A Stronger Hook

At the height of the Internet boom, many banks and financial institutions viewed the Internet as a low-cost distribution channel, a digital Field of Dreams to which retail and business customers would flock. But in today's harsh economic climate, banks are discovering that getting small businesses online is proving a lot tougher than they thought.

Still, institutions are willing to cast enhanced Internet offerings before small businesses since the potential payoff is so staggering. In 2001, only 1 million of the nation's 25 million small businesses, or about four percent, used any type of online banking platform (seven percent of all banking customers conducted transactions online). That's expected to grow to 10 percent by 2005, according to Celent Communications-a significant number for a bank that serves thousands of small business customers.

Despite the obstacles to moving small businesses across the digital divide, banks have a golden opportunity to seize a share of a market that's long been ceded to non-banking financial managers such as Merrill Lynch.

And it's a huge market. Small businesses spend an estimated $105 billion annually on financial products and services (expected to rise to $150 billion by 2005). In addition, the number of small businesses (those with $10 million or less in annual revenue) is growing by 14 percent a year.

"Banks have an opportunity to make a lot more money on the small business side than on the consumer side," said Meredith Hickman-Outwater, an analyst at Celent Communications.

But first, banks must dramatically shift the way they approach small businesses, experts say. They can't simply graft existing business tools onto online retail platforms. Instead, they must take the pulse of their small business clients.

"Before a bank makes a list of online features and functionality, they should do customer research," noted Celent analyst Pamela Brewster.

In part that's because the small-business sector is highly fragmented, ranging from micro-businesses with less than $500,000 in annual revenues (among them single-office/home-office, or SOHOs) to businesses making between $500,000 and $5 million per annum, and finally to lower-middle market firms generating $5-$10 million a year.

Each segment has its own needs. Micro-businesses, which constitute 75 percent of the market, largely want basic accounting tools, such as account lookup, fund transfers, limited electronic bill payment and payroll, plus the ability to download popular software such as Intuit's QuickBooks.

Smaller banks, in particular, could reap ROI gains by adding a small-business module to their online retail platform, Brewster said. That approach would cost around $800,000, in contrast to the $2-$3 million price tag attached to launching a more robust small-business platform with cash management and credit-card transaction services. Employee retirement benefits such as 401(k) rank second behind checking accounts as the most widely-held financial product among small businesses, opening up what analysts see as a huge opportunity for banks to cross-sell products.

Many small businesses, even those with fewer employees, rank tiered account-access and control capabilities high on the list of features they want from online banking.

THE CONSUMER MODEL
Some banks are already turning successful consumer-based Web applications into business-centric tools. In February, New Orleans-based Whitney National Bank launched Whitney Business BillPay. Powered by CheckFree's Genesis platform, Billpay gives Whitney's small business customers a customized electronic bill payment application online. Customers may view comprehensive payment fields, including invoice, discount and adjustment data, and assign their own check numbers for tighter tracking and reconciliation. Other features include account access and viewing, with daily updates, fund transfers, and account summary and detail.

When Whitney rolled out its online bill-pay last year, the bank heard from small businesses looking for a more customized tool, said Lou Porcelli, vp of Internet banking at $6.7 billion Whitney. When Whitney rolled out Business Billpay, "a pile of customers signed up for it right away," Porcelli said.

American Express has also entered the game with OPEN, its small business network. Launched in March, OPEN is designed to "add value to our customers by providing resources at a market rate in an area where their core competencies may not lie," said American Express spokesman Tom Sclafani.

Among the services provided by OPEN are credit reporting tools, bonus points for Dell Computers and loan notification. Customers can access online credit data about themselves, their partners or customers with data supplied by Dun & Bradstreet, and get e-mail alerts about credit status, helping them measure credit risk. OPEN also gives Amex' charge and credit customers snapshot account activity, online bill payment and side-by-side credit card comparison; customized lines of credit; pre-purchase approval and bill-payment extension. These features are packaged in an online dashboard, Sclafani said.

Like Whitney, American Express responded to small business concerns. Focus groups and other market surveys showed that cash flow ranked just below surviving the economic downturn on the list of customer concerns, Sclafani said. So OPEN brought a suite of offline services online. "We wanted to leverage the Internet as a channel to deliver this to our customers as well."

All financial institutions should take note, said Celent's Hickman-Outwater. "There's an opportunity to make a lot more money on the small-business side than on the consumer side."

THE PAPER CHASE
But banks face an unenviable task in persuading their small business customers to switch to the online channel.

Some 81 percent of small firms prefer using paper checks to pay bills over credit cards, ACH, wire transfers and electronic bill payment and presentment (EBPP), according to a 2001 Celent survey. While 60 percent of companies said they checked account balances online, only 42 percent used more advanced functionality such as online fund transfers, and a mere two percent paid bills online.

"Small businesses are in the habit of doing things the way they've always done them," Hickman-Outwater said.

Small businesses also express a lack of confidence in Internet security. While often willing to take risks, small businesses are risk-averse when it comes to online safety. Topping their list of concerns are account security and fears that transactions would get lost if a bank's systems crashed. Banks must work to dispel these largely "perceived" fears, Brewster noted.

Most small businesses, no matter their size, say they want a simple Web interface that also offers robust functionality. Ease of use entails integrating online banking platforms with all other banking channels, not only for a bank's data-management needs, but for a valuable customer experience too.

Ultimately, banks should look to add real online value. "What a bank should strive for in terms of a small-business platform is to make that become a lifeline to the small-business customer," Brewster said.

For many banks, the real challenge is to convert low-fee accounting services into revenue-generating transactional capabilities, such as instant online approval for loans, credit and other revenue-generating products, said Scott Gregory, a partner in the financial services strategy practice of PricewaterhouseCoopers. "The challenge in my mind is getting past the pure service aspect and making online banking a tool for account acquisition."

A WEALTH OF OPPORTUNITY
Banks can also leverage their personal-banking relationships with small-business.

Many small-business owners mix their personal and business finances, so banks should move to a wealth-management approach, Gregory said. In part that means banks should drive small businesses to a kind of online "dashboard" that gives customers one-view accounting. One leading account-aggregation vendor, OneCorp, offers a suite of services such as cash management, EBPP, online payroll and 401(k) management. Banks can bundle account aggregation with more personalized online tools, such as the ability to highlight problem areas, real-time alerts, check tracking or payment research.

"The small business owner gets convenience and control, and the bank begins to accrue greater revenue through cross-selling of products," Celent's Brewster said.

Then there are loans. Any small business at some point needs financing, whether startup capital, growth funding or money for surviving cash-flow blips. More often small-business owners will use a personal line of credit for capital expenses, but an effective cross-sell to a term loan, for example, benefits the bank and the customer. "The Internet is an education tool that can walk the customer through the process," said Russell Wehrlin, senior vice president of Speer & Associates.

Banks can also offer cost savings to their business customers by linking them to the business-to-business (B2B) marketplace, enabling them to ship products and buy office equipment and supplies online.

While small businesses may be reluctant to bank online, they aren't opposed to doing business online. Wehrlin cited polls showing that 90 percent of small-business owners are already doing business on a daily basis online, buying and selling goods.

Banks could use that Net savvy to offer small businesses Web design services, helping owners launch and build business storefronts online.