Small business lending is beginning to look more like a national market with all the attention from big bank and nonbank players. But wait, face-to-face still counts for something
Absolutely--it's an important area of growth for our bank," says Ralph Sillari, executive vice-president and director of credit development and delivery (small business) at Fleet Financial Group. "We make a lot of money for the bank, and small business now reports directly to the president of the bank."
"We pursue it actively and view it as having enormous potential," says Jackie Baer-Cowdery, senior vice-president--small business at Keycorp.
How times have changed. Ten years ago, a small business owner in need of financing didn't often have choices beyond a few local banks and finance companies. Today, he or she can pick up the phone to dial an 800 number, or hop on the Internet, and in short order an array of lenders who may be located hundreds or even thousands of miles away are willing and often eager to do business. In short, small business banking is starting to change in important ways from a strictly local to something more like a national market.
A confluence of circumstances is bringing this on, and with 20-20 hindsight, it was probably inevitable. There are three main reasons for this.
First, a change in mindset. Everyone knows of exciting startups, especially high-tech companies of the past decade or so, which began in garages and before long turned into giant enterprises. The sheer drama of it caught the media's attention.
Second, when it comes to lending to large corporate borrowers, the bloom is a bit off that rose. The action for such corporations these days is more likely to be on the investment banking side of the financial services business--mergers and acquisitions, stock and bond underwritings--than on the straight lending side, where loan margins often are paper thin.
Third, there are the technological advances which directly affect the ways lenders can go after the small business borrower:
* Large databases are accessed and analyzed to screen customer prospects and then launch targeted direct-mail campaigns to generate borrowers.
* Computer scoring models simplify and greatly speed up loan application analysis and processing.
* Borrowers use standard accounting or personal finance software on PCs linked to their banks for routine banking functions like balance inquiries, funds transfers between accounts, bill payments, etc.
* Borrowers use 800 numbers to phone regional or national call centers and reach live bank personnel who field inquiries.
* Businesses increasingly are comfortable using the Internet for financial transactions, though business lending on the 'Net is not yet common.
Most importantly, these newer technologies help to bring down some of the otherwise heavy marketing and servicing costs associated with small business banking. In the traditional way of doing things, it normally costs far more to make a thousand $100,000 loans than it does to make one $100 million loan. The new technologies go some ways toward evening the score.
New competitive faces
The upshot is that, after a long period of being out of the limelight, small businesses are looking less like wallflowers and more like the belles of the ball. Lenders have woken up to the fact that, as a class, these are desirable customers, generally borrowing at better margins for the banks than big corporate borrowers do, and often presenting excellent cross-selling opportunities for products like investments and insurance, 401(k) plans, annuities, and estate planning.
Technically, the small business market already was a national market in one sense: large finance companies like CIT, Heller, Commercial Credit and others maintained offices around the country, making loans to smaller businesses. They still do, but today the competitive field looks strikingly different in two ways:
First, many banks that formerly lent to small business in just one city, state, or local area now have branch networks in place in dozens of states, to cover entire regions or even reach coast to coast. …