Banks underestimate small business owners’ aversion to fees at their peril

When nbkc bank began offering its small business bank accounts nationwide, management’s first priority was to ensure that the accounts had low, if any, fees.

At the time — in 2018 — it was an unusual move by a bank, said Melissa Eggleston, the bank’s chief deposit officer in the Kansas City area. The $1.1 billion-asset bank made a strategic decision to forgo short-term revenue it could potentially generate by charging small business owners more fees.

Instead, the bank decided to focus on building long-term relationships with these entrepreneurs by offering a more competitive product. Today, the bank’s website proudly states that business owners will pay no fees for a range of services, including incoming wire transfers from anywhere in the US, online banking and bill pay.

“It was a breath of fresh air for them,” Eggleston said. “Historically, a small business customer would walk into a local bank and expect an extensive fee schedule.”

Melissa Eggleston, nbkc bank’s chief deposit officer, said her institution’s low-fee, no-fee checking account is a “breath of fresh air for” small business customers.

Paul Versluis

nbkc bank now has small business customers in all 50 states. Its deposits doubled to $866 million from the end of 2017 through June 30, 2022, according to data from the Federal Deposit Insurance Corporation. Specifically, the bank’s interest-free deposits, which include these small business accounts, grew from just $44 million to nearly $420 million over the same period, according to the FDIC.

Not surprisingly, nbkc’s low or no fee small business accounts are popular. On the retail side, there is more focus on so-called junk fees that banks charge consumers. The fees small business owners pay haven’t received the same level of attention, but experts say bankers would be wise to keep in mind that these customers also resist paying fees that seem like they add little to the relationship.

“Small businesses hate paying fees, especially those that are often associated with their current accounts. That’s one of the most important things owners will say,” said Mary Beth Sullivan, managing partner at banking advisory firm Capital Performance Group in Washington, D.C. “Having said that, small business owners are a little less price sensitive. , because if they need help, they are willing to pay for it. The key is to give very clear value received for the fees being paid.”

Universal hatred of fees

Banking is a notoriously sticky business, with customers reluctant to switch financial institutions.

This may be especially true for commercial customers, who tend to have more complex needs than the typical retail consumer. This reluctance to switch institutions was evident in a recent survey by Arizent, the parent company of American Banker, about what is important to small business owners when it comes to banking. Only 16 percent of small businesses surveyed said they were “very likely” or “somewhat likely” to leave their community bank in the next two years, according to Arizent data. For global banks and regional banks, these figures are 15% and 24% respectively.

However, if small business owners are extremely unlikely to switch banks, should financial institutions worry about annoying them with fees?

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The answer to that question is undoubtedly yes, said Vincent Hui, managing director of Cornerstone Advisors in Scottsdale, Arizona. It’s true that many banks could get away with adding or increasing various fees without a small business customer leaving. But this strategy is likely to limit the customer’s interaction with the bank.

Hui noted that research shows that about one-third of small business owners want to take out loans at any given time. An entrepreneur who is already irritated by their bank due to a range of additional fees, often in addition to the monthly service fee, is inclined to look elsewhere to borrow these funds.

“If a small business owner wants to take on debt because they have opportunities for expansion and growth, that’s an example where you want to have a good relationship with them and you’re the first to make a call, especially if they want to add on another service, to help their business,” Hui said. “If the business owner just tolerates you, that doesn’t mean you’re in a good position to get the next piece of business.”

There is also reputational risk in pursuing a strategy of generating revenue through multiple fees, Hui said. A small business owner who simply stays with a bank out of convenience is much less likely to recommend that bank to a colleague.

Arizent’s survey of small business banking supported Hui’s point. Fees were often cited by “adversaries”—customers who are unlikely to recommend their financial institution to others—as a source of irritation.

“The service is terrible and the fees are exorbitant,” said one survey respondent.

“I like my banking relationship, but they recently added a monthly service fee to my account,” said a second survey participant.

“The bank I used for 19 years was sold to another bank. The new bank charges almost everything you do,” said another business owner.

If the business owner just tolerates you, that doesn’t mean you’re in a good position to get the next piece of business.

Vincent Hui, Managing Director of Cornerstone Advisors

Thirty-six percent of small business owners said competitive pricing and low fees were “critical” when choosing a major institution. About 3% of business owners say fees are “not very important” or “not important at all.”

“Fees really create a bad experience,” said Rohit Arora, CEO of Biz2Credit, a New York-based online small business lending platform. “If the fees are too high, owners will transfer their accounts to another bank. There could be a huge backlash.”

The fees that banks charge can generally be divided into two categories, said Grayson Tuck, president of Memphis, Tenn.-based law firm Gerrish Smith Tuck. First, there are lender fees, primarily loan origination fees, in addition to the interest the borrower pays.

Then there are fees faced by bank customers, including small businesses, on the deposit side. These may include a monthly service fee, which can be as high as $30 per month, and fees for certain services such as remote deposit capture, wire transfers, insufficient funds and treasury management.

Banks can justify charging commercial customers these fees, not necessarily retail consumers, for the same service because the business relationship is typically more involved and requires more time and human resources, Tuck said.

“Banks will earn fees where they can get them,” he added.

A better way to structure fees

Arizent’s research found that many financial institutions could do better with the way they approach fees for entrepreneurs. There is a significant gap between small business owners who cite competitive fees as an area of ​​critical importance to them and those who are satisfied with what they pay for banking services, according to the survey. This means that this is an area where financial institutions can improve.

Experts have suggested banks should cut the fees, which appear to be simply looking for ways to make an extra dollar rather than adding value to the relationship. This can include understanding what matters to each individual small business owner. For example, some borrowers don’t want to pay a loan origination fee, but won’t mind paying a slightly higher interest rate to avoid that upfront fee.

“Most small businesses may not look at a single fee, but they will look at the total cost of the connection and the overall benefit of the connection,” Tuck said. “Does the cost justify the benefit?”

Most small business owners who understand the economics of running a successful enterprise are willing to pay for services they believe add value to their banking relationship, experts said. This may include payroll services or treasury management. Simplifying the fee structure can also go a long way in generating goodwill.

“My sense is that it’s more about business owners not wanting to pay,” Sullivan said. “They don’t have time to track down $5 here and there. Just roll it all up and tell me how much it costs, give me a package that’s going to cost me X a month, but it’s all free.”

In addition to its no-fee or low-fee checking, nbkc offers additional services for small business owners to take advantage of, such as ACH origination to pay vendors or employees, and nbkc banka also has a relationship with Autobooks that can be used to billing assistance, Eggleston said. The bank charges customers for these services.

Eggleston emphasized that the bank is always listening to its small business customers to see what additional products or services they want to help run their companies more smoothly.

“Everyone talks about growth and how important relationship growth is, but I think the idea of ​​just understanding your existing portfolio is just as important,” she added. “I would encourage listening and surveying your customers to understand their banking concerns today and the things they wish were different. The last thing we want is for people to come in the front door and then go out the back door.”

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