The critical component is leveraging data relevant to SMB members and designing solutions that meet their needs.
In the second quarter of July, it released the mid-year update to its State of Commercial Banking 2023 report, which analyzed data from PrecisionLender’s own Q2 database, as well as industry research and government data. The report reflects actual business relationships (loans, deposits and other fee-based business) from more than 150 US banks and credit unions, ranging in size from small community banks to the top 10 US institutions.
Among the findings was that cross-selling is extremely important and now is the time for financial institutions such as credit unions to focus on building relationships and expanding with the small and medium business (SMB) sector.
Our anecdotal experience is supported by a 2021 Q2 survey by the Aite-Novarica Group, which found that as many as 85% of small businesses want single sign-on to access all bank accounts (including 11% who said this is a requirement). However, a survey conducted by Arizent for Q2 2022 found that only 10% of financial institutions can offer a single digital experience to their business customers.
And that brings us to our mid-year analysis, which found that among PrecisionLender customers in the second quarter, cross-selling relationships produced significantly higher returns than those without. We look at profitability at three stages: credit only, credit plus deposits and treasury management (which includes value-added solutions).
Our research found that full relationships that include credit, deposits and treasury management are three times more profitable than credit-only relationships. Credit unions that can offer full-service banking solutions will not only attract new SMB relationships, but will be able to drive the profitability and liquidity needed for long-term growth.
Historically, the SME sector has been underserved by industry. Generally speaking, SMBs have a choice between using a digital retail banking platform (which provides an easy customer experience but lacks features needed to manage their business, such as payroll and accounts payable capabilities) or using a commercial digital banking platform that is too complicated for the small business owner.
As a result, many SMBs have been caught in the middle, wanting a digital platform that gives them the business functionality they need with the ease of a platform they are used to from their personal banking experience.
Finally, advances in digital technology are enabling credit unions to create experiences and solution sets that are relevant to SMBs, opening opportunities for credit unions to enter the commercial banking market.
Suggest a single view solution
When we talk to small business owners about what they want from their financial institution, they say they want a single view solution where they can access their personal and business accounts with a single sign-on. It’s what we used to call “one pair of pants, two different pockets.”
A 2023 study conducted by the National Federation of Independent Business (NFIB) sheds further light on the situation. When asked how many banks respondents use for business purposes, 55% said one, 34% said two, and 11% said three or more. Of the 97% of respondents who had separate personal and business accounts, 44% used different banks.
Use data to drive priority
The key to developing a suite of solutions for any type of business is for credit unions to leverage the data relevant to their member base. If credit unions can show their SMB members that they can handle both their business and personal banking needs, they will have a competitive advantage because of that historical affinity.
It has been common knowledge for decades that small businesses choose a financial institution largely based on the location of the branch. Now, according to the NFIB survey, 87% say customer service is most important. And given the preference for digital banking, the digital experience is now part of customer service. Credit unions have always had a strong affinity for their members, but have been challenged to fully serve members who are small business owners. The result is that the credit union often serves personal banking needs but does not have a business relationship – but there is potential for growth. Although the NFIB survey found that only about one in 10 business owners use a credit union for their primary business account, 2 percent have switched financial institutions in the past month and 5 percent are considering a switch.
Now is the time for credit unions to step in the door and open it. Historically, the banking industry has approached its customers from the inside out: telling customers what to offer and letting customers figure out how to make the offering fit their needs. Because credit unions are more nimble and can move faster, they can offer services and products based on the actual needs of their small and medium business members – building from the outside in. By embracing new technologies (including fintech solutions), credit unions can offer the solutions they need in a digital experience that’s tailored to them.
The critical component is data: Traditionally, neither banks nor credit unions have been particularly good at using data to understand and anticipate the needs of their member base.
Cross-selling to generate non-interest income
Although the small business sector has traditionally been extremely fee-prone, fintech has shown that small businesses are willing to pay for value. The way to cross-sell small businesses is to demonstrate how the service will save them time and money and bundle solutions into an easy-to-use package.
Let’s look at electronic payments as an example. Many small and medium-sized businesses do not understand how they work and have neither the time nor the interest to understand them, and the segment is known for writing checks. According to a PYMTS study, 81% of companies sometimes use paper checks to pay other businesses.
They are comfortable doing things as usual, even though accepting electronic payments would benefit their business. The problem is that financial institutions can’t sell SMBs on electronic payments in the same way that large businesses do (where the treasury staff goes out on the field and explains how to set up and use ACH payments) because it doesn’t is economically scalable – and SMEs prefer to research and buy products online.
Cross-selling traditional commercial cash management solutions is difficult because they are designed and built from the banker’s perspective, and SMBs don’t want to be better at banking. They are looking for ways to save time and money. This is where fintech companies come in, who have done a great job of embedding payments into another process. Fintech solves problems in a context the user understands.
Now let’s apply this principle to small business cross-selling solutions. Small and medium-sized businesses will embrace electronic payments and other banking products when presented as a package of intuitive solutions that provide real value. The most recent Global Fintech Adoption Index found that 56% of SMEs use a fintech banking and payment solution.
Again, the critical component in a successful strategy is leveraging data relevant to SMB members and designing solutions that meet their needs.
Now is the time.
Dean Jenkins Vice President, Product Marketing Q2 Austin, Texas
