While online banking for small businesses hasn’t quite soared to the heights predicted, it’s well on its way, according to a study released last week by TowerGroup.
Based in Needham, TowerGroup analyzed usage and services offered online by banks to the small-business market. Although financial service institutions have focused heavily on those segments over the last several years, it found that adoption by the more than 10 million small businesses in the United States has been slow.
“These businesses have a very broad and diverse set of product and service needs and can be extremely profitable to serve. This market has been traditionally underserved by the financial and tech industries and institutions are still just scratching the surface of this market,” said Andy Brown, program leader for small-business market research at TowerGroup, who spoke during a recent teleforum on the research results.
TowerGroup found that only 19 percent of the small-business-segment companies use online business banking, a small jump from 14 percent in 2001. However, 61 percent said they use the Internet to research financial services. “Online banking use among small-business-segment companies has been growing at about 5 percent for the past two years,” said Brown. “Looking at the number planning to adopt online banking this year, use should increase to between 23 and 25 percent in 2003,” he said. Therefore, banks need to pay more attention to not only the banking needs but also the business interests of small-business owners for potential areas of entry such as online bill presentment.
Much of the growth is attributable to large banks aggressively marketing their online small-business services. FleetBoston Financial was listed as one of the most successful at capturing the small-business market, boasting a 40 percent market share.
That percentage represents 200,000 customers registered for the Fleet OfficeLink product, said James W. Schepker, spokesman for Fleet. “We are signing up about 6,000 new online small-business customers each month,” said Schepker.
Schepker credits the quality of their offering as one reason for its success. “Word of mouth has been a key part of the product’s successful promotion. Direct solicitations to customers, supported by media advertising, have played additional roles in promoting this product,” he said. Of course, having sports stars like Derek Jeter of the New York Yankees and Nomar Garciaparra of the Boston Red Sox tout the benefits of the product in commercials helps as well.
Using It All
The TowerGroup study found that as online banking use increases in this segment, usage of other services that cost the bank more are used less. For non-depository transactions, online banking users visit a branch 73 percent of the time, contrasted with 77 percent for non-online users, while 81 percent of online users used telephone services for non-depository transactions compared to 83 percent of non-users. Because of benefits such as these, Brown said banks must do a better job of promoting their online banking products. “Underscoring this is the fact that most small businesses not using online banking say the main reason is they have no need or their current method is easier,” said Brown.
In addition to reducing service cost by encouraging use of so-called self-help services online, banks may further benefit because the online banking customer often maintains higher account balances. Among online banking users, the average small-business checking account balance was $63,990 vs. $44,740 for non-users. Additionally, an overwhelming majority used the Internet to check account balances.
“Quite frankly, just being able to go in and see your account balance on a real-time basis is the most popular
Despite the TowerGroup study results, Riley said that actual usage volume of various delivery methods such as in-person or telephone banking seldom tails off even when new online systems are introduced.
“One thing that you will always find is that if you provide another delivery channel, like online, you don’t really see a diminution of traffic, whether it be branches or call centers or any of the other delivery channels like ATMs,” said Riley. “What you see is that now people have more ways to interact with the bank and they use them all.”
And while Eastern offers many such online services, it doesn’t foresee a surge in usage. “You want to be able to provide the ability for people to interact with you or at least initiate the interaction over the Web. But we believe pretty strongly that Web-based commercial applications are not going to make up a significant amount of our applications in the foreseeable future,” said Riley.
Another feature that online small-business customers want is tiered access to accounts. Many people working in a small-business environment may need access to online banking, but upper management often does not want employees to have complete access to those accounts, said Brown.
Still, the outlook for this business segment is good. Small-business online banking has been growing at a steady rate for the past few years, said Brown. “[It] is now finally starting to reach that critical mass point needed to reduce that overall cost to serve the market.”
However, banks need to do a much better job of educating small businesses about the benefits of these services and encourage usage. But overall, the usage of online services is beginning to chip away at the reliance on traditional channels such as in-person visits and telephone calls to the bank for non-depository transactions, said Brown.
