This Month In Retail Banking
Small business is a highly attractive segment, particularly in the current deposit environment, because, among other advantages, it represents low betas with higher average balances than the consumer segment. Indeed, in the last three weeks, the segment has exhibited materially less churn and less rate shopping behavior, and even as consumer and wealth have undergone a significant repricing, we have yet to see the same dynamic play out among small businesses. The challenge has been that small business seems always caught between consumer and commercial, and it’s smaller than either.
In the aftermath of what’s befallen Silicon Valley Bank (SVB) and Signature Bank, however, we are expecting the small business segment to continue to be a major bright spot, not just in deposits but also in lending. Commercial deposits are seeing a decline in value as the recent events show how quickly large deposit balances can change hands, and we’re seeing the weighted-average life (WAL) of its deposits decline. Movement of small business deposits, on the other hand, has been much less active. At the same time, the profitability of mass-market consumers has declined from two years ago because of the massive reduction in NSF/OD fees and because their deposits are only a small portion of overall consumer deposits, most of which are held by the affluent customer base.
On the lending side, demand for access to cash remains steady. As of February, a sizeable percentage of small businesses reported borrowing on a regular basis and/or planning capital outlays in the next few months. It’s therefore critical that lenders focus on both sides of the relationship, deposits and lending, to ensure they’re providing the most comprehensive client experience to small businesses. Deposits may be front and center at present, but focusing also on lending remains tantamount to success.
Curinos recently conducted sentiment research to understand how small businesses view the current unsettled banking environment and what we could expect in the coming weeks. Most small businesses reported awareness of it, though to varying degrees. Most of these respondents were planning to take some type of action as a result, with about 40% saying they would spread money across multiple banks. Among those who said they would initiate new relationships, consideration was skewed toward national banks and credit unions/community banks, illustrating that “regional bank” may be retaining the stigma bestowed on it by the Signature and SVB failures.
In the coming year, we expect to see banks competing aggressively in the small business segment. This will likely manifest in large increases in bankers from some, large technology builds from others and some imminent action on pricing. One thing is clear: Banks looking to take share will need to develop a clear strategy and differentiated value proposition.