The Big Picture

Depending on how you define small business, there are as many as 30 million business entities in the United States, including self-employed or part-time sideline businesses such as selling collectibles on eBay,¹ or as few as 2.4 million if you only look at companies with at least $500,000 in annual revenues, but no more than $10 million.²

For the purposes of this report, we are defining the total small business market as 9.4 million; 2.4 million of that is the larger small business with revenues of $500,000 to $10 million (see Table 1, below) and 7.0 million microbusinesses with annual revenues of $50,000 to $500,000. While microbusinesses are the primary focus in this report, much of what we discuss would also be effective with larger small businesses, as well as self-employed or part-time businesses that fall under the $50,000 threshold.

In your business planning, it’s important to look more at the financial needs and attitudes of the end user and less on annual revenues. George in New Haven may only bring in $25,000 annually from his office equipment resale business; but combined with the $175,000 his wife brings in from her law practice, that’s a household you should be banking. A robust microbusiness offering could be the bait that lands all the business from George’s household.

¹Celent Communications, 7/00

²PSI Global, 4/00

Table 1

Description of Small Business Types

Source: PSI-Global 4/01; Online Banking Report, 4/01

The Real Opportunity for You

Unless you run a national franchise, the 7.0 million universe of microbusinesses is meaningless. You need to know what the opportunity is in your market. One way to look at it is through percentages. Assuming there are a total of 85 million U.S. households with bank accounts, then as many as 35% (30/85) identify themselves as business owners. More than 11% (9.4/85) own businesses that are relatively easy to find, they have identifiable business phone lines and at least $50,000 in annual revenues. Looking at just the $50k to $500k microbusiness segment, more than 8% (7.0/85) of all banking households also run microbusinesses.

Assuming 25% of microbusiness owners are current candidates for online services, and 50% will be users within 5 years, there are 1.75 million (25% x 7.0) prospects today, and 4 million by 2006 (50% x 8). For more details. To get a rough idea of the microbusiness opportunity in your market, multiply the total number of banking households by 8%.

Worksheet 1

Estimating the Number of Microbusinesses in Your Market

Number of banking households in your market                                               _____

Multiply by the percentage of all households that are microbusinesses      x      8 %

Approximate number of microbusinesses in your market                             = _____

Multiply by the percentage using the Internet (pxxx)                                   x     70%

Approximate number of Internet-using microbusinesses in your market      =            

The market may be large, but how much of it is truly up for grabs? Business banking relationships have traditionally revolved around the credit relationship. In cases of larger small businesses, a trustworthy bank officer is perceived as both an ally to the “loan committee” and someone who helps find solutions for business credit needs.

Unless you make the commercial loan, is there any hope of gaining a meaningful transaction or deposit business? OneCore, the premier Internet-only small business banking provider on the, has only attracted “a few thousand accounts” in more than 2 years. In fact, late last year, the company recrafted itself as a turnkey solutions provider for large bank business banking programs. Though the mid-six-figure price tag is high, it’s far less than it would take to build a similar platform from scratch. We think OneCore has a good chance of succeeding, if they can attract a marquee reference account before their investors back out. The company says it has adequate capital through 2002, so it appears they have a good shot at making it.

It’s possible to attract microbusinesses without providing credit, but why would you want to? The credit account is what drives profits to the bottom line for you and your customer. Every creditworthy microbusiness customer should have an overdraft line of credit, a home equity line of credit (assuming the business owner has home equity), and a business line of credit. These three credit facilities, even if they total no more than $10,000 initially, will make the business owner feel like a valued customer; and each line can grow larger over time as you grow more comfortable with the business owner’s financial track record. 

Table 2

U.S. Businesses by Annual Revenues

Source:  PSI-Global, Small Business Market Study 2001, 4/01 (commercial banking numbers from 4/00)

¹The person at the company that handles the majority of banking activities

²Could be serviced by commercial banking department depending on circumstances

³Also known as SOHO, small-office-home-office, a term used less frequently today

The small business sector spends a considerable amount of time and money on financial matters. In 1997 the McKinsey/BAI study found that the average annual financial services purchases from banks and non-banks combined, across 5.6 million U.S. small businesses, was $14,000; removing insurance, the average fell $7,700.

More recently, PSI found the total market size of balance-driven products (assets and liabilities) was $2 trillion; $870 billion (43%) was from microbusinesses, and $1.15 trillion was from small businesses (57%), Assuming a 200 basis point (2.0%) spread on the balances, the sector is generating $40 billion in net interest revenues, an average of $4,300 per business. In addition, PSI estimates that business owners have another $2.4 trillion of deposit and loan balances in their personal accounts. At a 200 basis point spread, the owners are generating another $48 billion in net interest income on the consumer side (see Table 4).

But, this only counts the money paid to financial services companies. It ignores the significant internal costs associated with financial management: accounting, bookkeeping, payroll, treasury, and so on. With the Web, banks have an opportunity to compete not just for the traditional financial products, but also for the entire financial operations of the business.

Table 3

Financial Products Purchased by Small and Microbusinesses—Business Usage Only¹

Source: Balances from PSI Global’s 2000 Small Business and SOHO Studies, 4/00; number of small and microbusinesses from PSI’s 2001 Study, 4/01

Total population (N) = 7.0 million U.S. microbusinesses plus 2.4 million U.S. small businesses = 9.4 million

¹¹Includes only products used exclusively in running and operating the business

²Includes short-term investments

³Average balance of businesses using the particular product

⁴Average balance across the entire population (N)

Table 4

Financial Products Purchased for Personal Use by Owners
of U.S. Small and Microbusinesses¹

Source: Balances from PSI Global’s 2000 Small Business and SOHO Studies, 4/00; number of small and microbusinesses from PSI’s 2001 Study, 4/01

Total population (N) = 9.4 million U.S. small and microbusinesses

¹Products used personally, not for the business

²Total market = (% using) x (average balance) x (9.4 million micro and small business owners)

³Total balances only, does not include auto leases or insurance

Online Banking Usage

Until last year, small business usage of online banking had been disappointing. Just a year ago (April, 2000), less than 7% of small and microbusinesses said they used online banking. But during the past 12 months, usage has spiked, climbing 56% to 10% overall. Growth in the larger end of the small business segment was even higher, with the $500,000 to $4.9 million segment with online penetration of 16%, 68% year-over-year gain. In the largest segment, businesses between $5 and $10 million, usage climbed to 29%, a 71% gain.

Table 5

Small and Micro Business Use of Online Banking

Sources:  (1) 1998 to Q2 2001 estimates, PSI Global 2000 Small Business Market Track with update in April ‘01; (2) 2001 YE to 2010 YE forecast, Online Banking Report, plus or minus 33%; assumes 3% annual growth in the number of businesses in each category