The Business of Banking Is Banking on Small Business

“In just four years, we’ve seen 15 banks exit the market,” says Paul Hickman, president and CEO of the Arizona Bankers Association. “Between the economy and Dodd-Frank [post-recession federal legislation regulating banks], many banks have reached a tipping point.”

The business of banking is changing significantly. New federal laws and fewer banks — particularly mid-size banks — shift the Metro Phoenix small business bankscape. Valley bankers are cautiously optimistic about Arizona’s economic forecast, but glowing adjectives and over-optimistic predictions are not forthcoming. There’s money to lend “to credit-worthy businesses,” adds Hickman. “All banks are chasing good borrowers.”

Small Businesses Are Bank Targets

The magic words for Phoenix-area banks: small business. “Net business households are up,” explains Dean Rennell, division manager for Wells Fargo business banking. “We want our bank to be accessible in business hubs and close to business owners’ homes.”

Opportunities for individuals to turn job loss into new business grew out of the recession. The shift from employee to self-employed business owner creates a new caste of businesses for surviving banks to court.

“We’ve learned it’s important for a bank to have a relationship that helps our business clients as their business growth helps us,” says Bo Hughes, executive vice president, chief operating and financial officer for Pinnacle Bank. “We see ourselves as a small-business partner. They’re the ones creating jobs and we’re a small business ourself.”

A common perception is that community banks are closest to Main Street businesses and more responsive to ever-changing needs as a business grows. Big banks are fully aware of that slant. “We function just like a community bank, but with greater overall resources,” says Dean Rennell. “This is a very competitive market, and we are out there working close to clients. Our business bankers are on the streets. Wells Fargo decisions are made locally. That’s an important distinction when it comes to small business and more crucial than five years ago.”

Dodd-Frank Changes Decision-Making

Local decision-making may be the biggest change since 2008. No matter what decision the bank makes, federal regulators are peering closely over the shoulders. “Dodd-Frank is only a 145-page law,” explains Hickman. “However, Congress delegated a lot of discretion to the various bank regulatory agencies. Last I heard, there are more than five thousand pages of regulations, and they are only half finished. It’s expensive for a bank to implement.”

Hughes also says it’s expensive. “The regulations add a lot of cost for banks in both technology and compliance. The law is not having its intended effect; the big banks are bigger, not smaller.”

“One factor of Dodd-Frank,” Rennell believes, “is that it is not as significant in how it affects small-business banking.”

This is a reason banks changed models to increase competition and deliver financial services needed by those new small businesses.

Banking Expands Business Services

The law deals a great advantage to community banks, according to Hughes. Being nimble and responsive, she explains, “means the decision-making is closer to the way banking relationships used to be — very personal. We are looking at our clients’ business operations, their strategic plans, and getting to know who runs the business. It works really well for both bank and client.”

Banks are shifting the way business is conducted in the Phoenix area. “Consumers are generally focused on electronic banking,” Rennell says. “We see more businesspeople in our retail stores than consumer customers. This means we need to bring our business clients a broader range of services. Because of Wells Fargo’s overall size, we are able to customize banking to meet a small business’s needs.”

Serving small business is a consistent target, say industry professionals. Uniformly, the banks see small business as the way to secure their own profitability. The range of financial services from the institutions is broadening for business clients.

“We try to offer a compelling value with bundled services,” says Rennell.

In the same vein, Hughes says, “Some businesses like to diversify their finances. We strive to be their single source of related services.”

It’s challenging for banks exiting the gloom of the past four years. According to Hickman, “Our members lend on a thin margin. They all need to get money in circulation to build their banks. It results in everyone chasing the ‘good borrowers.’”

“Banks are reinventing the way they do business,” Hughes says. “We’re going to see some more mergers and acquisitions this year. At least a couple more banks will close. The good news is that there are a handful of survivors who are stronger today than during the lending races five years ago.”

More Mergers and Bank Closures This Year

Hickman didn’t want to comment on where mergers and acquisitions might occur in Phoenix, but he believes that a few more banks are going to disappear in the near future. “Banks are cautious today,” he says, “but they have to lend to be profitable.”

“There are some banks out there that do not have the capital to lend their way back to strength,” suggests Hughes. “Some community banks are facing ‘board fatigue’; they just want to get out of the way of the new regulations.”

“There is a lot more face-to-face banking now,” Rennell says. “It’s not a one-size-fits-all program anymore.”

Addressing the same issue, Hughes says, “This is the new norm. Bankers are a lot closer to business customers. It’s not just a numbers game. We want to know the person we’re doing business with.”

For small business in Phoenix, this personal approach means owners feel wanted by banks. Despite cautious projections, there seems to be some hidden optimism from banks about their future with small business.