Totaling 30.2 million in number, small and mid sized businesses are the lifeblood of the American economy. They are also the lifeblood of American banks, representing a high-value segment that generates significant lifetime value in deposits, loans and fees.
Today the stakes are high for banks lagging in digitally serving these businesses. National lenders like American Express and alternative lenders have aggressively filled the digital absence left by banks and are growing rapidly as a result. If banks continue to resist digitally serving businesses, they risk first losing SMBs and soon after losing large businesses. As McKinsey bluntly stated in a recent report,
"If banks do not move quickly to engage with SMBs digitally, they risk losing as much as 60% of their overall profits to fintech attackers over the next decade."
While traditionally banks have faced challenges in economically serving SMBs and convincing businesses to switch banks, real-time lending has emerged as a proven digital product that both incentivizes switching and unlocks lucrative cross-selling opportunities.
The value of SMBs to banks
U.S. SMBs generate $90-$100 billion in aggregate lending and deposits, with each high-value SMB generating $4,000 in annual accounting profit to a bank.
|SMB Balances, by Revenue Size (Deloitte/BAI)|
|Annual Revenues||Average Deposits||Average Loans|
The income generated by businesses extends beyond their significant deposits and loan balances to include merchant services fees, treasury management fees, payroll services, investment fees, insurance revenues, and more. For example, 56% of SMBs use their primary bank for ACH and 23% use their primary bank for merchant processing.
Moreover, half of SMB owners report keeping their personal accounts with the same bank, linking the value generated by businesses to personal checking, savings, payment cards, mortgages, investments, and insurance.
The icing on the cake is that SMBs are also a highly loyal segment. They bank with only one or two financial institutions, with an average tenure with their primary financial institution of 15+ years. This offers a long runway when calculating lifetime value.
The challenge of SMBs for banks
Despite being a high-value segment, there have been inherent challenges in serving the SMB segment.
Lending profitability: Lending to SMBs has not been overly profitable. It costs a bank the same amount of front-office selling and back-office underwriting to originate a $50K loan as it costs to originate a $5M loan. Consequently, many banks have underserved and not incentivized bankers and retail branches to service business loans and lines of credit below $250,000.
Little incentive to switch: Banks have traditionally lacked compelling incentives to encourage a business to switch banks and move their banking relationship. Products have largely been commoditized. Interest rate comparisons are generally a wash. Online and mobile banking are table stakes. And cash incentives to attract deposits have largely attracted the wrong types of businesses.
Lagging in digital transformation: And while nearly a third of SMBs report being willing to switch banks for more innovative products, they largely aren't associating innovation with their banks. 57% of high-growth SMBs believe technology providers are more likely than banks to offer products for which they are willing to pay. This staggering belief is a symptom of banks moving slowly to transform digitally, while online-only lenders like American Express and alternative lenders like OnDeck, Kabbage and Square have aggressively charged ahead to court businesses with convenient digital products.
The real-time lending multiplier
Enter real-time lending, which addresses not only the challenges banks have faced in serving businesses - but when implemented correctly with the right technology and strategy, maximizes the potential bank revenue generated by a business.
Addressing challenges: Real-time lending makes SMB lending profitable by digitizing a bank's credit policy and leveraging data science to automate application, financial validation, term offers, and funding. What once took weeks of front- and back-office resources, can now occur instantly. Real-time lending is also a differentiable product, creating compelling and actionable marketing offers for fast, convenient financing that entices businesses to switch banks.
Maximizing lifetime value: If banks implement the right digital lending platform and growth strategy, it can truly unlock the maximum potential customer lifetime value of a SMB to the bank. The marketing automation and banker-integrated sales tools in our real-time lending platform were designed specifically for this - allowing banks to leverage real-time lending to attract deposits and unlock lucrative cross-selling opportunities.
For example, our platform tools have enabled our bank customers to:
- Identify customers paying alternative lenders and offer them better rates;
- Transform retail branches from inbound service to inbound sales;
- Prequalify businesses in a bank's footprint before they even apply for a loan;
- Capitalize on the immediacy of real-time funding to require deposit account opening to pay down the debt;
- Leverage real-time lending as the tip-of-the-spear to cross-sell other business and personal products like mortgage.
The list could go on and on. Real-time lending is a true multiplier in both attracting new businesses and unlocking lucrative cross-selling opportunities that maximize customer lifetime value.
Ultimately, the stakes are too high for banks to continue to wait to transform digitally in order to attract and retain business customers. We look forward continuing to partner with banks to offer businesses the fastest way to secure financing, to profitably grow their business portfolios, and to out-compete online-only and alternative lenders in their markets.