From “How to Win in Small Business,” a Curinos webinar on September 19, 2024, featuring Curinos managing director Adam Stockton and Curinos senior vice president Olivia Lui.
Small businesses have traditionally represented a valuable source of deposits for banks. With so much of their balances – close to 70% – tied up in the non-interest-bearing operating account, portfolio rates for small businesses have typically been much more favorable than for consumer, wealth and commercial deposits. But as market rates have risen in recent years, that advantage has shrunk as acquisition rates for these balances have come close to matching other customer segments.
On the lending side of the bank’s balance sheet, deteriorating credit quality and buy-box tightening have created a widening gap between the small business appetite for credit and the supply banks are willing to provide. Meanwhile, delinquencies have increased on unsecured lines, which has added to the mismatch. All this is against a backdrop of a small business’s declining reliance on branches and an increasing interest in receiving expert advice from their primary bank on business and financial matters.
Here are five key takeaways from the Curinos webinar:
1. Small business deposit rates are cost-effective, until you want more of them
To be sure, at today’s market rates, portfolio rates for small business deposits are attractive – about half those of wealth and only 40% of those of commercial – in part because so many of the small business balances are in non-interest-bearing accounts. So go out and get more of those deposits, right? Not so simple. Even though the portfolio rate may still be favorable, and will continue to be, the cost of adding new deposits has increased and is now comparable to that of other segments. So a short-term boost in volume isn’t necessarily less expensive than gaining deposits elsewhere.
Small Business Average
Industry Rates Paid – 2Q24
Small Business Product
Mix and Portfolio Rate
Source(s): Curinos Consumer, Small Business, Commercial Deposit Analyzers
Note(s) For Commercial and BB, Non-Interest Checking includes NIB DDA, and Hybrid DDA, Interest Checking includes ECR DDA
2. Primacy matters. It drives greater share of wallet, higher balances and better retention.
Large and small businesses alike keep about 60% of their total deposits with their primary bank, and those balances are sticky, which increases the value of the overall relationship. Unlike consumer balances, they grow in the first 18 months, and at the three-year mark, they’re fully three times greater than those of consumer. The importance of primacy to small business profitability – by having the business’s DDA for its operating account – can’t be overstated.
Share of Wallet at Primary and Non-Primary Institutions by Business Revenue
Deposit Balance Retention
Consumer vs Business
Source(s): Deposit Balance: 2023 Curinos Business Banking Survey | $100,000 to <$1 million N = 733 | $1 million to <$2 million N = 516 | $2 million to <$5 million N = 368 | $5 million to <$10 million N = 366 | $10 million to <$20 million N = 343 | $20 million to $50 million N = 314; Balance Retention: Disguised analysis for customers opening their first account between 3/1/19 and 4/30/21; Results averaged across resulting monthly vintages. Excludes customers with >$5mm in deposit balances.
Q32: What is the approximate total cash balance your company currently holds at (primary bank) across all deposit accounts, including Checking, Savings and Money Market?
Q33: What is the approximate total cash balance your company currently holds at other financial institutions (not primary bank) across all deposit accounts, including Checking, Savings & Money Market?
3. Despite the ongoing risk of runoff, deposit balances below $1 million can be attractive.
Rates paid on deposits rise disproportionately as balances increase. Balances over $10 million earn two to nearly five times the rates earned on balance below $1 million. That makes these lower balances an attractive target of low-cost deposits, except for one thing – runoff. Retention also increases with balances, or said another way, balances that start below $250k typically shrink. That makes the need for a small business deposit playbook all the more critical. Fortified with the right data and analytics, it can help identify the relatively profitable veins for deposits and eschew the others.
Portfolio Mix | Jun ‘24
Portfolio Rate | Jun ‘24
Portfolio Growth |
YTD Jun ‘24
4. The widening gap between demand for credit and its availability is a clear opportunity for banks.
For the last few years, demand for small business credit has exceeded supply, except for SBA loans, and the gap has only grown. This is because of deteriorating credit quality and banks’ narrowing the buy box in the face of economic uncertainly. But working capital is the lifeblood of any growing business, and business owners have been shown to be fiercely loyal to the FI that grants them the lines of credit they need in the early going. If primacy drives small business profitability, providing early access to credit drives primacy.
Small Business Lending – Market Demand vs. Supply by Product |
YoY Delta as of July 2024
Source(s): LendersBenchmark for Small Business Originations. < $5MM commitment amount
5. Small businesses are trading the importance of location for superior products, services and advice.
In many small business relationships, there will likely always be a place for branches and regional managers, but in the last few years, the importance of branches has declined almost by half. On the rise is the expectation of receiving superior products and services from a business’s primary bank, along with the desire for business and financial advice that’s actionable. Meantime, the perceived importance of digital delivery has subsided to pre-pandemic levels after having peaked during Covid.
Attribute Importance by Years
Source(s): 2023 Curinos US Business Banking Survey | 2023 Survey [N = 2,640] | 2021 Curinos US Business Banking Survey | 2021 Survey [N = 2,390] | 2018 Curinos US Business Banking Survey | 2018 Survey [N = 1,977]
Q22: Please select the three attributes that are most important to your company when selecting a primary bank (Top 3)
