Small businesses are statistically some of the most profitable customers available to banks, using a wide range of services for business and personal reasons.

Last year the top two lenders for small businesses were not banks at all, but the credit issuers Mountain West Financial and American Express. A third, Advanta Corp., which also provides credit cards and other forms of small business financing, was ranked in the top five.

For large institutions in particular, the small business battle is being fought on multiple fronts. These behemoths are feeling intense pressure not only from nonbanks, but from smaller community banks as well. According to Kathleen C. McClave, a consultant with Tillinghast-Towers Perrin, community banks are proving very attractive to small business owners who feel they they offer greater access to senior managers who can make decisions quickly and offer personalized advice. In addition, organizations such as Merrill Lynch & Co. and American Express are capitalizing on name-recognition and moving into the small business arena at cyber-speed.

Bullish on small business

Earlier this year, Merrill targeted the booming small business market via the Internet by announcing a new service for the 400,000 customers served by its Business Financial Services unit -- buying office supplies online. Customers of Works.com currently receive a 15 percent discount, and Merrill believes it can negotiate additional savings with suppliers aimed exclusively for small business customers.

Another advantage to this plan is that half of Merrill Lynch's customers use the company's small business cash management account, or Working Capital Management Account (WCMA). Customers will be able to centrally manage, pay for and track their Works.com purchases through WCMAs while earning bonus points on their WCMA Visa card for Works.com purchases.

While Merrill has stated publicly that it is starting off small and doesn't expect to make money from providing this service, many of its 14,000 brokers' wealthiest customers are entrepreneurs who boast a total of almost $150 billion in WCMAs. At first glance, buying pens and paper online may seem innocuous, but the Works.com alliance may shed light on Merrill's broader small business Internet strategy. Having acquired a 10 percent stake in Works.com, Merrill is positioned to sell airline tickets and computer equipment online, as well as services such as human resources and printing in the future.

The small business express

Considered by some to still be on the fringes of the small business market, Amex remains near the top of the list in small business lending despite the absence of traditional small business package elements such as a checking account.

Concentrating on the future with Internet-based strategies via its Online Merchants Services program, entrepreneurs can find pages on the company's site devoted to Web-based products, services and expert advice for businesses that accept, or would like to accept, the American Express card for payment. Member merchants can even access valuable marketing information specifically tailored to analyze an aggregate of customers and display customer-spending habits.

Amex also is going the extra mile to lure small businesses into the interactive possibilities of the World Wide Web. Pages featuring a crash course in the basics of e-commerce and suggestions for businesses preparing to build a Web presence -- everything from construction of a simple site, to the building of an online catalog to stores with online payment capability -- can be found. The company also provides links to Internet service provider partners such as CitySearch and MindSpring that will build a Web site designed especially for the small business owner.

A learning experience

While it's not too late for traditional institutions to refocus and retain small business owners, increased competition at all levels makes it paramount for banks to address prevailing small business needs in a proactive manner.

A prime example of this aggressive new attitude is being exhibited by New York's Chase Manhattan Bank, which spent the better part of 1998 restructuring the way it handles small business customers by placing small business bankers -- called "relationship managers" -- in 129 of its branches. This year, the company is opening additional branches in areas near small business locations.

Will the strategies being implemented by both community banks and larger institutions help win and retain the small business owner? While the walls that once divided banking, brokerage and insurance are coming down, non-banks are gaining ground on banking turf faster than banks are gaining ground elsewhere. And many fear that these gains will not offset continual losses of the small business market.