Partners, Volume 13, Number 1, 2003

Branches Boosted by Small Business
By Lynn Woosley

In an age of ATMs and on-line banking, is the bank branch dead? Apparently not when it comes to serving small business customers.

According to a 2002 survey conducted by Barlow Research Associates, 85 percent of small business customers rely on bank branches and 71 percent on account officer contacts. These are the two avenues for fostering small business relationships most frequently used by approximately 1,000 small businesses that replied to the quarterly survey.

Fully half of the contacts between a small business and a bank occur in a branch office, the survey indicates. On-line and telephone banking, although growing, appear to be adjuncts to the core branch relationship, not substitutes. Direct mail has not been particularly effective in reaching the small business market, according to the survey.

Impact on small business loans

A Federal Reserve Bank of Atlanta working paper by Scott Frame, Michael Padhi and Lynn Woosley also supports the importance of branches in small business lending. The study, based on survey and regulatory information from 99 large banking companies, uses census tract demographics and small business revenue data to reveal several factors that influence small business lending in a given census tract. The following factors increased lending to small businesses: the use of credit scoring, institution asset size, institutional equity capital, corporate focus on small business lending, the presence of a branch in the census tract or banking market, rural locations and higher census tract small business revenues.

Although the presence of a branch, whether in the census tract or in the banking market outside the census tract, is strongly positive for small business lending for both the low- and moderate-income (LMI) and middle- to high-income (MHI) samples, branching appears to have a marginally greater impact in LMI areas. For the LMI sample, branches in the same census tract as the small business also appear to be somewhat more economically important than those located elsewhere in the banking market.

Small businesses seek access and advice

The results of the study may reflect the continuing importance of relationship banking, even in an age of increasing reliance on banking technology. The results may also indicate that small businesses prefer convenient access to their lenders and loan officers in addition to the benefits of traditional relationship banking.

Small business owners may also rely on branches for advice about personal and business finances, seeking input about everything from the best type of loan to the different types of products and services offered by the bank. In many cases financial institutions are responding to small businesses’ banking needs by expanding branches and enhancing training. In addition to helping bankers serve small businesses better, particularly those in LMI communities, the availability of expertise at the branch can be a selling point, even when loans are centrally underwritten.


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