The Case for Digital Business Banking (NetBanker)

Ever wonder why you can never get a straight answer to how big the small business market is? It’s because there are so many ways to slice and dice it. We like the SBA’s estimate of 13 million to 16 million. This includes both employer firms and the full-time self-employed. Table 1 provides some other choices for the top line of your spreadsheet.

What’s this business worth for your bank? That depends on how you price and market small business services. Last year, McKinsey/BAI concluded that the small business market was worth $78 billion (OBR 9/97) across 5.6 million employer businesses, or $14,000/yr for each business. But as we pointed out last month (OBR 9/98), this figure doesn’t include the internal and external costs for accounting, financial management, and billing that can now be outsourced to Web-based service providers. We expect both financial and non-financial companies to compete for this growing market.

Table 1: Small business market size (U.S.)
Description	Number	Source
Home offices	39 million	IDC/Link, 1995
Business tax filers	24 million	IRS, 1997
Employers	5.4 million	Bureau of the Census
Businesses with more than $500 in sales	17.3 million	Bureau of the Census, 1992
Employed + FT Self	13-16 million*	SBA
Small businesses	12 million	Mentis, 8/98
Quicken users	10 million	Intuit
Number of business loans <$100,000 outstanding	6.7 million	SBA, 6/97
Businesses that use computers to do their books	6 million	Intuit
QuickBooks users	2 million	Intuit
Businesses using the Net by number of employees (% of total)
1 to 99	2.1 million (40%)	ZD InfoBeads
100 to 499	56,000 (75%)	ZD InfoBeads
500 or more	14,000 (95%)	ZD InfoBeads
Percent of 7 million small businesses that: (% of total)
-- have access to the Net	3 million (43%)	Mainspring, 6/98
-- use online banking (PC or Web)	550,000 (8%)	Mainspring, 6/98
Memo: consumer HHs	100 million

Small Business Banks

Nearly all U.S. commercial banks serve the small business market. Yet, relatively few banks are using the Internet to build share. A search for “small business” plus “bank” on Yahoo! only turned up eight banks worldwide. Surprising, considering the number of small businesses using the Net for research and commerce. In fact, Ziff-Davis recently found that more than 40% of small businesses (<100 employees) are using the Internet. Furthermore, the Software Publishers Association reported that 23% of PC households claim to be operating a small business of some type from their home.

Table 2: U.S. Banks serving small business
Description	Number	% of Total	Source
Number of banks listing small business loans in Q2 97 call reports	9,293	98%	FDIC
Number of U.S. banks offering online account access for small businesses	475	5%	Ernst & Young, 10/98
Number of U.S. banks listed on Yahoo as offering small business banking services*	7	0.07%	Yahoo, 9/98

* Searching on “small business” + bank resulted in 8 unique banks, 1 in Australia and 7 in the United States.

Table 3: Prices for online small business banking at the top 18 small business banks
Pricing model	Number	Range	Avg.
Free	1	$0	$0
Free access + BP fee*	5	$4.95 to $9.95	$6.95
Flat monthly fee*	9	$3.50 to $35.00	$13.31
Total	15	$0 to $35.00	$10.31
Surcharge for Quicken	5	$1.50 to 8.95	$5.48
No account access	3	n/a	n/a

Source: Mainspring, 6/98, www.mainspring.com

*Pricing generally includes a limited number of bill payments with extra payments available for $0.21 to $0.50 per payment.

*Table 4: U.S. Banks who say* they will offer online account access to small businesses**
	Self-Reported		OBR Estimates*
Year	Number	% of Total	Number	% of Total
1997	475	5%	400	4%
1998e	1,700	18%	750	8%
1999e	6,200	65%	1,500	16%

Source: Ernst & Young, 10/98; Online Banking Report, 10/98

*Online Banking Report estimate plus or minus 33%; includes consumer or business online banking programs that includ access (Web or direct-dial) to business checking accounts.

Table 5a: Micro-business friendly (MBF) banks*
Bank Asset Size		MBF Banks**	All Business Banks***	% MBF
<$100 million		188	6,047	3.1%
$250-$500 million		235	2590	9.1%
$500 million - $1 billion		15	292	5.1%
$1 - 10 billion		8	300	2.7%
>$10 billion		3	64	4.7%
Total Number		449	9,293	4.8%
Total Assets (billions)		$139	$4,046	3.4%
Table 5b: Total micro-business loans (<$100,000) outstanding at commercial banks
	MBF Banks**		All Business Banks***	% MBF
$ billions	$14.8		$112.2	13.2%
number	2.2 million		6.7 million	33.3%

Source: SBA, 1997

*Micro-business friendly banks, according to the U.S. Small Business Administration (SBA), have significant business lending activity in loan amounts less than $100,000.

**The 449 MBF banks make up 3.4% of total bank assets, but 13.2% ($14.8 billion) of the dollar value of micro business loans outstanding.

***Banks reporting small business lending data in June 1997 call reports.

Table 6: U.S. Commercial bank business loans by loan size $ billions
Year	<$100k	$100k-$250k	$250k-$1million	$1 million or more	Total
1997	$112.2	$72.1	$172.0	$567.0	$923.3
1996	$105.2	$67.1	$160.7	$515.1	$848.1
% Change	6.7%	7.5%	7.0%	10.1%	8.9%

Source: SBA, 1997

Credit Usage

Not surprising, more than three-quarters of all small businesses report usage of some type of credit. With more than 40% of small businesses now using the Internet (Table 1), the Web will increasingly become an important venue for selling and servicing business finance products.

Source: Federal Reserve Board, National Survey of Small Business Finances, 1995; data compiled during 1994 and 1995 for fiscal year 1993

* Suppliers not shown include family members, unrelated individuals, other businesses, and government (see table 8a and 8b below)

Table 8a: Sources of traditional credit, 1993 loans, lines and leases
Credit Source	% of Total Small Businesses
Any financial institution	54.2%
Any non-financial institution	13.7%
- Family or other individuals	8.6%
- Government	0.6%
- Other businesses	5.3%

Source: Federal Reserve Board, 1995 (using 1993 data, see above)

Table 8b: Distribution of total dollar amount of credit lines and loans outstanding, 1993
Credit Source	% of Total Dollars
Banks	58.6%
Thrifts and credit unions	4.2%
Nondepositor financial institutions	25.6%
Nonfinancial suppliers	11.6%
Total	100%

Source: Federal Reserve Board, 1995 (using 1993 data, see above)

Table 9: Percent of small businesses using various types of credit
Type of Credit Used	% Using	% of Total Dollars Outstanding (traditional credit only)
Any use of traditional or non-traditional credit	89.1%	n/a
Traditional Credit
Any usage	59.1%	100%
Credit lines	25.7%	42.0%
Mortgage loans	7.8%	24.9%
Equipment loans	14.8%	8.2%
Vehicle loans	25.3%	4.3%
Capital leases	10.3%	4.5%
Other loans	12.7%	16.2%
Non-Traditional Credit
Owner loans	17.6%	n/a
Personal credit card	40.7%	n/a
Business credit card	28.8%	n/a
Trade credit	63.8%	n/a

Source: Federal Reserve Board, National Survey of Small Business Finances, 1995; data compiled during 1994 and 1995 for fiscal year 1993

Market Size/Demographics

If you are looking to sub-segment the small business market, you may want to consider characteristics of the business itself, such as age, size, growth rate, industry, and so on. Another approach is to segment by characteristics of the business owner. For a wealth of data to support either approach, look at the SBA report Characteristics of Employees and Owners, 1997, available online at www.sbaonline.sba.gov/ADVO/stats/ch_emp_o.html

Table 10: Number of employees (all employers) millions
Year	Total Businesses	Total Employees
1995*	5.37	100.3
1994	5.28	96.7
1993	5.19	94.8
1992	5.10	92.8
1991	5.05	92.3
1990	5.07	93.5
1989	5.02	91.6
1988	4.95	87.8
7-yr Change (CAGR)	0.42 (1.2%)	12.5 (1.9%)

CAGR = compounded annual growth rate

*In 1995, 5.35 businesses with less then 500 employees employed a total of 52.7 million people; the 15,000 businesses with more than 500 employees employed a total of 47.6 million.

Source: Bureau of the Census

Table 11: Distribution of employer firms by number of employees
Number of Employees	% of Total
0	12.8%
1-4	47.7%
5-9	18.3%
10-19	10.7%
20-99	8.8%
100-499	1.4%
500+	0.3%

Source: SBA from Bureau of Census Data

Table 12: Self-employed as primary employer*
Year	Men	Women	Total
1997	6.59	3.92	10.51
1996	6.59	3.90	10.49
1995	6.60	3.88	10.48
1990	6.75	3.35	10.10

Source: Bureau of Labor Statistics

*Does not include approximately 1 million reporting self-employment as second job; unknown how many reporting self-employment are also included in the employer counts in Table 10.

Table 13: Self-employed by annual earnings, 1996
Annual Earnings	Number	% of Total
<$5,000	4.57 million	40%
$5k - $25k	3.95 million	35%
$25k - 50k	1.54 million	14%
$50k or more	1.25 million	11%
Total	11.30 million	100%
% of workforce	8.4%	n/a

Source: Bureau of Labor Statistics

Table 14: Self-employed by age, 1996
Age Range	Number	% of Total
<25	0.65 million	5.7%
25-34	2.16 million	19.1
35-44	3.41 million	30.2
45-54	2.75 million	24.3
55-64	1.57 million	13.9
65+	0.77 million	6.8%
Total	11.30 million	100%

Source: Bureau of Labor Statistics

Table 15: Self-employed by gender, 1996
Gender	Number	% of Total
Male	7.08 million	63%
Female	4.23 million	37%
Total	11.30 million	100%

Source: Bureau of Labor Statistics

Table 16: Non-farm business tax returns* millions
Year	Corpora-tions	Partner-ships	Sole Props.	Total
1997 (P)	5.20	1.71	16.75	23.66
1996	5.01	1.68	16.47	23.16
1995	4.82	1.58	16.16	22.56
1990	3.72	1.55	14.78	20.05
7-yr Change CAGR	1.48 4.9%	0.16 1.4%	1.97 1.8%	3.61 2.4%

Source: IRS, 1998 P= Projected

*Overstates number of business entities due to multiple tax returns being filed by some businesses.

Table 17: New employer firms*
Year	Number
1997	885,000
1996	842,000
1995	819,000
1990	769,000
Change: ’97 vs. ‘90 CAGR	116,000 2.0%

Source: U.S. Department of Labor

*State-by-state count of new business registrations. Includes approximately 200,000 businesses already operating in another state at the time of registration in the new state.

Table 18: Business closures*
Year	Termination*	Bankruptcy**
1997	857,000	54,000
1996	850,000	53,000
1995	864,000	51,000
1990	838,000	64,000
Chg ’97 vs ’90 CAGR	19,000 0.3%	(10,000) (2.4%)

Sources: U.S. Department of Labor (terminations); Administrative Office of the U.S. Courts (bankruptcies)

* State-by-state count of all business closing, overstated by an estimated 200,000 businesses who close in one state but remain in business in another.

** Bankruptcies included in termination total

Note: In another study of closures between 1992 and 1996, the Bureau of the Census found that 57% of firms with employees and 36% of firms without employees were successful at the time of their closure.

Table 19: Dissolution rates for businesses started between 1976 - 1978
Length of Time	% Dissolved During Period	% Dissolved Cumulative
After 2 years	23.7%	23.7%
After 4 years	29.0%	52.7%
After 6 years	9.5%	62.2%
After 8 years	8.7%	70.9%

Source: SBA from Dun and Bradstreet database which includes mostly employer firms

Table 20: Percent of businesses operating in 1992 that close in subsequent years
Year	Without Employees	With Employees	Total
1992	8.3%	2.7%	7.3%
1993	7.7%	1.5%	6.7%
1994	6.5%	2.3%	5.8%
1995	5.1%	3.0%	4.7%
Cum (4 yrs)	27.6%	9.5%	24.5%

Source: Bureau of the Census

Note: 57% of firms with employees and 36% of firms without employees were successful at the time of their closure.

Table 21: Age of businesses, 1992 businesses with receipts of more than $500
Launch Year	% of Total
1992	14.1%
1991	9.2%
1990	8.5%
1989	8.3%
1986-88	18.0%
1980-85	19.6%
Before 1980	22.4%

Source: SBA from Census Bureau data

Note: Excludes non-S corps (mostly large companies)

Table 22: Home office usage, 1995
Type	Total	% of Total
Full time Self-employed individuals	11 million	28%
Part time self employed	12 million	31%
Telecommuters	6 million	15%
Employees doing some work at home	10 million	26%
Total	39 million	100%

Source: IDC/Link, 1995

Table 23: Small business segments to target
Type	Number*
Employees of small businesses	57 million
Self-employed	11 million
Businesses less than 2 years old	1.5 million
Telecommuters	6 million
Online auction buyers and sellers	several million
Businesses closing but not bankrupt	800,000 per year
Businesses in your geographic market	varies
Businesses in any vertical segment (coffee shops, attorneys, etc.)	varies
Online merchants	unknown