Chris Oddleifson
‘Increased awareness’

Following a lackluster showing in the sector during the first quarter of 2003, community bankers have identified small-business banking as an area ripe for improved earnings and better performance.

Experts at TowerGroup, a Needham-based research and advisory firm for the financial services industry, said recent studies found that small-business banking is often the most profitable relationship a bank can have.

According to TowerGroup research, a small business is defined by the amount of revenue or number of employees a business has and most businesses under $10 million in annual sales are considered small businesses.

Christine Pratt, senior analyst at TowerGroup, said that “it’s important for banks to remember that two-thirds of all businesses remain open at least two years after they start and with 25 percent of all business in the retail industry, banks are able to generate additional revenue by offering fee-based products.”

According to one attorney, community banks need to take advantage of the small-business marketplace in order to increase their lending limits and deposit growth.

“Small community banks are taking advantage of the [small-business] sector of the market that is not being well served by the larger banks,” said Richard A. Schaberg, a securities attorney with Thacher Proffit & Wood in Washington, D.C., who represents more than 30 community banks in Massachusetts. “Starting with the consolidation that occurred with the big banks in Boston, there has been a huge [opportunity] for community banks to increase their customer base with small businesses. It’s a personal service thing. Attention to details and personal attention is a way to get small-business customers attracted to smaller banks.”

Schaberg said the potential revenue available through small-business banking is apparent to community banks because the money generated by small-business accounts makes up a larger proportion of their total transactions than is the case with a larger bank.

At Middlesex Savings Bank, a $2.8 billion-asset bank based in Natick, stroking the egos of small-business owners is one way of gaining business accounts in a competitive marketplace.

In the commercial lending department at Middlesex Savings, the word “small” is removed from the endeavor.

“We call it business banking because [the term] small can be [insulting] to the owner. If you’re the owner, you probably don’t think you’re a small business,” said David Falwell, senior vice president of commercial lending at the bank.

Falwell said there is always a certain level of competition when serving the business community because “small businesses may have relatively modest business needs” but one bank cannot provide the same level and amount of service to all the businesses it serves.

“You have to get in front of the customers and know which customers are in the market in the community you serve. Attracting and retaining [the customer] becomes a product of who you are in the business and whether you understand [the customer’s] needs,” said Falwell. “It’s important to realize that we can’t provide the [same level of] service to every business. We need to provide the smaller businesses the same type of service as the larger businesses [have come to expect] … offering simpler and easier products through the Internet and offering a suite of products that will solve the primary needs of the business.”

Service Strategies

Small businesses can help banks understand the current state of the economy and at Rockland Trust Co., the $2.2 billion-asset bank continues to survey small-business owners on community and economic outlooks.

“Because we’re a community bank, we really tune into the small-businesses community because how they fare, to a large degree, is reflective on how we fare,” said Chris Oddleifson, chief executive officer at Rockland Trust. “Community banks are dependent on the community and a big portion of that is small business. If we weren’t able to meet small-business needs, we would not be able to grow our earnings.”

Oddleifson said most community banks are “tuned in” to the needs and wants of small businesses because “we live in these communities. However, never rest on your laurels. We are in a perpetual quest of talking to our customers to continue to improve our service and products to the customer.”

According to TowerGroup Vice President Jim Eckenrode, businesses often choose to work with banks based in the geographical location of the business, but banks have to take some risks to win over the small-business customer.

“Banks should remember that small businesses are being solicited by other non-banks. A bank willing to step up and take a risk on a small-business customer will have just gained a loyal customer,” said Eckenrode.

Falwell said bankers and relationship managers are the keys to maintaining the small-business relationship.

“This is not a simple market to serve and there is a lot of risk. You get lots of small businesses that don’t survive, so essentially, [the banks must be careful to] make prudent loans,” said Falwell. “There is no magic to this. It’s simply understanding what markets you should be in and gaining the competitive advantage and then putting the right person in front of the business, who cares about the overall relationship and the customer.”

Oddleifson said that the relationship between banker and small-business owner is based mainly on trust and confidence, and can be mutually rewarding.

“Many small businesses don’t have specialists in finance and banks can bring that to the table. That goes beyond giving a loan or taking a deposit,” said Oddleifson

According to TowerGroup research, market trends affect businesses’ growth and banks should take into consideration industry trends and changes when signing on new business clients.

Pratt said the economy, new and changing regulation, consolidations, and technology and the Internet are all industry drivers that can affect a small business’s performance.

But once a business is signed on with a bank, Schaberg said smaller banks face challenges to preserving those business accounts.

“To provide personal service means investing in technology and systems, and that is tough for a small bank. It takes an investment in people and capital,” said Schaberg. “One of the things I’m seeing is community banks looking to raise their capital base, oftentimes because it will increase the size of loans they can make to customers.”

Schaberg said technology can be a barrier to some community banks trying to generate small-business accounts, but acknowledged that a smart business owner will not “hook on to a bank” without knowing what the bank can produce and provide.

According to Oddleifson, competition in the small-business market is good for banks because it helps bankers understand the products and services that are necessary to serve small businesses.

“It’s a good full breadth of product and services and needs that are satisfied,” said Oddleifson. “The last five years there has been an increased awareness [of small-business banking]. People are beginning to understand the power and value of a relationship in terms of retention and shareholder value and small businesses are a nice manageable size for community banks to provide service in a manageable way.”

According to reports provided by Rockland Trust Co., on a year-over-year basis, the number of small business accounts at the institution increased by 37 percent and the corresponding balances increased by 60 percent. The bank also experienced a 10 percent growth rate in loans.

Schaberg said community banks should be able to prove to business customers that the bank can provide the same level of service as a larger bank.

“This is not a big bank vs. small bank issue, but the small-business customers are benefited by increased competition and by having greater options,” said Schaberg. “If the big banks continue to buy out the small banks, and you’re a small bank that refuses to sell, you gain more business because of the small-business [owners] who don’t want big banks. Those who survive will continually pick up the business relationships.”

Melanie Nayer may be reached at mnayer@thewarrengroup.com.