American Banker hosted its annual small–business conference in Nashville, November 13-15, 2023. It’s the only conference dedicated to banking that supports small businesses.Here are several themes that generated significant interest among those attending.
1. It’s about more than the money.
Small–business owners are lonely. They’re looking someone they can trust and talk to, not just about their borrowing needs, but for advice. Fintechs and AI may fit the bill for transactions, but there will be no substitute in the future for a knowing, sympathetic ear. Just as an owner’s CPA is almost a member of the family, so too should a banker be on call and at the ready with more than just money when asked.
2. Margin compression and disintermediation? Get used to it.
Stockbrokers used to make a living on trades alone, but now the transaction cost is zero. In banking, overdraft fees have left a hole in budgets and online competitors increasingly are making capital more accessible to small businesses. If a bank isn’t the low-cost provider, it needs to lean into another competitive advantage. Meantime, there’s no substitute for staying focused on cost containment and innovating with new products that drive value.
3. Serve the underserved, and get ready to document it.
Section 1071 is on the horizon, and most institutions aren’t prepared. In underserved communities, Community Reinvestment Acts (CRA) scores are often insufficient in assessing a borrower’s eligibility because many owners say the metric doesn’t align with reality. So for these small businesses, banks may need multiple data sets to better inform their underwriting. Just as daunting will be setting up the infrastructure to collect, weigh and report on the lending activity. The clock’s ticking – now ‘s the time to prepare.
4. To the owner, the business isn’t “small.”
One helpful byproduct of Section 1071 is that the lending industry now has a uniform definition of “small business.” That’s because the Consumer Financial Protection Bureau (CFPB) has defined it as enterprises with $5 million or less in annual sales. But there’s also a risk. Many “small” businesses, if not most of them, consider themselves not small but “growing.” Owners may bristle if they think they’re being pigeonholed and not getting the attention they deserve. They care less about labels than getting solutions that satisfy their needs.
5. Small–business deposits are money in the bank.
Historically, small–business deposits have been acquired at about half the cost of consumer and commercial deposits, and they exhibit a significantly lower portfolio cost over time. A primary reason is that the majority of small businesses hold their balances in non-interest-bearing checking accounts. And at the three-year mark, small business balances are three times greater than consumer balances. When an FI has the primary lending relationship, it gets even better: Deposit balance levels are more than twice as high as without it.