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

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

2

Research Methodology

• 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)

3

Respondents by annual revenue and number of employees

Annual Revenue Number of Employees
(2009)

2 to 5 employees 21%**
Under $500,000 24%*

6 to 10 employees 16%

$500,000 to $999,999 19%


$1 million to $1.99 million 19%

$2 million to $4.99 million 20%

$5 million to $19.99 million 19% 101 or more employees 6%

*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 4
Source: FIS Enterprise Strategy, November 2010

Key small business lines of trade were well represented
Company's Primary Business

Professional, Scientific or Technical Services 13% *
Retail Trade 13%
Construction 10%
Healthcare or Social Assistance 8%
Accommodation or Food Services 7%
Financial or Insurance Services 7%
Wholesale Trade 6% Over 100 completed
Real Estate Sales, Rental or Leasing 5% surveys within
Non-Profit, Charity, Civic, Social or Religious Organization 5%
these lines of trade

Manufacturing 4%
Transportation or Warehousing 4%
Arts, Entertainment or Recreation 3%
Information 3%
Administrative & Support Services 3%
Repair and Maintenance Services 2%
Educational Services 2%
Personal Care Services 2%
Agriculture, Forestry, Fishing, Mining 1%
Other 2%

*Read as: 13% of small businesses in the sample are professional, scientific or technical services
n = 2,248 5



Factors Driving the Need for Product Packages





6

Why the focus on relationship-based product packages?

Reg Q repeal will unleash
Bank switching is on the rise innovation and new
competition

5.8 million U.S. small
businesses*

Customers want simplicity
Product packaging enhances
and a comprehensive
profitability
relationship

*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. 7

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%

Top factors driving issuance of RFPs Focus of recent RFPs

A new comprehensive
Desire to reduce banking fees 50% 52%
banking provider

Increased capital needs 34% A new credit provider 22%

A new cash management
Need new products 25% 11%
services provider

Consolidation of banking A new international banking
19% 7%
providers provider

Unhappy with current A new investment banking
13% 4%
customer service provider

Source: Greenwich Associates, “Wanted: New Banks for Small and Mid-Sized Companies,” August 2010 8

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
• 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

Source: McKinsey Payments Practice 9

Receptive to packages, and most owners’ business decisions
parallel their personal financial decisions
• 65% would consider switching to a bank that offered a bundle of financial
services specifically designed to meet their business needs 1
• 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

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 my 2 3 4 5 = I make financial decisions for my
business very differently business in the exact same way

4% 5% 31% 31% 28%

Source: 1 BAI, “Small Business Payment Strategies,” 2006. 10
2 Forrester Research, “The State of Small Business Banking,” 2009.

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

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

• More difficult for competitors to
Transactions copy
Employee & Cash
Related
Mgmt. • More difficult for customers to
comparison/price shop

• Improve customer engagement and
Credit longevity

• More profitable

Source: FIS Enterprise Strategy 11








12

As companies become larger and more complex, they
consume more financial services
Number of financial services used
12.29
11.43 Payroll Services
0.68
10.31 0.62 1.16
9.43 1.04 Employee Benefit
0.60
8.79 Financial Services
0.90 2.15
0.58
1.88
0.56 0.66 Secured Credit
0.49 1.52
6.67 1.44
1.15 2.18
0.39 2.09
1.95 Unsecured Credit
0.23
0.58 2.01 1.95
1.09 1.38
0.87
1.71
0.54 0.60 Cash Management
0.25
Services
2.57 2.78 2.74
2.32 2.39
2.01 Payments

1.72 1.82 1.90 1.94 2.01
1.51* Deposits

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

*Read as: Small businesses with annual revenue less than $500,000 own 1.51 deposit services, on average
n = 2,058 13

Larger companies have a greater capacity to use liquid
savings products
Number of deposit services used

2.01
1.94
1.90
1.82
1.72 0.35
0.27
0.29
0.26 Certificate of Deposit
1.51 0.22

0.14
0.62 0.67 0.66
0.50 0.56
0.37*
Business Savings or
Money Market Account

1.00 1.00 1.00 1.00 1.00 1.00 Checking Account

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

*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 14

Adoption of ACH and wire transfer services expand as
companies get larger (particularly at $2M+)
Number of payment services used
2.78
2.74
2.57
2.39 0.50
2.32 0.55 ACH Services
0.41
2.01 0.26 0.30

0.57
0.18 0.28 0.35 0.48 Wire Transfer Services
0.63
0.21
0.53 0.52
0.40 0.55 0.59 Merchant Credit Card
0.51 Processing

0.54 0.51 0.47
0.45 0.40 Debit Card
0.40

0.68* 0.75 0.75 0.68 0.72 0.65 Online Bill Payment

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

*Read as: Small businesses with annual revenue less than $500,000 have a 68% incidence of owning online bill payment services
n = 2,058 15

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

1.38

Positive Pay
0.17

1.09

0.11 0.32 Sweep Accounts
0.87

0.09 0.33
0.28 Lockbox
0.60 0.22
0.54
0.06 0.21
0.07 0.16 Remote Deposit
0.14
0.10 0.37 Capture
0.25 0.13
0.11 0.21 0.28
0.02
0.04 0.13 0.14 Account
0.06
0.07 0.20 0.24 Reconciliation
0.13 0.13 0.17
0.07* Processing

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

*Read as: Small businesses with annual revenue less than $500,000 have a 7% incidence of owning account reconciliation processing services
n = 2,058 16

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

2.18
2.09
2.01 Unsecured Short-Term
1.95 1.95
0.38 Loans or Working
0.22 0.31 Capital Lines of Credit
1.71 0.22 0.26
0.08
0.46 0.51 Overdraft Protection
0.51
0.53 0.47
0.48

0.48 0.49
0.52 0.42 0.43 Personal Credit Card(s)
0.47

0.76 0.78 0.80 0.83 0.81 Business Credit Card(s)
0.68*

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

*Read as: Small businesses with annual revenue less than $500,000 have a 68% incidence of owning business credit cards
n = 2,058 17

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

2.15 International (Foreign
0.16 Exchange, Import/Export
1.88 Letters of Credit)
0.11
0.15 SBA Loans
0.14 0.37
1.52
1.44
0.09 0.31
0.07 0.10 Commercial Property
0.11 0.39 Mortgage
1.15
0.25
0.09 0.28 0.32
0.06
0.26 Term Loans or Equipment
0.17
0.25 0.52 Financing
0.58 0.18 0.46
0.37
0.03 0.37 Equipment Lease
0.04 0.30
0.08
0.09
0.15 0.60
0.45 0.49
0.34 0.36 Credit Lines Secured by
0.18*
Receivables, Inventory,
LT $500K $500K - $1M $1 - $2M $2 - $5M $5 - $10M $10 - $20M Property or Other Assets

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

As company size increases, so does the adoption of financial
services linked to employee benefits
Number of other employee benefit-related financial services used

1.16

1.04

0.90 0.38

0.34 Health Savings Account

0.66 0.32

0.49 0.23 Company Sponsored
401(k), SEP or Profit
0.18 0.78 Sharing Plan
0.70
0.23 0.58
0.43
0.08
0.31
0.15*

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

*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 19

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

0.68

0.62
0.60
0.58 0.14
0.56 Payroll Cards
0.11 0.16
0.13
0.15

0.39

0.10 Outsource Payroll

0.54
0.49 0.47
0.45
0.42

0.29*

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

*Read as: Small businesses with annual revenue less than $500,000 have a 29% incidence of using outsourced payroll services
n = 2,058 20

Packaging opportunities: Financial services adopted by more
than 50% of small businesses
$500K - $10 -
LT $500K $1 - $2M $2 - $5M $5 - $10M
$1M $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 21








22

Strong small business demand for RDC and deposit services
is anticipated
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)

Remote Deposit Capture 11.0%*

Certificate of Deposit 6.2%

Business Savings or MMA 5.5%

Account Reconciliation Processing 5.2%

Sweep Accounts 4.6%

Positive Pay 3.6%

Debit Card 3.3%

Wire Transfer Services 3.3%

Merchant Credit Card Processing 3.1%

Overdraft Protection 3.1%

Lockbox 2.7%

ACH Services 2.6%

*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 23

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


SBA Loans 6.8%*

Unsecured Short-Term Loans or Working Capital Lines
5.6%
of Credit (less than one year)
Term Loans or Equipment Financing (one year+) 5.4%

International (Foreign Exchange, Import/Export
5.2%
Letters of Credit)
Commercial Property Mortgage 4.1%

Credit Lines Secured by Receivables, Inventory,
3.5%
Property or Other Assets
Equipment Lease 2.0%

Business Credit Card(s) 1.5%

-4.2% 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 24

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


Health Savings Account 10.3%*

Company Sponsored 401(k), SEP or Profit Sharing Plan 7.1%

Payroll Cards 2.1%

*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 25








26

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

Number of Business Related Branch Visits in the Past 30 Days

22%

19%
18%

11%*

8% 9%
7%
6%

Zero Once 2-3 4-5 6-7 8-9 10 - 14 15 times or
times times times times times times more

*Read as: 11% of small businesses did not visit their branch in the past 30 days
n = 2,058 27

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

Number of Times Accessing Business Checking Account Using the
Internet Over the Past 30 Days
33%

22%

14%*
13%
10%
7%

1%

Multiple times Daily 2 to 4 Once Once every Not at all Cannot recall
per day times per per week 2 - 4 weeks
week

*Read as: 14% of small businesses access their business checking accounts multiple times each day
n = 2,058 28

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

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

Review Balance & Transaction Activity 91%*

Transfer Money Between Accounts within the Bank 73%

Make Tax Payments 57%

Initiate Stop Payments 43%

Initiate Wire Transfers 35%

Transfer Money Between Accounts at Different
35%
Institutions
Export Account Data into Internal Accounting
32%
Systems

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








30

What do small businesses really want from their banking
and payments providers?
While price sensitive,
they are willing to pay for
Give
Advice
services that increase
convenience or save time
Help with Source: Aite Group
Administration

Help manage my
Balance Sheet
Usability = Key

Help me manage Cash Flow

Help me with the Basics: Save Time & Save Money

Source: FIS Commercial Treasury Services
31

Existing product sets become solutions
How could you turn
your existing product
sets into solutions?
Give • Wealth Management
• 401(k), SEP, Profit Sharing Plans
Advice
• Payroll
Help with • Direct Deposit
Administration • HSA cards
• Import banking data into internal accounting systems

• Investments
Help manage my • eStatements
Balance Sheet • Cash flow forecasting

• Invoice presentment • Tax payments
• Bill pay • Lockbox
Help me manage Cash Flow • Corporate card with • Account Reconciliation
rewards

• DDA • Business eBanking, mobile
Help me with the Basics: • Money Market • Line of credit
Save Time & Save Money • ACH • Sweep account
• Merchant capture • Merchant card processing

Source: FIS Commercial Treasury Services
32

Thank you

Paul McAdam
SVP, Research & Thought Leadership
708-449-7743
Paul.McAdam@fisglobal.com

Gail Angel
SVP, Commercial Treasury Services
773-907-2400
Gail.Angel@fisglobal.com

33

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