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November 1st: Torsten Jacobi, CEO of Creative Weblogging, joins host Anita Campbell. Sponsored by Six Disciplines. Show details.
Monday, September 26, 2005
Are Small Businesses Avoiding or Embracing Online Banking?
Entrepreneur magazine has an article by C. J. Prince about small businesses being slow to adopt online banking.

One of the main issues that holds back small businesses from adopting online banking is security. Small business owners fear for the security of their accounts when transactions occur online. (I happen to be quoted in the article on the reason that some small businesses do not adopt online banking.)

However, there is considerable nuance under the surface of the Entrepreneur article. I note that the article points to a January 2005 study by Edgar Dunn & Company. That study suggests that small businesses have become bullish on online banking. The Edgar Dunn survey reports that 58% of small businesses use Internet banking at least weekly -- a solid majority.

A different study cited in the article, this one conducted by Forrester Research in mid-2004, showed a much lower percentage -- 19% -- using online banking (download PowerPoint presentation here).

So why the discrepancy? Is there some explanation for this considerable difference in the two studies?

While I do not have access to the underlying survey data, one possible answer may be in the size of companies sampled. It is simpler for very small, no-employee businesses to do their banking online, compared with larger small businesses that may find the challenges associated with online banking to outweigh the benefits.

The Edgar Dunn survey sampled businesses with $50,000 up to $2 Million in revenue. Now, $50,000 in revenue means a very small business. Most likely a business with that level of revenue is a no-employee business -- in other words, a self-employed individual. The number of self-employed, no-employee businesses dominates in the U.S. -- there are some 17 million no-employee businesses according to the SBA, compared with 5.7 million with employees.

I would not be surprised to find that the majority of no-employee businesses use online banking, while the majority of businesses having employees do not. Their fundamental banking needs are just so different.

First let's examine the no-employee business. Often the self-employed person views his or her business banking as an extension of personal finances. This self-employed business owner places off-hour convenience at a premium, and online banking offers that. The bank account used may be limited to a plain vanilla business checking that is really just a step away from a personal checking account. Interfacing with a business accounting system is a pretty easy matter, too. The larger online banking sites typically enable easy one-step download to QuickBooks/Quicken, the accounting system most often used by no-employee businesses. So interfacing with other business systems is a no-brainer for the no-employee business owner.

It's only when you get to larger small businesses -- those with employees -- that the challenges start. By the time a business gets to say, 10 employees, banking needs have outgrown the plain vanilla checking account. The business may require online banking data to interface with other business software systems. There are payroll accounts and tax withholding issues. Cash management tools take on added importance. Suddenly, online banking becomes more complex, requiring more effort to implement it and more staff time to manage it. It's no wonder that small businesses at this level have less interest in online banking, despite the lure of automation. Sometimes, the cure is worse than the disease, and I suspect that is how larger small businesses view online banking, rightly or wrongly.

I'm interested in reader views -- do you agree, or is there some other explanation?

UPDATE October 7, 2005: More discussion is over at the Small Business Trends Forum.
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