SMALL BUSINESS
BANKING STUDY HIGHLIGHTS
1
• The Small Business (SB) segment is large and profitable, but banks have typically not focused on SBs with strategies targeted to
the varied needs of the segment
• SB banking insights
› Though on average SBs hold large deposit balances, less than 20% of customers account for over 80% of balances –
retention for key accounts is critical
› Lending profitability varies widely but is table-stakes for retention, since 1/2 of Small Businesses report being likely to switch
banks if denied credit; banks should consider lending as a reactive offering
› Payment products, on the other hand, play a pivotal role in the SB banking value proposition; comprehensive needs
assessments become critical to cross-sell payments solutions during opening of core checking account
• Merchant services profits account for almost 40% of the overall ~$13 BN SB profit pool – with the added benefit of being
downturn-resistant
• In discussing merchant services with SBs, cost, EMV, and mobile are amongst the most common topics; banks need to
leverage internal experts and acquiring partners to engage in meaningful conversations
• Debit and credit cards, at ~70% penetration, are the most commonly used banking products beyond checking
› SB debit card usage is low compared to consumers though – opportunity to increase with targeted offerings
addressing SB-specific needs, e.g. employee access and usage rights
› Credit card growth depends on bank risk appetite/ capabilities, with the largest opportunity in fully owned portfolios
but only if scale allows development of underwriting capabilities
› Branches are critical for SBs as 34% of SBs choose a bank based on branch convenience – SB banking needs to play a
prominent role in shaping distribution strategies
› Most respondents have dedicated SB RMs, but less than 30% of SBs recognize RMs as being extremely or very important to
their banking relationship: banks need to carefully consider cost/ benefit trade-off of RM strategies
› Banks also need to build SB-specific focus/ capabilities to support marketing and sales efforts by establishing clear segment
boundaries, a full dedicated P&L, specific budget and targets, and SB product management
• In order to match best practices, banks need to act on these insights, articulating SB-specific strategies and developing relevant
capabilities where needed
Executive summary
2
The Study assesses performance and strategies for Small
Business (SB) banking
Growth strategies
Deposits &
Lending Payments Channels
Operating models
Context
3
Small Business distribution by size
Total = ~28MM firms
Source: US Census Bureau, 2011
The Small Business segment is large and diverse, counting
over ~28 MM potential customers
4
Non-Employer
80%
Employer 20%
12.4%
3.4%
2.1%
1.7% 0.3%
0.1%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Employer Firms
0-4 5-9 10-19 20-99 100-499 500+
Number of employees
Pe
rce
nt
of
tota
l S
ma
ll B
usin
esse
s
Context
SB banking profits are comparable to
consumer segment profits…
Note: Profits calculated with Oliver Wyman assumptions for Small Businesses with <250 employees
Source: Oliver Wyman Survey of Small Business Owners (Q2 2014), Oliver Wyman Consumer Profit Pools
Small Businesses are highly profitable from a banking
perspective, representing a ~$13 BN profit pool
5
15.4
22.8
8.8
13.1
MassConsumer
profit
MassAffluent
Consumerprofit
Affluent& HNW
Consumerprofit
SBprofit
… And the SB banking relationship
attracts additional consumer business
689
438
1,127
SB banking profit Consumer bankingprofit from SB owner
Totalprofit
Annual post-tax Retail banking profit pools
$ BN
Average annual post-tax SB customer profits
$
Context
Bank focus on Small Business segment
Historical model Common Current Approach Best practice
• Lack of segment-specific
strategy
• No dedicated sales/
service teams
• Limited product range (can
be just adaptations of
personal or commercial
products)
• No dedicated P&L
• Segment-specific strategy
defined, but capabilities to
implement may be hard to find
• Dedicated RMs or branch
manager responsibility
• Offer full product range but
focus on lending; can leverage
partnerships to fill gaps
• Dedicated P&L, though often
not sophisticated (e.g. some
products missing, indirect costs
not fully allocated)
• Well-defined segment-
specific strategy with
adequate budget/ capabilities
• Dedicated RMs, beyond
geography can also be
specialized by industry
vertical
• Full product range entirely
developed and managed in-
house
• Dedicated P&L covering all
products and costs (direct
and indirect)
+ -
Banks however have typically not focused on the SB
segment with targeted strategies
6
Banks need to articulate SB-specific strategies and develop relevant
capabilities to achieve best practice
Context
Payment products in particular play a pivotal role in the SB
banking value proposition
4% 7% 8%
38%
69% 74%
Equip
ment
loan
Co
mm
erc
ial
mo
rtgag
e
Auto
loa
n/
lease
Me
rch
ant
serv
ices
Cre
dit c
ard
De
bit c
ard
Source: Oliver Wyman Survey of Small Business Owners (Q2 2014)
Core payments products
Most common lending products
Banking product penetration amongst SBs
% of SB respondents Annual post-tax SB banking profit breakdown
$ BN
4.8
2.1
0.1 3.1
5.3
0.8 1.3
13.1
Che
ckin
g
Oth
er
dep
osits
Tre
asury
mg
mt
Cre
dit c
ard
s
Me
rcha
nt
serv
ice
s
Oth
er
lend
ing
RM
Cost
To
tal
pro
fit
Foundational Cross-sell targets
Deposits & Lending/ Payments
Comprehensive needs assessments become critical to cross-sell payments
solutions during opening of core checking account (not as an afterthought)
7
29%
26%
12% 14%
8%
5% 5%
1% 0%
3% 4%
10%
13%
18%
28%
23%
Less th
an
$1,0
00
$1,0
00–
4,9
99
$5,0
00–
9,9
99
$10
,00
0–
24,9
99
$25
,00
0–
49,9
99
$50
,00
0–
99,9
99
$10
0,0
00–
499
,99
9
$50
0,0
00
or
mo
re
% ofcustomers
% ofbalances
Deposit balance ranges
Customer and balance distribution by balance ranges
Deposits Less than 20% of customers account for over 80% of balances
8
Deposits & Lending
Average
balances:
Checking: $25k
Savings: $58k
Retain key deposit accounts via preferred service while targeting high-
potential but under-penetrated customers to win share of wallet
Lending Lending profitability is inconsistent but is a table-stakes offering
Source: Oliver Wyman SB Benchmarking Database
Lending is critical to acquiring
and retaining SB customers
2/3 of Small Businesses
report that access to credit
is important in choosing a
primary bank
1/2 of Small Businesses
report being likely to switch
banks if denied credit
Average loan size ($ K)
R² = 0.0035
0 200 400 600
Po
rtfo
lio
NIM
Loan pricing is insensitive
to loan size…
R² = 0.9203
0 200 400 600
Net
ch
arg
e-o
ffs
Average loan size ($ K)
… While risk is higher for
smaller businesses
Deposits & Lending
9
Foundational lending products are a must-have, but unless banks have
sufficient underwriting expertise they should be a reactive offering
Portfolio net interest margin
by average loan size
Portfolio net charge-offs by
average loan size
Merchant services Banks see merchant services as a key downturn-resistant profit driver; cost,
EMV, and mobile are common sales topics
Merchant services are profitable and downturn-
resistant
We have identified merchant services as a
top source of fee income in retail.
We are interested in the entire banking
relationship; merchant services is key.
10
• Predominantly fee income-based, so less
sensitive to interest rate fluctuations
• Electronic spend continues to increase even if
total spend declines
We talk about cost because it's what we're
better at. It should become more balanced.
I'd say the number one thing lately has
been mobile.
Payments acceptance topics of conversation
% of survey participants
45% 45% 36% 36% 36%
27% 18%
9%
Cost
EM
V
Mo
bile
Se
cu
rity
Fe
atu
reset
Se
rvic
e
Loya
lty
Oth
er
Payments
Leverage internal experts and acquiring partners to engage SBs in sales
conversations, especially at checking account opening
• Bank integration with Apple Pay
› If not in wallet: risk of Small Business spend shifting to
issuer in Apple Pay wallet
› If in wallet: risk of Apple appropriation of interchange fee
portion
• Wallet status once integrated: Risk of being reduced to
bottom of wallet, hence losing existing revenue, vs. having to
further compress margins in exchange for top of wallet status
• Facilitating acceptance by Small Business clients (for
Apple Pay and other offerings)
› NFC at POS
› Mobile checkout
• Value-added service opportunities: Powering loyalty
programs/ads & offers for SB customers, either directly or
through third parties
Mobile payments Apple Pay may ignite the mobile payments market
Apple Pay Implications for Small Business banking
11
At the Point of Sale In-app
Payments
Articulate pros and cons of mobile payments for credible sales conversations
– and to maintain relevance of own cards
Debit usage metrics
1. Active rate is defined as any transaction in the last 30 days
Source: Oliver Wyman 2014 Debit Issuer Study
14.5
20.1
Active rate1
49%
68%
Small Business Consumer
Debit cards SB debit card usage still low compared to consumers – opportunity to increase
with targeted offerings
12
Payments
Develop debit solutions that address SBs’ unique needs, e.g. cards that
restrict employee cash withdrawals or balance inquiries
Transactions
per active
card per
month
Sales model Description Pros & cons
Owned and
operated
11% of
respondents
Customer applies to the bank,
bank assesses the credit risk,
and owns the balance held on
the account
• Highest profitability as all revenue is owned internally
(assuming effective risk assessment)
• Fully own customer relationship and related cross-sell
opportunities
• Greatest amount of time and effort required, and risk
of losses
Agent bank
89% of
respondents
Customer applies to bank, and
believes they have a credit card
with the bank, but the balances
are held by another institution
• Initial finder’s fee, potentially on-going revenue
sharing, and no credit risk
• Sales effort still required, but no underwriting
• Potential customer experience discrepancies
Referral
0% of
respondents
Bank refers customers to
alternative banks or provides
customer contact information to
other banks for pursuit
• Limited effort required and no credit risk for some
referral revenue
• Lower revenue
• Potential loss of customer relationship
−
+
−
+
−
−
+
~
+
Credit cards Credit card growth depends on bank risk appetite, with largest opportunity in
fully-owned portfolios
13
Ris
k/ R
ew
ard
+
-
Payments
Build focused risk management capabilities where scale permits in order to
own highly profitable credit card portfolios
Branches Branches are critical for SBs – changes to the network have disproportionate
impact on SBs vs. consumers
14
Channels
Ensure SB banking business units play a prominent role in shaping
distribution strategies, especially when it comes to branches
… But increase in digital driving branch decline
Physical footprint rationalization
We're trying to get as much cost out as possible,
which results in closures and cutting staff.
In-branch self-service capabilities
All of our new properties have technology
kiosks.
Staffing model optimization
We expect branch employees to have dual roles
with branch managers heavily involved in SB.
Source: Oliver Wyman Survey of Small Business Owners (Q2 2014)
10%
5%
5%
8%
9%
13%
18%
34%
Other
Rewards – appealing product rewards
Incentives – was given incentive to switch
Consolidation – already had business/ personal …
Product – good features and pricing
Range of offering – products to meet all my needs
Referral – bank came highly recommended
Location – branch convenience
Branches remain important for SBs…
What factor had the biggest effect on your decision to
bank with your current Bank?
Relationship Managers Most respondents have dedicated SB RMs, but the coverage model varies widely
and often does not generate desired benefits
15
Channels
Carefully consider cost/ benefit trade-off of RM strategies
~80% Respondents
with dedicated
SB RMs
5–100% Range of SB
customers covered
by RMs1
50–150 SB customers
per RM FTE
1. Excluding respondents with no RM coverage; only one respondent has 100% coverage
2. Source: Oliver Wyman Survey of Small Business Owners (Q2 2014)
How valuable is your RM to your overall relationship?2
SBs with an RM
8%
19%
29%
27%
19%
Extremelyimportant
Very important
Moderatelyimportant
Slightlyimportant
Not at allimportant
SB banking operating models generally are less developed
than Consumer or Commercial
16
SB product
management
Core SB
banking
capabilities
Clear segment
boundaries
Full SB-
specific P&L
Dedicated SB
budget/ targets
Operating models
Banks need to build SB-specific focus / capabilities to support marketing and
sales efforts
Only 15% of
respondents
have an SB P&L
that includes all
products and
allocates indirect
costs
Most respondents use only a revenue cut-off to
identify SBs, with levels varying significantly
Lower
prevalence of SB
budget and
targets to
incent the SB
sales force
Most respondents leverage product development
resources from other areas of the bank
Banks need to articulate SB-specific strategies and develop
relevant capabilities to achieve best practice
17
Deposits &
Lending
• Retain key deposit
accounts via preferred
service while targeting
high-potential but under-
penetrated customers to
win share of wallet
• Foundational lending
products are a must-have,
but unless banks have
outstanding underwriting
expertise they should be a
reactive offering
Payments
• Leverage internal experts and acquiring partners
to engage merchants in sales conversations,
especially at checking account opening
• Articulate pros and cons of mobile payments for
credible sales conversations – and to maintain
relevance of own cards
• Develop debit and credit solutions that address
SBs’ unique needs, e.g. cards that restrict
employee access and usage rights
• Build focused risk management capabilities
where scale permits in order to own highly
profitable credit card portfolios
Channels
• Ensure SB banking
business units play a
prominent role in shaping
distribution strategies,
especially when it comes
to branches
• Carefully consider cost/
benefit trade-off of RM
strategies
Operating models
• Comprehensive needs assessments critical to cross-sell payments solutions during opening of checking account
• Banks need to build SB-specific focus/ capabilities to support marketing and sales efforts
Growth strategies
Growth strategies