Banks underestimate small-business owners’ aversion to fees at their peril

When nbkc bank started offering its small-business banking accounts nationwide, management’s first priority was to ensure the accounts had low fees, if any at all.

At the time — back in 2018 — this was an unusual move by a bank, said Melissa Eggleston, chief deposit officer for the Kansas City area bank. The $1.1 billion-asset bank made the strategic decision to forgo the short-term revenue that 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 proclaims that business owners will pay no fees for a range of services, including incoming wire transfers from anywhere in the U.S, online banking and bill payment.

“It was a breath of fresh air for them,” Eggleston said. “Historically a small-business customer would walk into a local bank and expect an extensive fee schedule.”

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Melissa Eggleston, chief deposit officer of nbkc bank, said that her institution’s low- and no-fee checking account was “a breath of fresh air for” for small-business customers.

Paul Versluis

Now, nbkc bank has small-business customers in all 50 states. Its deposits doubled to $866 million from the end of 2017 to June 30, 2022, according to data from the Federal Deposit Insurance Corp. Specifically, the bank’s non-interest-bearing deposits, which includes these small-business accounts, have surged from just $44 million to almost $420 million over that same period, according to the FDIC.

It’s not surprising that nbkc’s low- or no-fee small-business accounts have been popular. On the retail side, there has been a greater focus on so-called junk fees that banks charge consumers. The fees small-business owners pay haven’t received the same level of attention, but experts say bankers would be wise to keep in mind that these customers are also similarly opposed to paying fees that come across as adding little to the relationship.

“Small businesses hate to pay fees, especially those often associated with their checking accounts. That’s one of the top things owners will say,” said Mary Beth Sullivan, managing partner at the bank consulting firm Capital Performance Group in Washington, D.C. “Having said that, small-business owners are a little less price sensitive because if they need help, they are willing to pay for it. The key is to make very clear the value received for the fees being paid.”

A universal loathing of fees

Banking is an infamously “sticky” business, with customers reluctant to change financial institutions.

This can be especially true for commercial clients, who generally have more complex needs than the typical retail consumer. This reluctance to switch institutions came through in a recent survey from Arizent, American Banker’s parent company, on what matters for small-business owners when it comes to banking. Only 16% of the small businesses surveyed said they were “very likely” or “somewhat likely” to leave their community bank in the next two years, according to Arizent’s data. For global banks and regional banks, those figures were 15% and 24%, respectively.

However, if small-business owners are extremely unlikely to switch banks, should financial institutions worry about irritating them with fees?

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The answer to that question is undoubtedly yes, said Vincent Hui, managing director at Cornerstone Advisors in Scottsdale, Arizona. It’s true that many banks would be able to get away with adding or increasing various charges without a small-business customer walking away. But this strategy would likely limit that customer’s interactions with the bank.

Hui noted that research has shown that about a third of small-business owners are looking to borrow at any given time. An entrepreneur who is already irritated with his or her bank over a range of additional charges, often on top of a monthly service fee, is apt to look elsewhere to borrow those funds.

“If a small-business owner wants to take on debt because they have expansion and growth opportunities, that’s an instance where you want to have a good relationship with them and you are the first call they make, particularly if they are also looking to add on another service to help support their business,” Hui said. “If the business owner is merely tolerating you, that doesn’t mean you are in a good position to get that next piece of business.”

Additionally, there is a reputational risk in following a strategy of generating revenue through numerous fees, Hui said. A small-business owner who is simply staying with a bank out of convenience is far less inclined to recommend that bank to a colleague.

Arizent’s small-business banking survey backed up Hui’s point. Fees were frequently cited by “detractors” — customers who are not likely to recommend their financial institution to others — as a source of irritation.

“Service is terrible, and fees are excessive,” one survey respondent said.

“I like my banking relationship but they have recently added a monthly service fee to my account,” a second survey participant said.

“The bank I had used for 19 years sold to another bank. The new bank charges for almost everything you do,” another business owner said.

If the business owner is merely tolerating you, that doesn’t mean you are in a good position to get that next piece of business.

Vincent Hui, managing director at Cornerstone Advisors

Thirty-six percent of small-business owners said that competitive pricing and low fees were “critical” when selecting a primary institution. About 3% of business owners said fees were “not very important” or “not important at all.”

“Fees do create a bad experience,” said Rohit Arora, CEO of Biz2Credit, a New York-based online platform for small-business lending. “If the fees are too high, owners will switch their accounts over to another bank. There can be a tremendous amount of backlash.”

The fees banks charge can generally be broken down into two categories, said Grayson Tuck, president of the Memphis, Tennessee, law firm Gerrish Smith Tuck. First, there are fees on the lending side, primarily origination fees for a loan, in addition to whatever interest the borrower pays.

Then there are charges that bank customers, including small-businesses, face on the deposit side. These could include a monthly service fee, which can run as high as $30 a month, and charges for certain services, such as remote deposit capture, wire transfers, nonsufficient funds and treasury management.

Banks may justify charging commercial clients these fees, and not necessarily retail consumers for the same service, because a business relationship is typically more involved and requires more time and human resources, Tuck said.

“Banks will earn fees where they can get them,” he added.

A better way to structure fees

Arizent’s survey found that many financial institutions could be doing a better job of how they approach fees for entrepreneurs. There was a significant gap between the small-business owners who listed competitive fees as an area of critical importance to them and those who were satisfied with what they pay for banking services, according to the survey. That means this is an area where financial institutions could improve.

Experts suggested that banks cut fees that come across as merely looking for ways to earn an extra buck, rather than adding value to the relationship. This may involve understanding what matters to each individual small-business owner. For instance, some borrowers are loath to pay an origination fee for a loan but won’t mind paying a slightly higher interest rate to avoid that initial charge.

“Most small businesses may not look at one fee in the singular, but will look at the overall cost of the relationship and the overall benefit of the relationship,” Tuck said. “Does the cost justify the benefit?”

Most small-business owners, who understand the economics of running a successful enterprise, are willing to pay for services they feel add value to their banking relationship, experts said. This may include payroll services or treasury management. Simplifying the fee structure can also go a long way in generating goodwill.

“My sense is it is more about being nickel-and-dimed than it is business owners not wanting to pay,” Sullivan said. “They don’t have the time to track $5 here and there. Just wrap it all up and tell me what it costs, give me a package that will cost me X a month but everything is free.”

Besides its no- or low-fee checking, nbkc offers additional services for small-business owners to take advantage of, such as ACH originations to pay vendors or employees, and nbkc bank also has a relationship with Autobooks that can be used to help with invoicing, Eggleston said. The bank does charge customers for these services.

Eggleston emphasized that the bank is always listening to its small-business customers to see what additional products or services they want to help run their companies more smoothly.

“Everyone talks about growth and how important relationship growth is, but I think the notion of just understanding your existing portfolio is just as important,” she added. “I would encourage listening and polling your customers to understand their banking pain points today and the things that they wish were different. The last thing we want is for people to come in the front door and then leave out the back door.”

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