When nbkc bank began offering its small business bank accounts nationwide, management’s first priority was to ensure the accounts had low fees, if any.
At the time — back in 2018 — it was an unusual move by a bank, said Kansas City Area Bank chief deposit officer Melissa Eggleston. The $1.1 billion wealth bank made a strategic decision to forego 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 announces that business owners pay no fees for a range of services, including inbound wire transfers from anywhere in the US, online banking and bill payment.
“It was a breath of fresh air for her,” Eggleston said. “In the past, a small business customer walked into a local bank expecting a comprehensive fee schedule.”
Now nbkc bank has small business customers in all 50 states. According to data from the Federal Deposit Insurance Corp. their deposits doubled to $866 million from the end of 2017 to June 30, 2022. Specifically, the bank’s noninterest-bearing deposits, which include these small business accounts, have increased from just $44 million to nearly $420 million over the same period, according to the FDIC.
Not surprisingly, nbkc’s fee-free or fee-free small business accounts are popular. On the retail side, there is a greater focus on so-called junk fees that banks charge consumers. The fees small business owners pay haven’t received the same attention, but experts say bankers should do well to keep in mind that these clients are also similarly opposed to paying fees that add little to the relationship.
“Small businesses hate paying fees, especially those often associated with their checking accounts. That’s one of the most important things owners will say,” said Mary Beth Sullivan, managing partner of Washington, DC-based banking consulting firm Capital Performance Group. “After that, small business owners are a little less price conscious because if they need help, they’re willing to go for it to pay. The key is to be very clear about the value they are getting for the fees they pay.”
A universal aversion to fees
Banking is a notoriously “sticky” business, with customers reluctant to switch financial institutions.
This may be particularly true for commercial customers who generally have more complex needs than the typical retail customer. This reluctance to switch institutions was evident in a recent survey by American Banker’s parent company, Arizent, about what’s important to small business owners about banking. Only 16% of small businesses surveyed said they were “very likely” or “somewhat likely” to exit their community bank in the next two years, according to Arizent data. For global banks and regional banks, the figures were 15% and 24%, respectively.
However, when small business owners are extremely unlikely to switch banks, should financial institutions worry about irritating them with fees?
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 would be able to add or increase various fees without a small business customer walking away. But this strategy would likely limit that customer’s interactions with the bank.
Hui pointed out that research has shown that about a third of small business owners are always looking for credit. A business owner who is already fed up with his bank for a series of additional fees, often in addition to a monthly service fee, is inclined to look elsewhere to borrow those funds.
“If a small business owner wants to take on debt because they have opportunities to expand and grow, that’s a case where you want to have a good relationship with them and you’re the first call they make, especially if they’re also looking to expand on.” another service to support their business,” Hui said. “If the business owner just tolerates you, it doesn’t mean you’re in a good position to get the next business.”
In addition, there is a reputational risk in following a strategy of generating revenue through numerous fees, Hui said. A small business owner who stays with a bank purely for convenience is far less inclined to recommend that bank to a colleague.
Arizent’s Small Business Banking Survey confirmed Hui’s argument. Fees have often been cited as a source of irritation by “critics” – customers who are unlikely to recommend their financial institution to others.
“The service is terrible and the fees are excessive,” said one survey respondent.
“I like my banking relationship, but they recently added a monthly service fee to my account,” said a second respondent.
“The bank I had 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 business.
Vincent Hui, Managing Director of Cornerstone Advisors
36 percent of small business owners said competitive pricing and low fees are “critical” when choosing a primary institution. About 3% of business owners said fees are “not very important” or “not important at all.”
“Fees 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 switch their accounts to another bank. There can be a tremendous backlash.”
The fees that banks charge can generally be broken down into two categories, said Grayson Tuck, president of the law firm Gerrish Smith Tuck in Memphis, Tennessee. First, there are fees on the loan side, mainly processing fees on a loan, on top of the interest that the borrower pays.
Then there are fees that bank customers, including small businesses, face on the deposit side. These could include a monthly service fee, which can be as high as $30 per month, and fees for certain services, such as
Banks can justify charging these fees to business customers, and not necessarily consumers for the same service, because doing business is typically more involved and requires more time and staff, Tuck said.
“Banks will earn fees where they can get them,” he added.
Structure fees better
Arizent’s survey found that many financial institutions could do better in their approach to entrepreneur fees. According to the survey, there was a significant gap between small business owners, who cited competitive fees as an area of critical importance to them, and those who were satisfied with what they pay for banking services. That means this is an area where financial institutions could improve.
Experts suggested that banks just looking for ways to make extra money, rather than adding value to the relationship, are cutting fees. This may involve understanding what is important for each individual small business owner. For example, some borrowers are reluctant to pay a loan processing fee but don’t mind paying a slightly higher interest rate to avoid that initial charge.
“Most small businesses may not look at a fee in the singular, but at the total cost of the relationship and the total benefit of the relationship,” Tuck said. “Does the effort justify the benefit?”
Most small business owners who understand the economics of running a successful business are willing to pay for services they believe will add value to their banking relationship, experts say. This may include payroll services or treasury management. Simplifying the fee structure can also go a long way in generating goodwill.
“In my opinion, it’s more about being nickel and dimed than business owners not wanting to pay,” Sullivan said. “They don’t have the time to track $5 here and there. Just sum it all up and tell me what it costs, give me a package that will cost me X a month but everything is free.”
Aside from toll-free or toll-free verification, nbkc has additional services for small business owners to use such as: B. ACH originations to pay vendors or employees, and nbkc bank also has a relationship with Autobooks that can be leveraged to support invoicing, Eggleston said. The bank charges the customer for these services.
Eggleston stressed that the bank is always listening to its small business customers to see what additional products or services they want to help run their businesses more smoothly.
“Everyone talks about growth and how important relationship growth is, but I think the thought of just understanding your existing portfolio is just as important,” she added. “I would encourage listening to your customers and asking them questions to understand their banking problems today and what they wish they were doing differently. The last thing we want is for people to come in the front door and then go out the back door.”