Wading Through Options Competition among community banks, megabanks and nonbanks is good news for business customers.

Environmental consultant Peter McClintock, right, and foreman Gary Greene will maneuver through the mire for customers, but they don't want to have to do the same for their banking services. Photo by Mark Rhodes

By Marjolijn Bijlefeld
In 10 years at his old bank, Peter McClintock had eight different loan officers. The most recent change left him frustrated. "I had to explain my business just as I had explained my business to the previous seven," he says.

Last October he restructured Emerald Forest, his Chesapeake environmental restoration company, from a sole proprietorship to a corporation. He figured it was as good a time as any to make a switch. A new community bank, Monarch Bank, had just opened nearby. He went inside for some information and saw its list of shareholders. He knew a half dozen personally. On that basis, McClintock switched. It helped that Lynn Gaunt, vice president of professional and small business banking, rolled out the red carpet and helped him sort through what business services he needed.

It’s not surprising that McClintock had no problem finding a good banking fit. The financial services industry is experiencing sweeping change. Monarch is one of many small banks that cropped up in the wake of big bank mergers, and these growing banks are all hungry for business clients. Big banks also are working harder to win the accounts of small businesses. They know they have to compete, not only with small banks, but with Internet banks and a growing pool of nonbanks that sell traditional banking products.

The result is intense competition, and the beneficiary is the customer — particularly the small business customer. Del Ward, senior vice president of business banking for Richmond-based First Market Bank, explains that small business "remains the only segment of the economy that’s still growing. If small business is not a bank’s primary focus, it’s missing out on the biggest and fastest-growing segment."

Small businesses spend about $40 billion annually on banking services, and that figure is expected to grow to $61 billion by 2002, according to Meri-dien Research of Mass-achusetts. That’s reason enough to attract bankers’ attention, yet the competition is likely to intensify. The federal Financial Modernization Act passed in November allows bank-holding companies to affiliate with insurance or securities companies, expand services and cross-sell a wide range of products.

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TowneBank’s Business Beetle, a black Volkswagen Bug, is emblazoned with gold lettering and the bank’s logo. The driver picks up deposits from business customers who aren’t near any of the Portsmouth community bank’s three branches. It’s TowneBank’s answer to lock boxes and ATMs, big-bank services that signal convenience.

The bank also assigns business customers a "private banker" who is on call around-the-clock. The banker’s business card shows home, office and 24-hour cell numbers. "One criticism we’ve heard is that when customers are with a big bank and have a problem, they don’t know who to call," says Starr Oliver, executive vice president of TowneBank. "We’ve positioned ourselves to say, not only can you find us, you can find us anytime."

One customer was traveling in Arizona when his car broke down and couldn’t be repaired. He called his private banker, who contacted a local car dealer. The banker financed the deal over the phone, and the next day the customer continued his trip in a new car.

Community banks consider "relationship banking" their trump card. They provide flexibility for business customers who need a loan and don’t fit big banks’ profile of a model borrower. Rather than requiring reports by a certain date or waiting for the next review cycle, Monarch’s Gaunt says she can call her loan committee of six, fax them the applicant’s information and get an answer that day.

Smaller banks look at loan applications individually and are willing to take on more risk. "Historically banks wanted to mitigate risk and underwrite a large portion to [the Small Business Administration]. ... For banks to be more competitive in the business market, they have to take on more risk themselves," says Barry A. Mathias, senior vice president and senior lending officer at Monarch.

TowneBank’s Starr says a quick response is crucial to keep customers satisfied. Her bank quickly gave the OK to a physician who had applied for a loan from both her bank as well as a larger bank. TowneBank won all the physician’s business — before the larger bank representative even came to fill out the loan application papers. "Speed will win the game nine times out of 10 in business banking," Starr says.

Smaller banks also are adding services, such as online banking, that used to be the domain of big banks. Monarch set up its information system to allow business owners to pull up accounts, check balances and transfer funds online. TowneBank will add online banking soon and online bill payment before the end of the year, Starr says.

The technology is more affordable. Formerly, "the only way a small business could be in touch with that information on a daily basis was to call and get charged for it or buy prohibitively expensive software," First Market’s Ward says. "Now for $14.95 a month, they can look at checks cleared, transfer money to and from a money market [account] so idle balances don’t sit. It would take too much time for the client to do it manually."

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Large banks say they can provide a broader range of services without sacrificing "relationship banking."

"What you get with a big bank that you don’t get with a community bank is the potential to continue your relationship as you grow," says Tony Mattera, vice president of corporate communications at Crestar Bank, which retained that name in Virginia even after its acquisition by Atlanta-based SunTrust Banks Inc. in 1998. Smaller banks might not be able to accommodate businesses that outgrow their credit lines, need larger loans, expect a network of ATMs and lock boxes, or need additional financial services such as insurance or management of 401(k) assets. And even if a community bank is able to refer out these services to partners, they’ve lost an element of quality control that comes from offering all services under one roof, Mattera says.

Bankers do acknowledge the perception that large banks don’t have time to deliver personal service. That has prompted some to refine their operations.

Wachovia, for example, tries to deliver relationship banking through one person. "Everyone says they have relationship banking, but usually it’s product-driven," says Jim Cherry, president of Virginia banking for Wachovia, headquartered in Atlanta and Winston-Salem. You might have a relationship with your insurance agent, another with the asset manager and yet another with the commercial account representative. Sure, it’s "relationship banking" but it’s three different relationships. When businesses grow to the point that they need services beyond what’s delivered at the branch office, they’re typically assigned a "relationship manager," a point person for all their banking needs.

Crestar is building on its relationships by creating unique services, such as the Crestar Women’s Business Connection. Hattie Hamlin is vice president of the resource center, which opened last October as a free service to customers and prospective customers. The center helps women-owned businesses grow. "For example, a small business might be 2 years old and ... leasing space. Maybe the business owner is ready to purchase a building but doesn’t know what questions to ask and what’s required. Getting the right information is half the battle," she says.

Large banks argue that information is their strong suit. Cherry says that several years ago, Wachovia segmented its business market into four revenue categories — under $2 million, between $2 and $25 million and so on. It now dedicates staff, products and training for each segment. In other words, he says, his bank doesn’t need to tweak or customize products; it already has products and services to match any size business. The purpose was to cater to small business. "Without that, not only do you ignore market segments, but you don’t have the right products and services [for] them."

Big banks point to the numbers: In terms of dollar value of loans, large banks have the lion’s share. Bank of America is the top SBA lender in the state and nation, says Jim Thomas, Richmond’s small business banking executive for Charlotte, N.C.-based Bank of America. "Outside of the SBA, we’re the leading small business lender in the U.S., with 1.7 million small business customers and $11 billion in loans to small businesses." Large banks say that’s possible because of tools like credit scoring.

"Our losses for borrowers that fail — but to whom we end up lending anyway — are much higher than with those borrowers who pass," Thomas says. "It’s not perfect, but it’s much better than the traditional method of trying to figure out with your gut who has the capability and willingness to repay a loan." Large banks also call credit scoring the great equalizer. There’s no place for discrimination in lending if what’s being reviewed is data.

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Fernando Sabio is among the new breed of unbanking customers. He’s never laid eyes on his banker, doesn’t need a branch office, and never uses a drive-up window. Last summer, the Alexandria-based construction-industry consultant started Moxie Group. He asked friends about their banking services, then decided he was willing to forego a personal relationship for lower-cost Internet banking.

He selected OneCore.com in Boston. "I was rather pleasantly surprised with the attention they gave me during the account setup process. The reps are more like consultative salespeople and add value beyond the infrastructure," he says.

That’s precisely what Barry Star, founder and chairman of OneCore.com had in mind. The former consultant, who was helping investment firms get into the online brokerage business, went to his local bank one day to deposit a $100,000 check and became irate when he learned it would charge him 85 cents "for the privilege of putting my money into a non-interest-bearing account. I said, ‘There has to be a better way.’"

OneCore.com is not technically a bank. It’s a broker-dealer, registered with the Securities and Exchange Commission, carrying the brokerage equivalent of FDIC insurance on accounts up to $100 million. Users like Sabio say it doesn’t matter what it is, just what it does.

"It was built by business owners for business owners," Star says. Business owners wanted their financial information on one report. They wanted good investment returns without having to sweep cash into money market accounts. They wanted payroll services, good prices, credit lines, credit cards and asset management all rolled into one.

Sabio uses OneCore.com for his core accounts and bill payments. He likes that he can provide selected viewing rights for his accountant and attorney so they can access information they need. "Since I travel a lot, I wanted to make sure that the traditional hurdles to planning — which are temporal and geographic — were overcome. I can have these things done while I’m doing something else. That keeps overhead down, so it made the decision a no-brainer."

While some people might have concerns about Internet security or lack of accountability with an Internet-based bank, those issues don’t faze Sabio. "If it transfers some of the risk onto me, I’m willing to accept that because I’d prefer to have control as a business owner. The flexibility this system offers is unequaled," Sabio says.

Internet banks are growing. Star says OneCore.com’s enrollment is increasing by 30 percent per month, and businesses from 42 states are customers. While the trend started with "new economy" businesses headed by young people with a high comfort level with computers, service and other businesses are falling in line.

Sabio decided he wanted the hands-on control over his accounts that he gets through the Internet. Others, like environmentalist McClintock, seek bankers they know and trust who will take the time to understand their businesses. It’s a buyer’s market, so business customers are likely to find what they want.

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Demetri Tsanacas, the chair of the business and economic division at Ferrum College, says nonbank competitors — such as Visa, American Express, GMAC and Sears — are going after the companies that used to be large banks’ best customers. That leaves large banks wooing what used to be second tier customers and smaller banks going after smaller customers still.

So which banking option is best? There’s no formula. Both large and small banks pledge their commitment to small businesses — and both say they can serve them as well as or better than banks at the opposite end of the spectrum. Community bankers say they’ve come from large banks where they were frustrated at their lack of authority. Megabankers say they’ve worked for small banks where they thought they could provide it all — until they arrived at the bigger bank and saw how much more there was to offer.

Ward came to First Market, the community bank majority-owned by Ukrop’s, from NationsBank — now Bank of America — two years ago. He says the services provided by community and large banks are identical. He contends that banking services are the commodities, and it’s the bankers themselves who provide the value. Larger banks say the value comes in being able to grow along with a business, being able to provide a greater array of products and services and still being able to provide personal relationships.

They’re all expanding their options. Banks large and small now offer a suite of business services, including online banking, checking accounts that sweep excess funds into money market accounts that earn higher interest on otherwise idle money, and even business consulting.

For business consumers, that’s good news. "Competition is good for the customer. If you have good credit history, then you are the target for a lot of banks," says Bank of America’s Thomas.