In the emerging customer engagement model, the emphasis is on streamlined and effective multi-channel interaction, guided by market and customer analytics.
As retail customers continue their migration to digital channels, banks are stepping up the pace of branch consolidation. Across the industry, institutions are busy tightening location count and staffing, anxious to cut expensive idle overhead as more consumer activity shifts to online, mobile, ATM and phone channels.
But as retail-dominated change sweeps through the branch networks, the transition is posing challenges for an important companion line of business — small business banking. While many business customers embrace digital channels, the group overall is migrating at a much slower pace and still heavily depends on the branch.
Nearby branch presence remains the top influence in selecting a new provider, and many proprietors prefer to use the branch channel to apply for a loan or open a new checking or savings account. Compared with consumers, moreover, the need for transaction services is much more intense among small businesses. It is a tough balancing act. While many small business customers feel they are being “dragged into the future” of multi-channel banking, that is the inevitable destination others already embrace.
Sagging relationship profitability further complicates the picture. Overall industry challenges — shrinking margins and fee revenue, rising compliance costs and capital requirements — have taken a toll on small business banking as well. It is harder to justify the use of expensive banker talent to acquire and manage small business relationships. Staff reduction is part of the answer, but must be accompanied by strong productivity gains among the ongoing team.
The situation highlights the need for a proactive and comprehensive small business banking strategy to meet three objectives: 1) preserving patronage and sales revenue growth in a transition era; 2) overhauling the economics of the line of business; and 3) repositioning the overall franchise for more intense multi-channel competition.
Near term, the first order of business is to anchor the current sales and revenue stream while boosting productivity. This requires a clear-eyed view of priority markets and segments to inform the redistribution of sales staff and other resources in line with opportunity. Sharper prospecting tools will help to make the most productive use of sales resources. Meanwhile branch-to-digital transition initiatives can be put in motion, including a team of bankers for phone-based sales and shifts in marketing spend and messages to build awareness and usage of digital channels.
Looking to the longer term, preparations must begin for a full-on multi-channel marketing and sales outreach to small business customers. Big data and advanced analytics will play a major role in digital marketing and sales, as well as customer engagement. Alternative arrangements to support sales and service outside the branch will be fleshed out, supported by promotions and incentives to win customers. And marketing will play a much larger role than what is commonly seen today.
The big picture is that banks must transition to a new business model for small business banking. Today’s relationship model is all about high-touch sales and service, heavily anchored by branch staff and relationship managers. In the emerging customer engagement model, by contrast, the emphasis is on streamlined and effective multi-channel interaction, guided by market and customer analytics.
Opportunity at Risk
Small business banking is at an unusual juncture. On the one hand, the market is picking up steam and has good potential for further growth in loans and deposits. On the other hand, digital disruption is posing challenges on multiple fronts — distribution, marketing, and sales — including incursions by a new breed of web-based marketplace lenders. In this transition era, banks will have to work harder to retain and grow share.
Although the branch is losing relevance among all customer categories, recent Novantas research underscores its ongoing importance in small business banking. When asked about their top reasons for doing business with their primary bank, 44% of surveyed small business owners cited “branch near the company,” with proximity ranking as the dominant selection factor. When consumers were asked the same question, only 20% listed branch proximity as being among the top reasons for their patronage.
Turning to sales, small businesses also have the strongest preference to originate accounts at the branch — 61% — compared with 51% of consumer respondents. With service, 54% of SmB respondents said they still prefer to use the branch to deposit a check, versus a 24% preference among consumers. Even funds transfers, an activity thoroughly absorbed into digital banking, still elicited a 23% branch preference, compared with 11% of consumers.
This does not mean that small business customers will forever cling to branches. Rather, their pace of digital migration will continue to lag the retail side, probably significantly. That spells ongoing conflict with retail-driven branch consolidation (Figure 1: Small Business Growth on a Shrinking Branch Foundation — Sustainable?).
While post-recession branch cutbacks to date have been substantial, they cannot be called radical — a net reduction of 7,000 units off a historic peak of 95,000 nationwide. But the pace of consolidation could easily double or triple going forward. The trend seems inevitable as retail branches lose further transaction volume to digital channels and begin to lose account origination volume as well.
Small business relationship managers will play a huge role in bridging the gap, not only dedicated bankers in the field, but also competent central teams that will carry a prospecting and sales workload over the phone. These highly efficient central teams will take the lead in penetrating grass-roots community businesses, which are difficult to profitably serve under a high-touch relationship model.
Today’s small business RMs generate roughly 25% of deposit sales and 40% of loan sales. Five years from now, teams will be expected to generate roughly 35% of deposit sales and 50% of loan sales — and do so with a much lower total staff count.
Digital channels will have to step up as well. While strong survey preferences for digital account origination vastly exceed the current reality, the customer appetite is there. Five years from now, perhaps 10% of both SmB deposits and loans will be booked online. But online growth has its own challenges, including competition from a new breed of specialized marketplace lenders that offer quick-turnaround credit.
In migrating the organization to a leaner customer engagement model, a key question is what to do about sales staffing. Only a portion of the small business market — larger, high-value clients — can be profitably served by dedicated small business bankers who interact with customers in person. Lean-but-effective alternatives will be needed elsewhere (Figure 2: The Future of Multi-Channel Small Business Sales).
Branch sales. Few local networks will house dedicated small business bankers going forward. As these experts are almost totally relocated to the field, cross-trained retail bankers will anchor branch sales for specified segments of the market, focusing on smaller enterprises with less than $2 million in annual revenues. The complication for these generalists is trying to handle expanded per-person SmB coverage responsibilities while juggling a likely higher retail sales load as well. This is one of several instances where analytics and technology will make the difference, helping branch generalists to multiply their effectiveness while still handling multiple priorities.
Remote phone-based sales. While an in-person sales outreach is less feasible for the overall customer base, it is futile to assume that impersonal digital channels can take up all the slack. The middle ground is the phone, a medium that supports easy conversational interaction with clients at low cost.
Staffed by experienced small business bankers, a central phone-based team can augment the SmB sales outreach in two important ways:
- Prospecting and cross-sell — Along with direct sales to myriad smaller clients (which are harder for front-line bankers to reach), the inside sales team can help with relationship expansion and cross-sell within the current customer base.
- Contact/referral anchor — The inside sales team can provide a single point of contact for small business referrals that originate in the branch, backstopping branch bankers and helping to assure a smooth customer experience. They also can help to generate qualified sales leads and get the ball rolling on prospect appointments with live representatives.
Roving specialists. Dedicated small business bankers need to concentrate on the market segment where their expertise can make the biggest difference — larger clients, typically with annual sales of at least $2 million. This is not walk-in branch opportunity. Each SmB banker will typically provide in-person coverage for a multi-branch trade area, building client entrée and rapport to discover and fulfill high-value customer needs.
Analytics and Technology
New organizational strengths will be needed to support the emerging framework for small business customer engagement. Key activities — marketing, sales and service — will increasingly depend on digital tools and channels.
- Instead of supporting the occasional product campaign or “by-the-calendar” promotional schedule, marketing needs to become a multi-channel targeting engine, able to sort through customer traits, behaviors and events to find the best opportunities for customer acquisition, cross-sell and continued engagement throughout the customer lifecycle.
- The sales process will depend on a steady stream of qualified leads, coordinated among branch, phone and roving staff, supported by customer and prospect information housed in uniform systems for customer relationship management.
- Small business customer service, while not the main thrust of this article, is in need of digital transformation as well. More remote “self-service” options and applications will be needed (and will require promotion). Clients need to be encouraged to migrate more transaction volume to digital channels (online, mobile, IVR), enhancing convenience while reducing the cost to serve.
Customer analytics will play a central role in identifying and sizing opportunities. This guidance allows the bank to “right size” sales and support resources for profitable acquisition and relationship growth. Applications include:
- Understanding the best/rest of customers. By analyzing which current small business customers provide full relationship wallet and the bulk of revenues today, the bank can develop “look alike” models to replicate for new customers. Such modeling also provides a basis for behavioral segmentation that will inform targeting, coverage models, calling efforts and product development.
- Relationship expansion. Some of the best sales prospects may be under-served customers, either current or new-to-bank. Models that estimate “wallet share” and total relationship potential help to identify which customers offer the greatest opportunity. Examples include current deposit-only customers who likely have significant loan and treasury management needs, or current loan-only customers who can be steered into checking/savings/cash management.
- Prospecting. Wallet modeling and other customer analytics help with the development of smart prospect lists for relationship managers, based on the likely banking wallet and relationship potential, likely offer receptivity, and the potential to profitably serve.
- Product bundling/pricing. Customer analytics help with the development of product bundles that specifically address the needs of target customer segments (e.g., practice loans and core cash management accounts for medical practices). They also help in tailoring rates and fees and ensuring they are aligned with current and future customer relationship potential.
The appropriate platform technology is needed to bring analytic applications to life in the everyday activities of small business marketing and sales.
- Lead generation and sales dialogue. Integrated marketing automation platforms (e.g., Marketo, Act-On, and Adobe) can supply leads to lower-cost staff in the branch or call-center. These staffers also need support from CRM tools, both to track/manage prospects through the sales funnel, and for information and prompts to support the sales dialogue.
- Cross-sell action steps. Relationship expansion also depends on integrated marketing automation and CRM tools that can translate analytically-identified opportunities into specific marketing and sales actions for account origination.
- Customer profiles and touchpoint context. In a small business sales setting where representatives will need to handle a higher volume and also communicate effectively over the phone, supplemental customer information can help to build conversational context and rapport. Platform tools can help in supplying not only customer and prospect profiles, but also the timeline of touchpoints from prior marketing and sales campaigns and responses.
- Reporting and analytics. Easy-to-use tools (e.g., Tableau or QlikView) are needed to support non-technical users in managing the marketing and sales funnel. Otherwise the bank faces an overreliance on expensive analytic talent for ongoing projects and planning — or risks seeing tools only partly used.
While the transition in small business banking is complicated overall, efforts can be organized around near-term and long-term priorities. These organizational agenda items fall into three major domains — analytics, sales, and marketing (Figure 3: Managing the Organizational Transition). Also there are concurrent priorities with service.
Analytics — near term. Identify top-priority small business markets and customer segments within the current network, leveraging current available data on customers and prospects. Employ enterprise segmentation to better leverage sales resources, including for prospect targeting, lead generation and an improved close ratio.
Analytics — longer term. Capture additional behavioral and off-us data; drive more of the analytical workload with “big data” initiatives. Deploy sophisticated analytics to gauge the impact of marketing and distribution tactics (e.g., market share, share-of-voice, brand attributes) on small business sales performance. Employ regionally-tailored marketing strategies to drive awareness, independent of the branch network.
Sales Force — near term. Redistribute the current small business sales force to ensure that coverage is aligned with market-level opportunity. Leverage current call-center and/or central sales resources to launch an inside-sales unit for small business.
Sales Force — longer term. Build out a specialized small business inside sales capability; strengthen mobile field sales team to drive new account acquisition and cross-sales. The inside sales team will support the mobile field team with lead prospecting and qualification, plus drive direct sales via outbound calling and online support.
Marketing — near term. Shift marketing spend to non-branch direct-response channels; create awareness and a competitive level of “perceived convenience” for small business. Begin building awareness of alternative transaction capabilities to reduce dependence on the branch channel, especially for routine transactions, and to encourage self-service for speed and convenience.
Marketing — longer term. As an offset to a shrinking physical network, further strengthen efforts to drive brand awareness and perceived convenience. Continue to promote alternate transaction capabilities to reduce dependence on the branch channel, especially for routine transactions, and encourage self-service for speed and convenience. Develop and implement full “lifecycle-management” capabilities that react to key customer behaviors over time to fully (and automatically) engage with customers at critical junctures in their journey with the bank.
Service — near and longer term. Continue to build new digital capabilities for sales and service in alternate, non-branch channels. Leverage marketing and service channels to build awareness of these capabilities, especially for routine service transactions, adding to the arsenal of self-service tools available to customers. Explore the use of additional incentives to encourage the use of the digital channels and technologies (e.g., remote deposit capture), and to migrate substantial additional transaction volume away from the branch.
Robert Griffin is a Director in the Chicago office of Novantas, Inc. He can be reached at email@example.com.