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With many large banks reducing service offerings to smaller businesses and many community banks lost to merger, credit unions nationwide are striving to fill the void created by those events by augmenting business banking products and sales efforts.
Many credit unions claim to offer business banking services already, but an examination of their portfolios reveals an array of “micro-business” members: hobbyists, freelancers and gig-workers seeking a means to separate their personal and side-gig finances.
But those micro-businesses should not be confused with “going-concern” businesses; i.e., full-time firms with a fixed address and employees beyond a sole proprietor. Whereas the micro-business and other side-gig ventures carry minimal balance and profit expectations, true going-concern businesses can significantly bolster a credit union’s balance sheet.
At most financial institutions, credit unions and banks alike, the median revenue contribution of a going-concern small-business relationship is six to ten times greater than the median revenue contribution of a consumer relationship, creating opportunities for credit unions with a segment forsaken by many of the largest banks.
Historically, business banking had remained the province of larger regional and national banks, which offered community-based lenders and local decision authority. However, most larger banks centralized credit decisions years ago, leaving local officers exclusively in a servicing mode.
In recent years, larger banks have migrated the servicing function for small businesses— especially those with annual sales of less than $1 million—into automated channels, removing the dedicated business-officer relationships that small-business owners need.
This has left small businesses an underserved community in many markets, and worthy of the same consideration credit unions have offered to overlooked segments of the consumer sector for generations.
For credit unions to compete in the going-concern business segments, they need to develop offerings beyond a basic free business checking account, which at many institutions provides little more than a repository for inflows and outflows, but lacks the additional treasury management services required by going-concern businesses.
In conducting numerous projects for credit unions across the U.S., Bancography has found that the typical credit union business-deposit portfolio often houses thousands of obligatory share accounts—75% of which carry balances of less than $100 and remain essentially dormant—and a single checking account product type with median balances of $400-$600 with minimal or even dormant transaction volumes, and no associated credit-side relationship.
To attract going-concern businesses, a credit union’s deposit-product portfolio must expand to address multiple segments within the business banking sector, including:
- A basic product type for smaller firms with annual sales of less than $1 million.
- A more sophisticated product type for firms with annual sales in the $1M-$5M range.
- A separate product type to meet the distinct needs of nonprofit organizations, which provide an especially meaningful target for credit unions, since they are nonprofits, too!
An effective business-product portfolio must also offer a robust array of ancillary services, such as remote deposit capture, positive pay (for both checks and ACH transactions), sweep features and QuickBooks downloads. These features may be bundled into appropriate groupings for specific vertical segments, such as professional-services firms, construction firms or retail enterprises.
Determining the appropriate pricing for the business checking portfolio requires a competitive audit, to find the optimal price points for monthly service charges, minimum balance levels to waive those charges, relationship-based fee-waive criteria, item-count limits, excess-item fees, and fees for ancillary treasury management add-ons such as those noted above.
To fully realize the business-deposit potential within their markets, credit unions may need to add lending capacity, specifically in commercial and industrial loans. Whereas the commercial real estate loans dominating most credit union business-loan portfolios involve a one-time interaction, C&I borrowers will maintain an ongoing relationship with the credit union, fostering cross-sell of deposit products.
Launching or bolstering business banking efforts may be mostly an exercise in product design, but a successful launch involves other factors, too, including resolution of key decision points:
- Will branch managers represent the primary salespersons for business products?
- Will the credit union add dedicated business bankers, and might that vary by target-business size?
- Should business bankers report to their local market executive or to some central business banking function at headquarters, or is there a matrix-management model?
- Can current processing systems support the design of a new business checking product?
- Can they tally and charge for excess cash handling and assess other fees beyond basic service charges?
- Can they implement relationship-based fee waivers?
- What capabilities will the credit union need to add in terms of credit analysis, collections/workout, training, sales support, dedicated business call center agents and executive oversight, among others?
- What are the one-time and recurrent costs of these capabilities?
Finally, before undertaking the expense and operational challenge of adding business banking services, the credit union must confirm that the effort would be financially tenable.
This requires sizing the markets in terms of number of target-segment firms, expected fair-share penetration levels, and average balance levels; calculating corresponding revenue implications; and then layering those revenue forecasts onto an expense forecast impounding both one-time startup costs (e.g., systems, training) and ongoing salary and administration costs.
The addition of business banking services can bring multiple benefits to a credit union, including diversification of revenue sources, the ability to accrue balances in greater increments compared to consumer members, and likely a lower cost of funds than the consumer portfolio offers.
Bancography offers strategic planning services to credit unions across the U.S., with specialties in branch planning and product management. Bancography’s Business Banking Strategy offering can provide a roadmap for augmenting business services at your credit union, combining a competitive audit, deposit-product design and pricing, market sizing, balance forecasts, and a recommended organizational framework to yield a complete business case analysis. Click here or email info@bancography.com to learn more.
Steven Reider is the founder of Bancography, a financial services consulting firm providing branch-planning services. He brings 25 years of experience to his role at Bancography, and his recent projects have included delivery strategies for retail, commercial, wealth and mortgage banking services across many of the nation’s largest metropolitan areas. In 2003 Steve joined the faculty of the American Bankers Association’s Stonier Graduate School of Banking, where he teaches a course in branch network optimization. Additionally, Steve authored Bancography Plan, Bancography’s innovative branch planning software tool. Prior to launching Bancography, Steve served as vice president in corporate marketing at AmSouth Bank, a $40 billion institution.
