What Small Business Wants from Banking & Payments

What Small Business Wants from Banking & Payments Paul McAdam, SVP, Research & Thought Leadership

Gail Angel, SVP, Commercial Treasury Services

What Small Business Wants from Banking & Payments

2

Research Methodology & Background

Relationship-based Product Packages

Product Ownership & Packaging Opportunities

Low Hanging Fruit: Products in High Demand

Channel Usage Insights

Packaging to Meet Customer Needs

• 51-question, online survey completed by 2,249 small business financial decision makers in November 2010

• Respondents’ positions within companies:

– Owners, CEOs or presidents

– CFOs, controllers or treasurers

– Office managers, accountants, bookkeepers

• Company criteria for qualifying for this study:

– Have more than one employee

– Use a business checking account most often for the company business

– Had less than $20 million in 2009 revenue

• Survey fielded by FIS to members of a small business panel maintained by e-Rewards (Research Now)

Research Methodology

3

Respondents by annual revenue and number of employees

4

*Read as: 24% of small businesses in the sample had less than $500k in 2009 revenue **Read as: 21% of small businesses in the sample had 2 to 5 employees n = 2,247 Source: FIS Enterprise Strategy, November 2010

24%*

19%

19%

20%

19%

Under $500,000

$500,000 to $999,999

$1 million to $1.99 million



Annual Revenue (2009)

6%

10%

23%

23%

16%

21%**

101 or more employees

51 to 100 employees

21 to 50 employees

11 to 20 employees

6 to 10 employees

2 to 5 employees

Number of Employees

Key small business lines of trade were well represented

5

2%

1%

2%

2%

2%

3%

3%

3%

4%

4%

5%

5%

6%

7%

7%

8%

10%

13%

13% *

Other

Agriculture, Forestry, Fishing, Mining

Personal Care Services

Educational Services

Repair and Maintenance Services

Administrative & Support Services

Information

Arts, Entertainment or Recreation

Transportation or Warehousing

Manufacturing

Non-Profit, Charity, Civic, Social or Religious Organization

Real Estate Sales, Rental or Leasing

Wholesale Trade

Financial or Insurance Services

Accommodation or Food Services

Healthcare or Social Assistance

Construction

Retail Trade

Professional, Scientific or Technical Services

Company's Primary Business

Over 100 completed

surveys within

these lines of trade

*Read as: 13% of small businesses in the sample are professional, scientific or technical services n = 2,248 Source: FIS Enterprise Strategy, November 2010

6


Factors Driving the Need for Product Packages






Why the focus on relationship-based product packages?

7

Bank switching is on the rise Reg Q repeal will unleash

innovation and new competition

Customers want simplicity and a comprehensive

relationship

Product packaging enhances profitability

5.8 million U.S. small businesses*

*Note: There are approximately 5.8 million small businesses in the U.S. that employ more than one person. There are approximately 22 million single-employee small businesses in the U.S. Sources: U.S. Census Bureau and Small Business Administration.

Bank switching is on the rise

• 15% of small businesses have requested competitive proposals for a new bank in the past 6 months

• 16% of small businesses plan to issue a RFP for new banks in the next 12 months

• The historical average for both is 10%

8

13%

19%

25%

34%

50%

Unhappy with currentcustomer service

Consolidation of bankingproviders

Need new products

Increased capital needs

Desire to reduce banking fees

Top factors driving issuance of RFPs

4%

7%

11%

22%

52%

A new investment bankingprovider

A new international bankingprovider

A new cash managementservices provider

A new credit provider

A new comprehensivebanking provider

Focus of recent RFPs

Source: Greenwich Associates, “Wanted: New Banks for Small and Mid-Sized Companies,” August 2010

Reg Q repeal will create competitive shifts in DDA as the economy recovers and interest rates rise

• Big impact in the small business segment due to high concentration in DDA revenues (~ 75% of revenues) and mobility of these relationships due to low cross-sell of treasury management products

9 Source: McKinsey Payments Practice

• Significant product and price innovation in the industry

– Likely to be hybrid ECR offerings to shift deposits. Could result in inflows to interest-bearing DDA from business time and savings products

• Some businesses will close their sweep account if they deem the DDA interest rate competitive enough from an ROI perspective.

• Small business deposits “hiding” in retail migrate to interest-bearing business DDA.

– Small business accountholders keep a greater share of their funds in business DDA as a way to separate funds

• Attacker players (e.g., card issuers, brokerage firms) could be looking for more than $200 billion in incremental deposits and will likely price them aggressively

Receptive to packages, and most owners’ business decisions parallel their personal financial decisions

4% 5% 31% 31% 28%

When making financial decisions for your business, how similar is your decision-making process compared to how you make your

personal financial decisions? 2

1 = I make financial decisions for mybusiness very differently

2 3 4 5 = I make financial decisions for mybusiness in the exact same way

10

• 65% would consider switching to a bank that offered a bundle of financial services specifically designed to meet their business needs 1

Source: 1 BAI, “Small Business Payment Strategies,” 2006. 2 Forrester Research, “The State of Small Business Banking,” 2009.

• 39% prefer to receive financial services from several providers rather than from a single provider 1

• 51% of small businesses prefer to keep their business accounts with the same firm where they keep their personal accounts 2

Relationship-based product packaging is an essential tool to escape product commoditization

Deposits

Credit

Employee Related

Source: FIS Enterprise Strategy

• More cost-effective than cross-selling the same product mix over time

• More difficult for competitors to copy

• More difficult for customers to comparison/price shop

• Improve customer engagement and longevity

• More profitable

11

Transactions & Cash Mgmt.

12








As companies become larger and more complex, they consume more financial services

13

Number of financial services used

1.51* 1.72 1.82 1.90 1.94 2.01

2.01 2.32 2.39 2.57 2.78 2.74

0.25

0.54 0.60 0.87

1.09 1.38

1.71

2.01 1.95 1.95

2.09 2.18

0.58

1.15 1.44

1.52

1.88 2.15

0.23

0.49 0.66

0.90

1.04

1.16

0.39

0.56

0.58

0.60

0.62

0.68

LT $500K $500K - $1M $1 - $2M $2 - $5M $5 - $10M $10 - $20M

Payroll Services

Employee BenefitFinancial Services

Secured Credit

Unsecured Credit

Cash ManagementServices

Payments

Deposits

6.67

8.79

9.43

10.31

11.43

12.29

*Read as: Small businesses with annual revenue less than $500,000 own 1.51 deposit services, on average n = 2,058 Source: FIS Enterprise Strategy, November 2010

Larger companies have a greater capacity to use liquid savings products

14

Number of deposit services used

1.00 1.00 1.00 1.00 1.00 1.00

0.37* 0.50 0.56 0.62 0.67 0.66

0.14

0.22 0.26

0.29 0.27 0.35

LT $500K $500K - $1M $1 - $2M $2 - $5M $5 - $10M $10 - $20M

Certificate of Deposit

Business Savings orMoney Market Account

Checking Account

1.51

1.72 1.82

1.90 1.94

2.01

*Read as: Small businesses with annual revenue less than $500,000 have a 37% incidence of owning Savings or Money Market Account services n = 2,058 Source: FIS Enterprise Strategy, November 2010

Adoption of ACH and wire transfer services expand as companies get larger (particularly at $2M+)

15

Number of payment services used

0.68* 0.75 0.75 0.68 0.72 0.65

0.54 0.51 0.47 0.45 0.40

0.40

0.40 0.53 0.52

0.55 0.59 0.51

0.21

0.28 0.35 0.48 0.57

0.63 0.18

0.26 0.30 0.41

0.50 0.55

LT $500K $500K - $1M $1 - $2M $2 - $5M $5 - $10M $10 - $20M

ACH Services

Wire Transfer Services

Merchant Credit CardProcessing

Debit Card

Online Bill Payment

2.01

2.32 2.39

2.57

2.78 2.74

*Read as: Small businesses with annual revenue less than $500,000 have a 68% incidence of owning online bill payment services n = 2,058 Source: FIS Enterprise Strategy, November 2010

16

Number of cash management services used

0.07* 0.13 0.13

0.20 0.17 0.24 0.07

0.13 0.14

0.21 0.28

0.37

0.06

0.11 0.13

0.16

0.21

0.28

0.04

0.10 0.14

0.22

0.33

0.32

0.02

0.07 0.06

0.09

0.11

0.17

LT $500K $500K - $1M $1 - $2M $2 - $5M $5 - $10M $10 - $20M

Positive Pay

Sweep Accounts

Lockbox

Remote DepositCapture

AccountReconciliationProcessing

Adoption of cash management services increases significantly as companies get larger ($2M is a key inflection point)

0.25

0.54

0.60

0.87

1.09

1.38

*Read as: Small businesses with annual revenue less than $500,000 have a 7% incidence of owning account reconciliation processing services n = 2,058 Source: FIS Enterprise Strategy, November 2010

Not a great deal of variation in unsecured credit use, other than in unsecured loans/lines

17

Number of unsecured credit services used

0.68* 0.76 0.78 0.80 0.83 0.81

0.47 0.52 0.42 0.43

0.48 0.49

0.48

0.51 0.53 0.47

0.46 0.51 0.08

0.22 0.22 0.26

0.31 0.38

LT $500K $500K - $1M $1 - $2M $2 - $5M $5 - $10M $10 - $20M

Unsecured Short-TermLoans or WorkingCapital Lines of Credit

Overdraft Protection

Personal Credit Card(s)

Business Credit Card(s)

1.71

2.01 1.95 1.95

2.09 2.18

*Read as: Small businesses with annual revenue less than $500,000 have a 68% incidence of owning business credit cards n = 2,058 Source: FIS Enterprise Strategy, November 2010

Adoption of secured forms of credit becomes much more prevalent as company size increases

18

Number of secured credit services used

0.18* 0.34 0.36

0.45 0.49 0.60 0.15

0.30 0.37

0.37 0.46

0.52

0.09

0.18

0.25 0.26

0.32

0.39

0.08

0.17

0.28 0.25

0.31

0.37

0.04

0.06

0.11 0.10

0.14

0.11

0.03

0.09

0.07 0.09

0.15

0.16

LT $500K $500K - $1M $1 - $2M $2 - $5M $5 - $10M $10 - $20M

International (ForeignExchange, Import/ExportLetters of Credit)

SBA Loans

Commercial PropertyMortgage

Term Loans or EquipmentFinancing

Equipment Lease

Credit Lines Secured byReceivables, Inventory,Property or Other Assets

0.58

1.15

1.44 1.52

1.88

2.15

*Read as: Small businesses with annual revenue less than $500,000 have an 18% incidence of owning secured credit lines n = 2,058 Source: FIS Enterprise Strategy, November 2010

As company size increases, so does the adoption of financial services linked to employee benefits

19

Number of other employee benefit-related financial services used

0.15*

0.31 0.43

0.58 0.70

0.78

0.08

0.18

0.23

0.32

0.34

0.38

LT $500K $500K - $1M $1 - $2M $2 - $5M $5 - $10M $10 - $20M

Health Savings Account

Company Sponsored401(k), SEP or ProfitSharing Plan

0.23

0.49

0.66

0.90

1.04

1.16

*Read as: Small businesses with annual revenue less than $500,000 have a 15% incidence of owning company sponsored 401(k), SEP or Profit Sharing Plans n = 2,058 Source: FIS Enterprise Strategy, November 2010

Above $500,000 in annual revenue, there is not a high degree of variation in payroll services adoption

20

Number of payroll services used

0.29*

0.42 0.45

0.49 0.47 0.54

0.10

0.15 0.13

0.11 0.16

0.14

LT $500K $500K - $1M $1 - $2M $2 - $5M $5 - $10M $10 - $20M

Payroll Cards

Outsource Payroll

0.39

0.56 0.58

0.60 0.62

0.68

*Read as: Small businesses with annual revenue less than $500,000 have a 29% incidence of using outsourced payroll services n = 2,058 Source: FIS Enterprise Strategy, November 2010

Packaging opportunities: Financial services adopted by more than 50% of small businesses

21

LT $500K $500K -

$1M $1 - $2M $2 - $5M $5 - $10M

$10 - $20M

1. Checking Account

2. Debit Card

3. Online Bill Payment

4. Overdraft Protection

5. Personal Credit Card(s)

6. Business Credit Card(s)

7. Business Savings or MMA

8. Merchant Credit Card Processing

9. Outsource Payroll

10. Retirement or Profit Sharing Plan

11. Wire Transfer Services

12. Secured Credit Line

13. ACH Services

14. Equipment Lease

n = 2,058 Source: FIS Enterprise Strategy, November 2010

22








Strong small business demand for RDC and deposit services is anticipated

23

2.6%

2.7%

3.1%

3.1%

3.3%

3.3%

3.6%

4.6%

5.2%

5.5%

6.2%

11.0%*

ACH Services

Lockbox

Overdraft Protection

Merchant Credit Card Processing

Wire Transfer Services

Debit Card

Positive Pay

Sweep Accounts

Account Reconciliation Processing

Business Savings or MMA

Certificate of Deposit

Remote Deposit Capture

Projected increase in service ownership over the next 12 months (Current don’t use but plan to use minus those that plan to discontinue use)

*Read as: The percent of small businesses that plan to start using remote deposit capture (net of the percent that plan to discontinue usage) is 11.0% n = 2,058 Source: FIS Enterprise Strategy, November 2010

Strong small business demand is anticipated for SBA loans, international services and other forms credit

24

-4.2%

1.5%

2.0%

3.5%

4.1%

5.2%

5.4%

5.6%

6.8%*

Business Credit Card(s)

Equipment Lease

Credit Lines Secured by Receivables, Inventory,Property or Other Assets

Commercial Property Mortgage

International (Foreign Exchange, Import/ExportLetters of Credit)

Term Loans or Equipment Financing (one year+)

Unsecured Short-Term Loans or Working Capital Linesof Credit (less than one year)

SBA Loans


Personal Credit Card(s)

*Read as: The percent of small businesses that plan to start using SBA loans (net of the percent that plan to discontinue usage) is 6.8% n = 2,058 Source: FIS Enterprise Strategy, November 2010

Strong small business demand is projected for HSAs and retirement/profit sharing services

25

2.1%

7.1%

10.3%*

Payroll Cards

Company Sponsored 401(k), SEP or Profit Sharing Plan

Health Savings Account


*Read as: The percent of small businesses that plan to start using Health Savings Accounts (net of the percent that plan to discontinue usage) is 10.3% n = 2,058 Source: FIS Enterprise Strategy, November 2010

26








Nearly 90% of small businesses use the branch on at least a monthly basis

27

11%*

7%

22%

18%

8%

6%

9%

19%

Zerotimes

Once 2 - 3times

4 - 5times

6 - 7times

8 - 9times

10 - 14times

15 times ormore

Number of Business Related Branch Visits in the Past 30 Days

*Read as: 11% of small businesses did not visit their branch in the past 30 days n = 2,058 Source: FIS Enterprise Strategy, November 2010

Nearly half of small businesses access their business checking accounts online at least daily

28

14%*

33%

22%

10%

7%

13%

1%

Multiple timesper day

Daily 2 to 4times per

week

Onceper week

Once every2 - 4 weeks

Not at all Cannot recall

Number of Times Accessing Business Checking Account Using the Internet Over the Past 30 Days

*Read as: 14% of small businesses access their business checking accounts multiple times each day n = 2,058 Source: FIS Enterprise Strategy, November 2010

Reviewing account information, transferring funds and making tax payments are the most common online activities

29 *Read as: 91% if small businesses doing online banking review balances and transaction activity and plan to continue it n = 1,762 Source: FIS Enterprise Strategy, November 2010

91%*

73%

57%

43%

35%

35%

32%

Review Balance & Transaction Activity

Transfer Money Between Accounts within the Bank

Make Tax Payments

Initiate Stop Payments

Initiate Wire Transfers

Transfer Money Between Accounts at DifferentInstitutions

Export Account Data into Internal AccountingSystems

Currently Use and Plan to Continue Using in the Next 12 Months

30








What do small businesses really want from their banking and payments providers?

31

Help me with the Basics: Save Time & Save Money

Help me manage Cash Flow

Help manage my

Balance Sheet

Help with

Administration

Give

Advice

While price sensitive, they are willing to pay for

services that increase convenience or save time

Source: Aite Group

Usability = Key

Source: FIS Commercial Treasury Services

Existing product sets become solutions

32

Help me with the Basics:

Save Time & Save Money

Help me manage Cash Flow

Help manage my

Balance Sheet

Help with

Administration

Give

Advice

Source: FIS Commercial Treasury Services

• Wealth Management

• 401(k), SEP, Profit Sharing Plans

• Payroll

• Direct Deposit

• HSA cards

• Import banking data into internal accounting systems

• Investments

• eStatements

• Cash flow forecasting

• Invoice presentment

• Bill pay

• Corporate card with

rewards

• DDA

• Money Market

• ACH

• Merchant capture

• Business eBanking, mobile

• Line of credit

• Sweep account

• Merchant card processing

• Tax payments

• Lockbox

• Account Reconciliation

How could you turn your existing product sets into solutions?

Thank you

Paul McAdam

SVP, Research & Thought Leadership

708-449-7743

[email protected]

Gail Angel

SVP, Commercial Treasury Services

773-907-2400

[email protected]

33

What Small Business Wants from Banking & Payments

Economy & Finance

Transcript of What Small Business Wants from Banking & Payments