Here’s how community banks can leverage PPP lending to become the primary financial relationship for small businesses.
Money-center banks currently control two out of three small business relationships, leaving community banks, regional banks, and credit unions to vie for the remaining third. However, opportunities are increasingly arising that may allow these smaller players to capture the primary financial relationship with small and midsize business (SMB) customers and win market share from the megabanks. One such opportunity is the Paycheck Protection Program (PPP).
First, it’s important to understand what smaller financial institutions have to offer SMBs. Community banks and credit unions tend to offer better, more personalized service than big banks do — and are more likely to have a vested interest in the success of their local SMB customers. For proof, look no further than the pandemic, as community banks have been the most reliable providers of PPP loans for struggling businesses.
For these banks, PPP lending (including the current “Second Draw”) offers a unique opportunity to convert loan recipients into long-term customers. This in turn drives results for the bank, as owning the primary financial relationship with a small business brings with it, on average, 64 percent of that business’s subsequent financial product purchases.
This article examines how community banks can capture that primary financial relationship by providing a superior user experience and seamless onboarding to SMB customers.
PPP is a loan program that originated from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It is designed to help small businesses stay afloat and pay their employees during a time of unprecedented crisis, with loans backed by the Small Business Administration (SBA). The program stipulates that 60 percent of funds must be used for payroll and employee benefits costs, leaving 40 percent for everything from rent to utilities to software and accounting.
During the program’s first round, several big banks allegedly provided preferential treatment to large commercial clients. Unfortunately, many large companies received forgivable PPP loans as a result, crowding out smaller applicants and prompting public outcry.
Despite these setbacks, community banks followed the spirit of the program and continued to provide loans to the SMBs most in need of relief. Extending the life of beleaguered businesses has demonstrated these banks’ commitment to assisting SMBs and proven that small loans can have a big impact. As of August 2020, the average loan size provided to SMBs was approximately $107,000; however, many of the loans were significantly smaller, with loans under $50,000 representing 73 percent of total PPP loans and 18 percent of total loan value. Among participating lenders, more than 82 percent of them had less than $1 billion in assets, and lenders under $1 billion issued almost 30 percent of all loans.
Community banks and credit unions that granted PPP loans are now in a unique position to leverage these loans into more productive relationships with SMBs. To do this, banks should make it as easy as possible for new and existing SMB customers to open new accounts, and also install processes to encourage higher initial funding. High initial funding amounts are correlated with primary financial relationship status, which in turn opens the door to cross-selling of additional, more profitable products and services.
According to research, 71 percent of small and medium businesses consider a bank’s self-service tools and onboarding process when selecting a new financial institution. Yet the Financial Brand reports that a high number of organizations (47 percent) have no formal onboarding process. Moreover, fewer than half of financial institutions (45 percent) say that they communicate with customers after a new loan is booked.
PPP loans are a strong way to kick off a commercial banking relationship that may later become more profitable. But following up with these SMB customers requires a personalized approach, and each new customer should receive a series of messages via the channels most likely to elicit responses and drive ongoing engagement. With this strategy, smaller banks can provide their signature personal touch while keeping customers aware of the additional complementary products on offer.
Then, when customers are ready to consider additional products or services, banks must make it as easy as possible to open and fund accounts. When banks can onboard customers quickly and efficiently, it shows that they value their customers’ time. This is particularly attractive to resource-constrained SMBs for whom less time spent on financials means more time spent on meaningful business activities.
The first step in the process is to actually reach out to customers. From the moment an SMB customer begins the account opening process, banks should ensure that marketing campaigns and other automated communications are in place to support the growth of the financial relationship.
Research indicates that if a new account opener doesn’t engage with a bank’s communications within the first 90 days, it’s likely they never will. This makes the three-month period after an SMB account is first opened a critical window for banks to grow the relationship. During this window, new account holders should receive five to seven communications from their bank for optimal engagement.
But for the best results, these communications must also be delivered via the right channels. Email, for instance, is a tried-and-true channel that allows for instant outreach. Along with SMS reminders, email can allow a bank to link information and resources that make it easier for customers to learn about other products and account-related services. Linking to a landing page or microsite for a product can even cut out steps in the cross-selling process altogether.
At the same time, creating multiple points of contact with new customers doesn’t require complex or elaborate messaging. It’s best to keep communications simple when introducing new products or services. Highlight one to three high-level benefits of each, then follow up with additional information about particular features to customers who express interest.
Finally, to maximize cross-selling efforts, there’s no substitute for personalization. Banks that understand their customers will know what to sell them — and when. On one hand, that might mean using a data-driven approach to form lookalike groups and determine which products other banks or credit unions have successfully cross-sold to their customer bases. But it also means grasping the real business needs of every customer, and crafting communications that speak to those needs (rather than diving into product-centric messaging). Avoid “pitching” the product to the customer or assuming they already understand its value.
Effective cross-selling is also a matter of timing. MANTL recommends that banks focus on driving strong adoption of the first account before cross-selling a second product. After the relationship has been established with a PPP loan recipient, for example, banks can then pivot toward cross-selling. In addition, by this point, it is likely more clear what the customer’s business needs are, allowing a bank to tailor future product recommendations accordingly.
If you want to grow SMB relationships, start with a user-friendly experience backed by accessible customer service. Offer your business customers a great experience — whether through a PPP loan, checking account, or other service — and monitor their engagement with additional account-related services like direct deposit, bill pay, and credit cards. Use of these services can be a sign that the customer is open to using the account as their primary financial relationship.
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