability, service can we offer that will provide for an unfair competitive advantage?

– What products / services can we offer?  How can these be bundled to create the greatest value to our prospective customer base?

– Do we have the capability to service the business?  How?

– Can we price the products to attract customers while meeting profitability objectives?

– What marketing / sales initiatives should be launched to promote the offering?  What metrics should be established to assess performance and adjust the programs on as-needed basis?
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Serge Milman

Serge Milman is the Principal Partner of San Francisco, CA based SFO Consultants which provides Strategy, Finance and Operations Management Consulting services. He is also the Principal of Optirate – a blog dedicated to growth and profitability strategies for Banks and Credit Unions. Serge can be reached at

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