Have you walked into your local bank branch recently? Probably not. Why would you? But if you did, you would find a large peaceful empty space like a church on Wednesday, and perhaps a few desks along the side with bored "bankers" waiting to make a home loan or set up a savings account, and a couple of tellers desperate for a customer to walk up. As is, the bank branches of the 50 largest banks in the country are nothing more than expensive billboards for their commodity services, services which are all available online, through your smartphone, or over an old fashioned landline.
Hint; the answer is not to shutter all those locations, swapping one commodity service for another - the answer lies in an unfashionable but huge opportunity, and big data.
On Germantown Avenue in Chestnut Hill, where I live, there are seven banks that I could hit with a baseball from the middle of the main intersection, even with my middle-aged arm; Citizens, Citi, Bank of America, Wells Fargo, TD, Santander and PNC. There is never a line to see a teller. When you walk in, you get a barrage of, "Hello! How are you today? Can I help you with something?" There's a hint of desperation beneath the surface as they know, perhaps subconsciously, that their job is unnecessary, and jobs like that don't last long.
Let's review a bank's purpose, to serve savers and borrowers; banks are supposed to provide capital services that help our economy grow, they are supposed to lend responsibly. And, over the last few years, overall bank lending expanded and the economy grew, both at a dismal rate relative to past recoveries. Not surprisingly, bank lending and economic growth tend to track each other. And yet, the real economy, as experienced by small businesses and individuals, feels as though it is lagging terribly, as if it never really recovered. Average incomes are stagnant, and unemployment is unacceptably high. It is the familiar story of the Haves, and the Have Nots. Neither the Fed Chairman nor senior bankers seem to know why or what to do.
The answer can be found by looking at the facts around the recent modest growth in lending,
• large loans to large businesses, meaning businesses with greater than $1 million in loan value, grew each year since 2009, at a moderately healthy rate.
• loans less than $1 million (small business loans), have contracted every year since their peak in 2008, according to data tracked by the US Small Business Administration.
This picture is supported by FDIC data that shows a 19.1 percent decrease in small business loans ($1 million or less) outstanding since the start of the Great Recession. In other words, large businesses have had easy access to credit at historically the lowest rates ever in US history, translating into ready access to bank loans and public credit markets. Over the same time period, banks have pulled back from small business lending year in, year out.
As reflected by the stock market, the largest businesses have experienced an economic recovery allowing them to bolster their balance sheets, replacing their old, higher cost debt with lower cost debt (thank you, Ben Bernanke) driving their earnings higher, all while small businesses have struggled with a scarcity of credit, fighting through increasing regulation and tax burdens, the wind squarely on their nose. The Haves and the Have Nots. According to the SBA,
• only 29% of small businesses have bank loans.
Bankers should care about this gap; it's an opportunity. There are roughly 5.8 million employer firms in the US, of which, firms with less than 20 workers represent 89.7% of the total. Firms with less than 500 workers make up 99.7% of the total of US employers. And the SBA calculates that small businesses account for 65% of all new job creation, contributing roughly 50% to GDP for 2012, approximately $7.5 trillion. So the total potential un-served market for bank loans is roughly the 70% of small businesses without bank loans, or $5.25 trillion of our economy.
But lending to small businesses isn't that easy, whine the bankers. They need better information. It's 2013, so, let's solve this by providing services from bank branches which will generate new fee revenue and information.
• New Idea: banks should offer to be the outsourced Chief Financial Officer (CFO) for small businesses. Most small businesses struggle to maintain their own books, and or hire a local accountant, or a spouse or an uncle to track and manage their financial operations. Small businesses would welcome services that go beyond simple checking and payroll processing, where all their transactions would feed into a web-based program like Quickbooks, and their balance sheet, income statement and cash flow statement would be reliably maintained. Bank CFO services should include federal, state and local tax return preparation, filing and refund processing. The bank's outsourced CFO services can be competitively priced with what small businesses are already paying, generating new fees and customers for banks while alleviating a burden for business owners.
Information = big data from small businesses
Most importantly, this new CFO service enables banks to capture all the data around a small business, all the information they need to underwrite a loan. As it is now, small businesses walk into a bank and begin the process as if they just arrived from Mars. Small businesses should be served within their local or regional economic network - they should not need to venture far to find a lender. Network analysis can be performed to determine which are the more important nodes (relatively more important businesses) based on volume of business, various rates of change of key metrics such as sales, receivables, payables, transaction volume, and customer concentration to name a few. Banks will identify new leads for customers as client's vendors and small businesses' customers rise in significance by their frequency of interactions with each other.
The potential impact
Aside from big banks doing what they are supposed to do, make loans to fuel economic growth, and help grow their own capital and the capital of their customers, the broader social and economic impact is worth pondering for a moment. Let's assume that banks were making loans to small businesses at the same growth rate as they made to large businesses in 2011 and 2012. Using the SBA data, small businesses would have received an additional $34.5 billion in credit over the last two years (starting from the actual level of $178.8 billion). Now, back of the envelope, let's assume a conservative 2x coverage ratio on a 10% total annual loan cost with amortization and interest payments, and this new debt translates into an additional $70 to $100 billion in small business revenues. Before factoring in any multiplier, this new revenue equals an additional .5 to 1% added to US GDP, a drop of 1% in the unemployment rate, and the creation of an additional 1.5 million jobs over two years.
Banks can and should innovate and market new services generating lending growth before shuttering up all those main street branches. Foreign markets, trading on their own accounts, and subprime lending have all been tried already.