Partnering to provide actionable insights to attract and ...info.vantiv.com/rs/048-BUR-972/images/WhitePaper_WinSMB FV+.pdf · Top 10 banks taking more share of primary small business

Winning With Small Business

Winning With Small BusinessesSmall businesses are undeniably critical drivers of the U.S. economy, especially across the financial services sector

Not-so-small - SMBs account for:

They’re attractive, a�uent, and profitable

Top 10 banks taking more share of primary small business banking relationshipsfrom 47% to 52% between 2011 and 2014

With large banks migrating down-market from corporate focus and FinTechs migrating up-market from micro-business focus, regional and community banks must take action

Roughly 3% of small businesses switch banks each year and 33% of those who change cite the following reasons:

Fees/charges too high Poor service Poor product o�erings

Small businesses represent a highly attractive profit pool

Small businesses frequently bring their owners with them, increasing the profit potential by over 60%

Small business owners are almost twice as likely to be a�uent as non-small business owners

Chase announced an initiative geared at streamlining bank processes for small business clients, hoping to drive a superior customer experience

Fi�h Third has aggressively hired small business banking specialists

Capital One revamped its suite of small business checking products, rebranding to “Spark Business”

99% of all employer firms in the United States

37% of total high tech employment

98% of firms exporting goods

A�uent and high net worth consumer profit o�ers $8.8B in annual post-tax retail banking profit

Small business profit o�ers $13.1B in annual post-tax retail banking profit

Nearly half of private sector jobs

Two-thirds of newly created jobs

Partnering to provide actionableinsights to attract and retain customers

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Table Of Contents

Executive Summary 3

The Small Business Growth Imperative 4

Figure 1 - Role of Small Businesses in the U.S. Economy 4

Figure 2 - Small Business Lending - Supply and Demand 5

Figure 3 - Small Business and Associated Consumer Profits 5

Figure 4 - Online Marketing Cost for Small Business Banking 6

Figure 5 - Largest Banks Gaining Deposit Share with Small Business 7 and Share of Largest Banks Stabilized in Business Loans

Figure 6 - Small Business Banking Ecosystem - Traditional and 8 Emerging Competition

Levers For Growth 8

Figure 7 - Frequency Of and Motivations Behind Bank Switching 9

Three Keys to Effective Product Design 10

Figure 8 - Key Factors Impacting Bank Selection 11

Priced to Maximize the Value Exchange 11

Figure 9 - Perceived Value of Product Features 12

Easy to Buy / Easy to Sell 13

Figure 10 - Capital One’s Guided Sales Process 14

Figure 11 - Bank of America’s ‘Bundle’ Recommendations 14

Simple and Segmented 14

Micro Business, Business to Consumer, Business to Business 15

Effectively Leveraging Product Design In Your Organization 16

What Is At Stake 17

About Oliver Wyman and Vantiv 18

3


ExECUTIVE SUMMARY

In our previous paper on “Strategic Growth Through High Value Small Business Targeting,” we made the case for institutional focus on small businesses, and segment focus on winning disproportionate share of the most valuable small business clients. In this paper, we will address a key capability necessary to successfully compete in the marketplace – product.

While politicians, the popular press, bankers and small businesses themselves can’t definitively answer the question, “are banks doing enough for small businesses,” there are a few things we know for sure. The market for small business financial services is incredibly competitive. The past few years have seen dramatic expansion of competition across channels (with paid search prices for small business financial services topping the tables) and across institution types (with large banks and non-banks alike now actively competing for small businesses).

With that backdrop, many banks and credit unions are revisiting their core growth levers with product being a major focus. Here, we’ll describe three keys to success in product design:

1. SImPle and SeGmenTedSimplify the product suite, align the products to distinct segments with distinct needs, and enable your customers/prospects to quickly assess the product suite to find the right “fit.”

2. eaSy To Buy / eaSy To Sellalign the product suite with your delivery capabilities: complex products for specialized sellers, less complex products for generalists. empower your sellers and your customers through effective online and offline digital and analog sales aids.

3. PrIced To maxImIze THe Value excHanGerecognize the difference between economic value to the bank and perceived value to the customer, align features and price products to maximize the value for both parties.

While there is no silver bullet in product design – no single winning product or portfolio of products – an examination of leading banks reveals how these principles have been deployed to great success in gaining share in recent years and growing segment profits. designing an effective product suite can help your business gain more profitable customers.

4


THE SMALL BUSINESS GROWTH IMPERATIVE

Banks and credit unions are constantly being asked to support small businesses as an engine of growth for the u.S. economy. The cry from politicians and trade organizations for several years has been: “lend more.”

Politicians have correctly identified small businesses as a critical sector of the u.S. economy, and one that has been a decreasing area of focus for u.S. banks and credit unions, by some metrics. meanwhile, bank leaders are constantly touting their focus on small businesses both

as a means of community development and a path to shareholder returns. So what is really happening?

First, small businesses are undeniably critical drivers of the u.S. economy, across sectors and through the cycle. as defined by the u.S. Small Business authority, small businesses account for over 99 percent of all employer firms in the u.S., nearly half of private sector jobs, and two-thirds of newly created jobs. and while we associate small businesses with “main street,” they also account for over one third of total high tech employment, and 98 percent of exporters.

are banks serving small business’ needs? Politics aside, the answer is mixed. credit is certainly harder to come by today than it was pre-crisis, but few small businesses are “unbanked,” and few that want credit aren’t receiving it. according to a paper published jointly by the consumer Bankers association and oliver Wyman, only 15 percent of credit-seeking small businesses didn’t receive credit.

That said, banks are increasingly focused on the attractive economics of small business banking in a few regards. First, as illustrated in Figure 03, small businesses represent a highly attractive profit pool – an even larger aggregate profit pool than the combined affluent and high net worth customer profit pool. Further, the small business frequently brings its owner with it…increasing the profit potential of the relationship by over 60% to ~$1,100 in post-tax profits annually.

Source: SBa (https://www.sba.gov/sites/default/files/FaQ_march_2014_0.pdf)note: Small businesses defined as independent businesses having fewer than 500 employees

Role of Small Businesses in the U.S. Economy

Figure 01

99.7%OF US EMPLOYER

FIRMS

46%OF PRIVATE-SECTOR

OUTPUT

63%OF NET NEW PRIVATE

SECTOR JOBS

37%OF HIGH-TECH EMPLOYMENT


EMPLOYMENT

98%OF FIRMS EXPORTING

GOODS


PAYROLL

33%OF EXPORTING VALUE

99.7%OF U.S. EMPLOYER

FIRMS

5


Small Business Lending - Supply and Demand

Figure 02Source: Snl Financial, oliver Wyman analysis

Small Business and Associated Consumer Profits

15.4

22.8

8.8

13.1

Massconsumer

profit

Massaffluent

consumerprofit

Affluent& HNW

consumerprofit

SBprofit

689

438

1,127

SB bankingprofit

Consumerbanking profit

from SB owner

Totalprofit

17%

43%

32%

28%

43%

23%

8% 5%

SB banking profit Consumer banking profitfrom SB owner

note: Profits calculated with oliver Wyman assumptions for Small Businesses with <250 employeesSource: oliver Wyman Survey of Small Business owners (Q2 2014), oliver Wyman consumer Profit Pools

SB banking profits are comparable to consumer segment profits...

...and the SB banking relationship attracts additional consumer business...

...and the SB banking relationship attracts additional consumer business

annual post-tax retail banking profit $Bn average post-tax SB customer profits distribution of consumers by investable assets

Figure 03

SB ownermassconsumer

profit

massaffluent

consumerprofit

affluent& HnW

consumerprofit

SBprofit

non-SB owner

SBbanking

profit

Totalprofit

consumer banking

profit from SB owner

<$10k $10-100k $100-1MM >$1MM

It is worth noting that the consumer relationship associated with SmB owners is particularly attractive. as most banks and credit unions are focused on the affluent population, perhaps the easiest way to build that franchise

is through growing the small business book. Small business owners, are almost twice as likely to be affluent as non-small business owners, as illustrated in Figure 03.

Figure 01

6


It is not surprising that small businesses are an increasing area of focus across the financial services sector. a simple sign of the increasingly intense competition for small business customers is the Google adWords cost-per-click for small business financial services versus other products.

Bidding on search volume for small business loans is more expensive than checking accounts, mortgages, and commercial line of credit. every small business product we tested is more expensive than other highly competitive sectors, from cars to clothing.

The last few years have seen notable public moves toward increased focus on small business.

• chase announced an initiative geared at streamlining bank processes for its small business clients, hoping to drive a superior customer experience.

• Fifth Third has aggressively hired small business banking specialists.

• capital one revamped its suite of small business checking products rebranding to “spark business.”

• Pnc launched cFo (cash Flow optimizer), a reporting and analytics solution specifically targeted for small businesses.

It is not surprising that the largest banks in the country have been gaining share as the primary banks for small businesses. according to recent surveys , the top 10 banks increased their share of primary small business banking relationships from 47 percent to 52 percent between 2011 and 2014.

Figure 04

Online Marketing Cost for Small Business Banking

Cost of online advetising by product typeCost per click on Google AdWords

Source: Google adWords, oliver Wyman analysis

1.62.0

4.65.3

6.2

7.5

8.58.5

12.612.613.2

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

$11

$12

$13

$14

JeansCar dealer

MortgageFree checking account

Credit card

SB credit card

SB checking account

Comm. line

of credit

SB banking

CreditCard

SB loan

Cost

per

clic

k ($

1)

7


53.4% 47.6%

46.6% 52.4%

2011 2014

Market share of primary small business checking accounts (2011 – 2014)Top 10 Banks1 vs. Other depository institutions2

Other depository institutions

Top 10 Banks

Shar

e of

Tot

al

28% 28% 27% 25% 23% 22% 22% 23% 22% 22% 21%

9% 8% 9% 9% 9% 9% 9% 10% 10% 10% 9%

19% 19% 20% 21%20% 20% 20% 20% 21% 20% 21%

15% 17% 12% 12% 13% 10% 10% 10% 10% 9% 10%

29% 28% 32% 32% 35% 38% 39% 39% 38% 39% 39%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Under $500MM $500MM to $999.9MM $1BN to $9.9BN $10BN to $49.9BN $50BN or more

Market share of small business loans over timeBy lender size as measured by total assets (for depository institutions only)

Largest Banks Gaining DepositShare with Small Businesses

Share of Largest Banks Stabilizedin Business Loans

Source: oliver Wyman’s Survey of Small Business owners Finances (2011, 2014) 1 Top 10 Banks include: Bank of america, capital one, citi, chase, Fifth Third, Pnc, SunTrust Td Bank, uS Bank, and Wells Fargo

Source: uS Small Business administration

competition isn’t just coming from the large banks now awakened to the profitability of small businesses. across the product and provider continuum, we see increased competition in domains where regional and community banks and credit unions used to have material competitive advantage.

•OnlineproviderssuchasKabbage,OnDeckandlendingclub are making in-roads into small business loans – making the buying process simpler and more efficient and generally offering customer experiences that most banks can’t match today.

•Thelargecreditcardissuerscontinuetogainshareintransaction support – american express open provides a comprehensive eco-system of services surrounding the small business, while other banks such as capital one and chase have increasingly invested in product development and marketing small business card offerings.

•Non-traditionalacquirerssuchasSquareandPayPal,initially focused on the micro-merchant segment have now expanded their offering of innovative products (mobile acceptance) and services (value-add analytics) to small businesses.

•Thelargestbanksareinvestingveryheavilyinomni-

channel strategies – offering sector-specific solutions (e.g. currency processing in retail, revenue cycle management in healthcare), integrating their branch and digital channel capabilities (e.g. appointment setting, video specialist, online application and fulfillment) and enhancing their digital marketing capabilities (e.g. moving from paid search to programmatic buying, integrating new data sources into crm).

Figure 05

8


To compound the complexity, many of these institutions are partnering with regional and community banks as often as they are competing with them – providing products, taking referrals, selling assets, etc. customer acquisition and product pricing dynamics are harder to manage than ever.

under attack from both large banks migratingdown-market from their corporate focus and FinTechs migrating up-market from micro-business focus, the regional and community banks must respond.

leVerS For GroWTH

ultimately, any financial institution has only three levers for growing its small business franchise.

1. develop deeper customer relationships – selecting those with larger financial services wallets and cross-selling critical products and services to grow unit profitability. This lever was discussed at some length in our 2014 paper “Strategic Growth Through High Value Small Business Targeting.”

Small Business Banking Ecosystem - Traditional and Emerging Competition

note: named institution are examples only.

Products / Services

Profit contribution

Key players and target market

Checking / Deposits

$6.9BN

Lending / LOC

($0.7BN)

Business cards

$3.1BN

Merchant Services

$5.3BN

Size of businesses served

Micro-businesses Small-to-medium

Increasing size

Traditionally served predominantly by regional

and community banks

Online providers

Non-traditional payments processors

Banks / other issuers

Large banks

Figure 06

9


2. Invest in service quality to better retain current customers, make relationships “stickier,” and ensure satisfaction at “moments of truth” across the many disruptive events in the life of a small business. While a powerful lever for financial services, this topic we’ll put aside for now.

3. acquire more small business clients by developing a comprehensive proposition that enhances your appeal and close close rate. The remainder of this paper will

focus on acquisition and product design as the most important (and easily addressed) levers in driving increased acquisition rates.

We will focus primarily on product design for two reasons: it is one of the dominant features that drives customer acquisition and attrition, and it is often the feature that can most easily be changed.

Source: oliver Wyman Survey of Small Business owners (2014)

Frequency Of andMotivations Behind BankSwitching.

Figure 07

NO73%

I was unhappy with the old bank and decided to look elsewhere

I wanted to consolidate my banking relationships

I changed my place of residence and this triggered the change

I relocated mybusiness and thistriggered the change

I was attracted to the new bank, even though I hadn’t been actively looking to switch

My old branch closed

My relationship manager moved to my new bank

Other

33%

12%

10%

10%

9%

8%

3%

15%

Yes, I Switched In The Last:

Over 18Months Ago

21%

13-18Months

2%

7-12Months

2%

6Months

1%

LocationRelated

LocationRelated

LocationRelated

Fees / charges were too high and / or increased recently

Poor Service

Poor o�erings which did not meet my needs

Primary reason indicated for changing primary banking relationshipOf switchers (2014)

ReasonForUnhappiness

65%Product Design Related

47%Service Related


% Of Switchers Who Indicated Unhappiness As Primary Reason

I had heard/read/ was told that the bank had superior products/services

Bank o�ered mea relationshipmanager

Special o�er from my new bank

ReasonForUnhappiness


26%Service Related


% Of Switchers Who Indicated That They Were Attracted ByNew Bank

10


First, let’s level set on when small businesses switch banks, and why. roughly 3 percent of small businesses switch banks each year. However, those that do switch tend to do so for a very limited set of reasons. either they move and want a more convenient bank, there is a material (real or perceived) difference in service experience, or there is a material (real or perceived) difference in the product offering.

While none of the papers in this series purports to offer a “silver bullet,” there is in fact one sure fire way to grow your small business franchise: open more branches near small businesses. We won’t spend another second on

that than to say that while financial institutions around the country are wringing their hands regarding decreased customer traffic in the branch and the need for an “omni-channel” strategy, heads of the small business segment are quietly confident. one such executive less quietly shared, “I fully expect that decades from now, when the last branch left on main street serves its last customer before turning the lights off for good…that customer will be a small business owner and she will be there to meet with a small business banker.”

The second major lever for acquisition growth that we won’t address here is salesforce design and

42% 35% 34%24% 23% 23% 21% 15%

37%

4% 7% 26% 23%

52%

26%

11%

21%

60% 59%50% 54%

25%

53%74%

Product – the product had

good features and pricing

Rewards – there is a rewards

dimension to the product that is very appealing

Range of offering –

Primary bank has products to

meet all my current and future needs

Location –Primary bank’s branches were very convenient

Consolidation – I already had

other business or personal

accounts with primary bank

Incentives – I was given a

specific incentive to open my

account there/switch my account to there

Referral –Primary bank came highly

recommended

Other

Shar

e of

bus

ines

ses

by p

rofit

abili

ty a

nd m

ain

reas

on fo

r sw

itchi

ng to

cho

sen

prim

ary

bank

Highly Profitable Modestly Profitable Unprofitable

% of total switchers: 9% 5% 13% 34% 8% 5% 18% 10%

Key Factors Impacting Bank SelectionPrimary factor for eventual decision to bank with current primary bankBy profitability to the banking sector

note: Switchers are defined as small businesses who switched their primary banking relationship in the last 18 months.Source: oliver Wyman Survey of Small Business owners (Q2 2014)

Figure 08

11


effectiveness. most financial institutions are still struggling with how best to serve small businesses. Is this the primary mandate of the branch manager?...in-branch specialists?...multi-branch specialists?...a remote team? even with the core role definition taken care of, there are still questions around loading, goals, incentive compensation, performance management, training and tools, etc. We’ve discussed pieces of this in previous papers and will leave it at that for now as we explore further the core question of product design.

THREEKEYSTOEFFECTIVEPRODUCTDESIGN

you may recall from our earlier paper on “Strategic Growth Through High Value Small Business Targeting,” that there is a broad skew in profitability among small businesses – driven largely by the size of the business and the nature of the cash flows that would result in large checking balances as well as heavy usage of credit card and merchant services. Following on the same logic that started by saying, “focus on businesses that have multiple product needs,” it then makes sense to focus on product design as a lever for acquisition. and it isn’t surprising that while location is a bigger driver of bank switching, customers who switch for product-related reasons are disproportionately profitable.

What can banks and credit unions do to optimize the core product suite for acquisition? let’s start by taking a look at the top 10 banks we know have been taking share over the last few years at the expense of the regional and community banks and credit unions. Spending time on the

websites, on the phone with, and in the branches of these banks will reveal a few similarities. The most successful banks in the country tend to have small business product suites with three similarities: simple and segmented, easy to buy / easy to sell, and priced to maximize the value exchange.

In the remainder of this section, we’ll discuss each of these principles, and explore products and product suites built on these criteria.

PrIced To maxImIze THe Value excHanGe

Starting with the last, what does it mean for a product to be priced to maximize the value exchange? Simply put, products must generate value both for the customer and for the financial institution. The more value created for the customer, the more value the customer is willing to share with the bank or credit union. If products had only two features – interest rate and fees, for example – the math would be simple. But, in a world where the core checking package has dozens of features, figuring out how to simultaneously maximize customer perceived and bank realized value is non-trivial.

While there are many techniques for optimizing the product design, they all ultimately come back to knowing your customer.

Figure 09 on page 12, illustrates the type of understanding necessary to correctly calibrate product features (ideally at

Figure 08

12


the segment level, as we’ll discuss later).Here we look at three features of a small business checking account: the speed at which deposited funds clear and are available to the customer, the number of included transactions before item fees kick in, and the interest rate. What we see is apparently irrational and variable preferences…however, it is in understanding these preferences that value exchanges can be improved. Starting with interest at the bottom, one would think that an interest rate that is five times the national average would fare significantly better than an interest rate that is only double the national average. after all, the math here is simple – the interest on one product is 2.5 times

that of the other. However, in this study, and many like it, we find that features such as interest rate materially drive preference….but only insofar as they are offered, not meaningfully proportional to their level. That is, there is a big difference between non-interest bearing and interest bearing, but beyond that, small business owners aren’t too picky. This recognition can save banks who might otherwise lead with interest rate in order to attract more lucrative customers as they can now invest in other features that matter more.

Two features that matter more as they are enhanced are presented in the top row of Figure 09.

Perceived Value of Product Features

Source: oliver Wyman research

Included transactions

100 250 750

Funds availability

Standard 2-5 days Next day Instant

Interest

None 2X the nationalaverage

5x the nationalaverage

2x 3x

1.5x

Figure 09

Funds availability Included transactions

Interest

13


The first, funds availability, raises an interesting question. We see that customers have a strong preference for instant funds availability despite the fact that the vast majority of small businesses would have no need for such a feature – they maintain relatively stable balances and rarely transact with such precision that accelerating the receivables cycle by one day would make a material difference in their working capital position or earnings. That said, the perceived value is quite high.

If a financial institution can manage the operational complexity and the fraud risk inherent in accelerating funds availability, there is market share to be gained.

The last feature, included transactions, behaves a bit more as we would expect. Three times the included transactions generates three times the perceived value. But note that this is anomalous more than it is a rule that governs small business owner preferences for product features.

eaSy To Buy / eaSy To Sell

What does it mean for products to be easy to buy and easy to sell?

The easiest way to simplify is to limit the number of products on offer. most of the large banks offer between two and four packaged checking solutions (along with analyzed accounts). It is worth noting that this is a relatively new phenomenon with the “segment of one” philosophy that led to broad-based product proliferation being replaced by the recognition that it is more important to have an efficient sales process than to have the perfect product fit.

customer research suggests that for most banks, three products, broadly aligned against segments we’ll discuss in more detail below, strikes the right balance between broad coverage of client needs and simplicity of the sales process.

Beyond simplifying the number of products, the product suite and sales process must align. If your institution has full-time, dedicated small business bankers, you can afford a more complex product environment, and trust the bankers to help customers find the right combination of products and services. For those counting on the branch manager or platform banker to own small business goals along with the broader consumer business, mental shelf space is far more limited. erring on the side of simpler products, more presentation of “soft bundles” and limiting the add-on features is likely more productive than attempting to empower either customer or seller with a breadth of options more likely to lead to confusion or paralysis than more and deeper relationships.

Finally, online and offline sales aids must facilitate the buying process. Flipping through the websites of leading banks gives some strong hints as to best practices:

•Guidedshoppingexperience–ratherthanpresentinga long list of product offerings (or worse, a set of individual product spec sheets), walk the customer through the product selection process in a structured manner. This results in a better product fit for the customer, and gives a jump start on crm – revealing key information about the small business that will assist in meeting future needs.

Figure 09

14


micro-businesses are frequently start-ups or secondary income sources for their owners. as such, very little time is spent contemplating financial services needs. This is not surprising, since their needs are relatively simple. They need an account that supports basic transactions (such as cash deposits and withdrawals, check writing, and the occasional wire transfer), potentially basic e-commerce capabilities, and advice on the basics of setting up a business (including legal entity structuring, financial management and tax filing).

Because every dollar is invested in growing the business or returning value to the owner, micro businesses are reticent to pay for financial services. They look for products that are simple, include only the basic features (nothing to make them think “this isn’t for a simple business like mine”), and have simple, transparent, and ideally waivable fee structures.

Because micro businesses have small wallets, it is important to have high sales conversion rates (to minimize sales costs) and gain high share of the available wallet. Sales conversion is a result of product presentation vs. design. Wallet share is accomplished through driving activation and deepening in the product structures themselves. examples include: (Continued on page 15)

Business-to-consumer small businesses represent the majority of non-micro small businesses. While the vast majority of these still don’t have full-time financial managers, they do more actively manage their cash flows and are more likely to have more complex and volatile payables and receivables. They are looking for tools that allow them to manage cash flows and operating capital while enabling them to both receive and remit payments in the environments in which they operate (which typically span credit card, payroll/acH, check and cash with limited wires).

These businesses recognize the value that banks and credit unions provide. They are more active users of the services and more aware of the pricing practices (including item fees on packaged accounts for more payments intensive businesses). They are also more likely to need credit either for short-term cash-flow smoothing (leveraging credit card, line of credit, or alternative financings such as merchant cash advances) as well as for expansion (e.g. real estate and equipment). Business-to-consumer small businesses have larger wallets and are therefore less likely to aggregate their financial services products with a single provider. Financial institutions can and should still compete on price, but the incumbency value of being(Continued on page 15)

Business-to-business operations rely much more on advanced payment (treasury management) services as well as access to capital. These businesses are often larger and are more diverse as a category. Some have extensive payments needs (from payroll, to international supply chain management, to receivables management), while others have very infrequent payments needs but carry large balances and rely on access to credit given seasonal or lumpy cash flows.

often having a full-time (or at least dedicated part-time) financial manager, B2B small businesses are more likely to take a “best in breed” approach to financial services selection – disaggregating in order to gain superior pricing.

While many of these businesses will opt for an analyzed account in order to earn rebates against their treasury management fees, and thereby moot the bank challenge of winning a broader relationship, those that are smaller/less complex or prefer more predictable fee schedules will opt for a packaged account.

Here leading products for business-to-business incorporate premium features often at substantial price reductions. They recognize the depth and breadth of the business and consumer wallet – the high absolute level of profit from deposit spreads and(Continued on page 15)

mIcro-BuSIneSS BuSIneSS-To-conSumer BuSIneSS-To-BuSIneSS

15


The “cashback” product encourages activation and utilization through providing $0.10 cash back for qualifying transactions, and encourages deepening by waiving the $15 monthly fee (which is higher than many competitors) for customers that have multiple additional products (including credit card, loans/lines, and merchant services).

The “Business checking”product encourages activation and utilization through a select merchant rewards program, and encourages deepening by waiving the $10 monthly fee through partnership with Pnc for merchant services or active usage of a Pnc credit card.

advertised as, “I want the basics,” the “Business Fundamentals” product is clearly positioned for customers looking for simplicity. It offers a range of deposit-based waiver criteria (minimum daily, average monthly, combined balance), and waiver criteria for usage of debit or credit cards.

the primary checking provider is still substantial enough to warrant careful product design and relationship pricing in order to drive outsized acquisition. Product design for business-to-consumer often speaks to economic optimization and optionality for business growth. examples include:

The “Premium checking” product encourages consolidation of personal and business accounts by offering both a personal checking account and business savings account fee free; it also waives fees for two months to allow customers to opt into different combinations of products/services that earn fee waivers (e.g. merchant services and credit card, or business loan or line of credit).

The “Gold Business Package” offers a variety of features intended to deepen the relationship and make it more sticky. Features include a free card reader with a merchant services contract, credit/discounted pricing on payroll services, bonus interest rate on savings account, waived monthly maintenance fee on personal checking account, enhanced credit card rewards, and ability to waive fees through deposit and credit balances.

the profit potential in cross-sold products (mostly credit card and merchant services). This often includes fee waivers for a very high transaction volume, some amount of free wire transactions / money orders / cashier’s checks, and heavy discounts or incentives for merchant services and credit cards. examples include:

offers a broad variety of free services as enticement to join the bank (e.g. money orders, printed check image statements, foreign aTms) while also offering the opportunity to waive fees through active use of merchant services, remote deposit capture, or a loan or line of credit

The “unlimited” product offers unlimited transactions and cash deposits, five free wires monthly, and the opportunity to waive fees for clients that have any two other qualifying small business products.

mIcro BuSIneSSconTInued

BuSIneSS To conSumer conTInued

BuSIneSS To BuSIneSS conTInued

16


•“Softbundled”recommendations–atypicalsmallbusiness needs more than a checking account, but they won’t find the right solution by looking through a long list of “add-ons,” and selecting each individually. rather, presenting illustrative “bundles” that customers can select and then customize accelerates the sales process and illustrates a deeper understanding of the customer needs.

SImPle and SeGmenTed

What does it mean to have a product suite that is simple and segmented? It means that a small business owner should be able to quickly assess the product suite and “see themselves” in one of the products. This means that a description of all the products and their primary features fits on a single page; no fine print is needed to understand the core proposition; and the products are designed and presented in such a way that a customer has no difficulty deciding “the right product for me.” This begins with having a sense of what the appropriate segmentation of small businesses is – are there 12 segments each with different needs and therefore requiring different products?....2?....6?

In our experience, there are three dominant segments: micro-business, business-to-consumer, and business-to-business. We discussed these briefly in a previous paper, but it is worth reviewing the product preferences of these segments.

eFFecTIVely leVeraGInG ProducT deSIGn In your orGanIzaTIon

We said earlier that there are no “silver bullets,” which is why this paper discusses the principles of product design versus simply describing what products your bank or credit union should offer. The answer to that last question very much depends on your strategy, the types

and distribution of customers in your footprint, your delivery capabilities and what your partners can bring to the table.

In terms of strategy, one of the big questions is whether your organization views small business banking as being closer to wholesale or retail banking. Typically, for those that view small business banking as a wholesale endeavor, the goal is to drive deeper relationships with larger small businesses. This requires products that appeal to more complex businesses, and an articulation of those products that clarifies the bank’s commitment to meet the complex and sometimes bespoke needs of the business. Those that view small business banking as a retail endeavor, typically look for efficiency in the sales and service process. Products that present simple bundles/solutions enable a small business owner to enter the branch and leave with everything they need to run their business (e.g., a checking account, payment solutions, a credit card and merchant services) are preferred to a longer sales process or one centered on credit.

There are typically two other defining strategy questions: First, is credit a lead or cross-sold product, and second, what is the brand position relative to cutting edge technology? In addressing the first question, the product design implications include the extent to which credit is presented as a waiver criteria for deposit fees as well as how additional lending solutions (e.g. merchant cash advances tied to merchant services) might be presented. In addressing the second question, the product design implications include initial focus of bundles (e.g. ecommerce and mobile acceptance vs. traditional point of sale terminals in the merchant services world) and presentation/articulation of the core product and bundled features.

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many banks and credit unions further customize their product offerings based on the nature of the small businesses in their footprint. So-called “vertical” or “sector” strategies come into play here (e.g. a bundled offering for medical practices), but simple tweaks to how products are presented and what use cases are shared (automechanic vs. nail salon vs. construction) can meaningfully impact the pull-through rate. There are many resources available to banks and credit unions that want a better understanding of the small businesses in their footprint. among these are the data vendors (e.g. d&B, Hoovers) and card issuing and merchant processing partners that have insight into the local merchant base based on transaction volume.

We’ve discussed aligning the product suite with your delivery capabilities; it is also important to align them with the capabilities of your partners. Before making a fee waiver contingent on credit card spend or merchant services, it’s important to be able to deliver those products confidently. It’s also important that what you gain in the relationship (deepening, stickier) exceeds the value of the rebated fees.

WHATISATSTAKE

While small businesses switch banks very infrequently, the formation rate is quite high, and there is substantial variation in bank effectiveness in capturing new and switching small businesses. We discussed in a previous paper the value in changing your customer mix – the ability to double the profit of your small business segment without growing the customer base. Product design, as we discussed briefly in that paper and more extensively here, is a critical component of driving that shift in customer mix (acquiring disproportionate share of the most profitable customers). Product design can also accelerate growth of the business. even among the

largest banks in the country, there is roughly a 5 percent difference between the annual growth rate (in terms of number of clients) of the highest and lowest performing banks.

at the highest level, there are only three levers for value generation in any business – customers, products and channels. We hope this paper provides perspective on how to tackle a third of that value equation, and raises some new and interesting opportunities for your business.

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about oliver Wyman and Vantiv

oliver WymanThis white paper was prepared by the Financial Services practice of oliver Wyman, a leading independent management consulting firm, and all opinions expressed are solely those of oliver Wyman. oliver Wyman serves Global 1,000 clients on a wide range of strategic issues, and counts 75 of the global top 100 financial institutions as its clients. The firm has guided some of the world’s most sophisticated institutions on their retail banking and payment strategies. oliver Wyman’s staff of 3,700 operates from offices in more than 50 cities in 26 countries. For more information, please visit www.oliverwyman.com.

Vantivas part of its ongoing commitment to industry thought leadership, Vantiv commissioned a series of reports of topical interest to financial institutions, including this report, but had no editorial influence over the facts and opinions provided herein.

Vantiv, Inc. (nySe: VnTV) is a leading payment processor differentiated by an integrated technology platform. Vantiv offers a comprehensive suite of traditional and innovative payment processing and technology solutions to merchants and financial institutions of all sizes, enabling them to address their payment processing needs through a single provider. We build strong relationships with our customers, helping them become more efficient, more secure and more successful. Vantiv is the second largest merchant acquirer and the largest PIn debit acquirer based on number of transactions in the u.S. The company’s growth strategy includes expanding further into high-growth channels and verticals, including integrated payments, ecommerce, and merchant bank.

For more information, visit www.vantiv.com.

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For more information contact

Thomas J. Sheridan

Senior Vice President - FI merchant Services

Vantiv

P: 513.900.3436

[email protected]

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