United States Small Business Administration 
Office of Advocacy 
RS 145_______________________________________________________________________________________________







Purpose Small businesses and banks depend
on one another for much of their success. Small Businesses rely
on banks to provide depository and check processing services,
lend money, help establish retirement plans, manage payroll, and
meet other daily needs. Banks, on the other hand, need small business
customers because they offer significant profit potential and
because small businesses tend to be steady, high-volume users
of their branch system. Furthermore, banks are oriented, by their
history and by current regulatory policy, toward the communities
in which they have offices.

These mutual needs create an important relationship
between small 
businesses and banks that has been buffeted by market and regulatory

forces in the past. The banking industry has also been changing
rapidly; 
during the 1980s, the industry changed fundamentally when state
governments 
began to permit interstate banking. Today, virtually every major
metropolitan 
area is served by banks that are controlled by holding companies
from outside 
the area. In addition, banks' competitive boundaries are changing.
As large 
banking organizations are forming they bring more sophisticated
competitive 
boundaries are changing. As large banking organizations are forming
they 
bring more sophisticated competition to many markets. This, in
turn, causes 
smaller banks to sharpen the focus of their strategies on community
ties.

Non-bank competitors are also developing
ways to penetrate the small 
business market for financial services. In a sense, large banks
are on the 
middle ground. Small independent banks emphasize their single
community 
ties and focus on a niche where they can be strong competitors.
Non-bank 
competitors, who have more tenuous community ties, concentrate
on niches 
where the profit opportunities are high and community orientation
is much less 
important to customers. In the face of this change, it is important
to understand 
how large banks relate to small businesses.

This project attempted to look at several
questions concerning large banks' 
approaches to small businesses to gain a better understanding
of this 
relationship. These questions are: How are small business needs
perceived 
by banks? How are large banks organized to meet those needs? How
do 
banks market their services to small business? How do banks deliver
those 
services? What do banks expect to gain from meeting those needs?
How is 
the rapid evolution of the financial services industry affecting
approaches to 
the small business market? What are the policy implications of
the answers to 
these questions?

Scope and Methodology

The objective of this project was to compile
and analyze information describing how large banks relate to small
businesses in light of the numerous and far-reaching changes in
regulations, technology and competition. The research methodology
combined traditional data and literature review with extensive
personal interviews with individuals responsible for various aspects
of the small business programs of 13 large banks across the country.
The banking companies interviewed ranged in asset size from as
low as $4 billion to $100 billion. The 13 banks were spread throughout
the United States from California to New England to the Southeast.
An agreement was reached with the 13 banks to allow interviews
of a range of bank personnel responsible for all aspects of the
banks' small business programs. The interview process took approximately
two days on site; more than 50 separate interviews were conducted.
In each institution, individuals interviewed included those responsible
for overall direction and policies of the small business program,
small business marketing specialists, loan officers, branch officers
and specialists in government lending programs. This project represents
the opinions of representatives of 13 large banking institutions
and not a statistical sample of all small business lenders. The
information gathered from the interviews should not be extrapolated
to the regional or national population of small firm lenders.
The findings of this report are those of the authors alone and
are not necessarily those of the U.S. Small Business Administration.

**Highlights**

* Small business is a key market for large
banks. Neither large nor small banks dominate lending to small
businesses in the United States.

* Technological changes brought about intense
competition in various markets as large banks competed for deposit
services, mutual funds captured a huge share of the banking market,
and small banks offered new services to those customers who formerly
could obtain them only from large banks.

* Banks are restructuring their organizations
so that they can serve this market more efficiently. New approaches
are being developed that use technology to help centralize decision-making
and view employees who spend time with the small business customer
as the manager and developer of a multi-faceted financial services
relationship.

* To market their services to small business,
banks are emphasizing "relationship managers" who are
interested in cross-selling products to customers so that they
build the relationship. The branch system is still critical to
the small business customer because the branch handles the constant
stream of routine cash and check processing requirements of small
business. Credit products are being "sold" by relationship
managers or branch managers, but the decision-making is moving
to centralized, volume-oriented centers of activity.

* Banks are being driven toward the small
business market for two reasons, both stemming from profits. First,
costs must be reduced in order to achieve the full profit potential.
Reorganization and changes in delivery systems result from trying
to reduce the costs of serving this market. Second, good margins
remain in the small business market that are as attractive as
those of middle-market and corporate lending in past years. Banks
want to hold on to this market.

* Banks in the most competitive markets
tend to be further along in reorganizing for efficiency. These
banks use technology, centralizing credit analysis and underwriting.
They also pay more attention to their sales force, people whose
primary responsibility is to sell products to small business customers.
These banks also have a high level of commitment to the small
business market and its profit potential.

Viewed narrowly, the answers to questions
posed in the study simply describe how large banks and small businesses
relate to each other. More important, however, is what these answers
suggest to bank management, small business advocates and small
business owners. It is clear that these answers suggest changes
in the way large banks' small business efforts will be managed
and how small business advocates must interact with large banks.

Ordering Information

The complete report is available from: 

National Technical Information Service 
U.S. Department of Commerce 
5285 Port Royal Road 
Springfield, VA 22161 
(703) 487-4650 
(703) 487-4639 
(TDD) Order number: PB94-195161n 
Cost: Pending