December 29, 2011

There are approximately 30 million small businesses in the U.S. that employ about half of all private sector employees and account for a high percentage of key customer relationships for financial institutions. But although many banks are beginning to help small businesses understand the value of online financial management, the lack of differentiation between services geared toward retail and small business customers leaves many of the latter dissatisfied with their banks' understanding of their needs and ability to offer relevant products. As a result, banks are losing ground to nontraditional service providers for services such as online card acceptance, borrowing, invoicing and financial management -- all of which are critical to small businesses' operations.

The Aite Group reports that small businesses will spend more than $400 billion in 2010, and that their spending on financial services has steadily increased over the past two years. By increasing the availability of specialized small business services -- such as online banking and bill pay, electronic invoicing and receivables management -- banks can access a vastly untapped revenue stream while building stronger relationships within this key customer segment.

The benefits banks can experience by offering solutions tailored to small businesses include:

  • Capitalizing on an untapped market opportunity: A huge disparity exists in the percentage of small businesses that bank online and also use their financial institution's site to manage other cash flow needs. Banks should focus on the innovation required to improve their payment flow products, including remittances and B2B payments.

  • Achieving incremental fee revenue: As the number of small businesses looking to nonbank providers for these services substantially grows, it is evident that they are not only used to paying for the service, but are also willing to do so.

  • Enhancing competitive differentiation: The progressive bank with the right suite of services can compete with financial software providers and win rather than continue to lose this market to nontraditional providers.

  • Improving retention: It is fairly common knowledge that the more touch points per customer the greater probability of maintaining that customer's business for the long term. With small businesses, they will likely view the bank more favorably if specialized products are available to meet their needs.

The small business strives to find a balance in satisfying its unique transactional needs with services that can help reduce back office management. It is imperative for banks to realize the value that small businesses customers represent and offer them these specialized services instead of limiting opportunities to lending.


Greg Adelson is group president of iPay Technologies, a division of Jack Henry & Associates and a payments provider that supports more than 3,700 U.S. financial institutions.