Bank profitability tends to ebb and flow based on market and macro conditions, so lines of business that can generate consistent income for institutions are particularly valuable. The small-business segment fits the bill as a reliable source of profitability in large measure because of the length and durability of the relationships that exist on both sides of the balance sheet.
What makes small-business relationships so valuable, and what can financial institutions do to capture and maintain more of them?
Given a perfect storm of macroeconomic factors over the past year, all market segments have experienced deposit runoff. While small-business deposits haven’t been immune, they’ve been far stickier and less expensive relative to other segments. This is because small businesses value aspects of their banking relationships that go beyond rate.
Curinos research shows that, over the past five years, rates for small-business money market deposit accounts (MMDAs) have averaged roughly 37 basis points (bp), while retail and commercial lines of business have ranged from 64 bp to 240 bp. At the end of 2022, rates paid across all small-business deposit products averaged 116 bp, compared with 175 bp to 266 bp for all other lines of business. So, on average, financial institutions spend about half as much to acquire small-business deposits than consumer deposits (See Figure 1).
Figure 1: Average Industry Rates Paid
All Products | December 2022
Source: Curinos Consumer Analyzer | Curinos Small Business Analyzer | Curinos Commercial Deposit Analyzer
Adding to the advantage, three-quarters of all small-business balances exhibit a portfolio rate below 10 bp, primarily because upwards of 60% of small-business balances are in an operating account that doesn’t earn interest. To put this into perspective, non-interest-bearing deposits account for only 18% of all consumer deposits (See Figure 2).
But a word of caution should rates remain higher for longer: Institutions that rely too much on rate to attract new small-business deposits run the risk of alerting existing customers to the upward shift in rates and thereby repricing the back book.
Figure 2: Portfolio Composition By Product (April 2023)
Lending As A Deposit Source
If you’re looking to attract and retain more of these dependable, low-cost deposits, lending may provide some help.
Curinos research has shown that securing the small business-lending relationship goes well beyond meeting a customer’s borrowing needs – it also yields stronger, deeper deposit relationships over time. Small businesses that have a lending relationship with a bank of 36 months or more have deposit balances more than double that of institutions without the lending connection. And at the 36-month mark, small businesses on average exhibit deposit balances that are three times those of consumer accounts (See Figure 3).
Figure 3: % Customer-Level Deposits And % Account-Level Deposits
% Customer-Level Deposits With vs Without
Lending Relationship (Business Only)
% Account-Level Deposits,
Consumer vs Business
Source: Disguised analysis for customers opening up their first account between 3/1/19 and 4/30/21 | Results averaged across resulting monthly vintages. Excludes customers with >$5mm in deposit balances
So if a bank is tightening up on credit because it’s concerned about not having enough deposits to fund its loans, it may be well advised to look to the asset side of the balance sheet. Enough satisfied small business borrowers could serve as a source of incoming deposit volume to help fund additional lending.
How To Win
Small businesses focus on factors beyond rate when selecting and maintaining their banking relationships, and this tendency contributes to the segment’s relatively strong profitability profile. This insight is derived from analysis of recent deposits and lending data from the Curinos LendersBenchmark Analyzer for Small Business Originations consortium tool.
But to win small-business relationships and maintain them, financial institutions must offer proactive, client-focused products and services that match the business’s mission and goals. They should consider the small business’s profile and product and services that would best respond to it.
A priority focus on the small-business segment will not only provide profitable relationships through low-cost deposits and sticky lending solutions, but it will also strengthen and deepen relationships with small-business customers, solidifying the bank’s presence in the community. It’s a win-win!