With the ending of SBA Payment Protection Program (PPP) loans, banks’ small business loan portfolios declined significantly in the second half of 2021. However, in line with the economic recovery, the outlook for small businesses appears positive entering 2022 (pandemic permitting). With this in mind, we observed the following trends in small business marketing, thought leadership and product development during 4Q21 as both traditional and challenger banks jockeyed for position in the small business market.
Financial providers continued to market to small businesses in a variety of ways, such as:
Developing campaigns and messaging around small business events, such as Women’s Small Business Month (in October) and Small Business Saturday (in November).
Financial providers are pursuing a multi-faceted approach to small business thought leadership, including:
Coverage of a broad range of topics of interest to small business owners
Increase in content targeted at different business owner segments and industries
Multiple content formats, led by articles and blogs, but providers are also increasingly using other content types, such as newsletters, videos, infographics and podcast series. (Bank of the West launched the Means & Matters podcast focused on women business owners. Cadence Bank introduced Good Companies, its first podcast.)
Continued focus on portals to organize content. Regions extended its Next Step sub-brand with the launch of the Next Step for Business portal.
With a significant majority of small businesses embracing digital channels, banks are expanding digital functionality and using these channels for both service and sales.
KeyBank reported a 50% rise in digitally active small business clients post-pandemic.
In a November 2021 presentation, U.S. Bank reported that the digital channel’s share of small business sales rose 2.5 times over the previous year.
Huntington Bank reported that digital channels accounted for 16% of new business deposit accounts, up from 12% in 2Q21 (and 0% in 3Q20).
Traditional banks are facing competition from a diverse array of challengers that are launching new products, aggressive pricing and a focus on the digital experience.
American Express sought to take advantage of its leadership small business payments by launching Kabbage Funding and the Amex Business Checking app.
Intuit launched the Money by QuickBooks mobile app and QuickBooks Checking.
Leading issuers launched new small business cards to capture a share of the expected strong growth in small business card spending in 2022.
In 2022, we expect that most of these trends will continue as new entrants look to identify and exploit market gaps, and incumbents focus on protecting and growing their small business customer bases by refining their positioning, products, offers and customer experience.
As the U.S. economic recovery picked up speed in the third quarter of 2021, the decline in commercial line utilization that had taken place throughout the pandemic started to bottom out. Even though commercial loans continue to decline on a year-over-year (y/y) basis, banks are reporting very strong growth in their commercial loan pipelines. In the expectation that economic growth will continue to recover and this will translate to growth in commercial loans, banks are already starting to position themselves to capture their share of this growth.
With this in mind, the following is a list of five commercial banking initiatives that banks pursued in the third quarter of 2021:
Revisiting commercial banking capabilities. In a commercial banking environment characterized by changing customer priorities, the advent of innovative financial technologies and the emergence of new competitors, many banks are revisiting their commercial banking value proposition. This is seen in the articulation of new commercial banking strategies in recent company filings and investor presentations as well as in recent commercial banking videos from banks like Truist and Citi.
Publishing industry-specific thought leadership. By focusing resources on industries that have strong growth potential and/or that are under-served, banks can improve ROI. One of the best ways to build engagement within these sectors is by publishing industry-specific content (e.g., articles, blogs, newsletters, reports, podcasts and webinars). Many banks also look to turn this content into a prospect generation tool by listing relevant executives (often with email and direct phone numbers) in these publications.
Developing a series of branded content, which both increases awareness of this content and facilitates promotion across multiple platforms. Examples of branded content series include:
Providing value-added treasury management and commercial payment tools. With businesses increasingly comfortable with applying new technology solutions to enhance business efficiency and productivity, banks have launched a number of treasury management and commercial payment tools, including:
Increasing focus on ESG. In addition to annual ESG and CSR reports, many banks are publishing ESG-related content for their commercial clients. Examples in 3Q21 included Bank of the West’s Means & Matters Stories of Money and Sustainability and the BMO Harris Sustainability Leaders podcast. Citizens went even further by launching Green Deposits for its corporate clients.
Most leading U.S. credit card issuers reported relatively strong y/y growth in outstandings in the first quarter of 2018.
Breaking these growth rates out by FICO Score segment, we see that issuers generated growth across multiple FICO Score categories.
There are important differences in the FICO composition of card portfolios. The <660 FICO Score segment accounted for 34% of Capital One’s portfolio, a much higher percentage than other issuers, such as Fifth Third (3%), Chase (7%), KeyBank (11%), Citi (16%) and Discover (19%).
Among the largest issuers, one of the most notable trends was strong growth in the low-prime/sub-prime and super-prime segments, but low/no growth in their prime portfolio. Bank of America grew its sub-prime (<620) outstandings by 6% and its super-prime (>720) increased 8%. However, its loan portfolio held by consumers with FICO scores between 620 and 739 only increased by 2%.
Most regional bank card issuers (such as PNC, SunTrust and Regions) reported strong growth in their sub-prime and near-prime portfolios. Fifth Third’s <660 FICO Score portfolio rose 43%, but this category only accounts for 3% of the bank’s credit card portfolio, so growth was from a very low base.
As issuers enjoy strong growth in their credit card outstandings—especially for sub-prime and near-prime consumer segments—it is worth noting that charge-offs are also on the increase. Most issuers reported double-digit y/y basis-point growth in their credit card net charge-off rates. Four of the 12 issuers below now have charge-off rates of more than 4%, and only one (American Express) has a charge-off rate of less than 3%.
So, while issuers want to grow credit card loans across the FICO Score spectrum, they need to ensure that various functions are all calibrated to ensure that cardholder delinquencies and charge-offs remain at manageable levels. These functions include:
Marketing: targeting, offer development, and messaging
Pricing: fees and APRs need to be set at levels that balance cardholder ability to pay with an appropriate margin to offset potentially higher charge offs
Customer support: onboarding, financial education, as well as early engagement in cases where cardholders experience payment challenges