Big businesses are operating out of your consumer accounts

It’s a general industry understanding that some small business operators prefer to utilize a consumer account over a business specific product. Their assumed rationale being the complexity of signing up, they are too small, the fear of additional fees, or not understanding the benefits of such accounts.

To challenge those perceptions, research was recently conducted after thorough transaction data cleansing, examining a data panel of transaction behaviors from regional and community financial institutions; the results surprised researchers and might surprise you too:

• Account holders are operating businesses out of their consumer/retail accounts.
• During the data analysis process 1,700 retail accounts rose to the very top, each containing obvious business-like transactions and this sample set was used for analysis.
• The median monthly business expenditures was $114K.
• A variety of business-specific transactions were commonly found within these retail accounts: payroll, wholesale purchases, business information technology expenses and more.

Why should credit unions be concerned about business activity flowing through retail accounts?

The obvious answer is the missed opportunity to serve those members better with business accounts that feature business-specific tools — automated clearing house (ACH) fraud protection, transaction services, merchant services and more. A consumer or retail account often isn’t set up to handle all of the facets of business, so you’ll be providing a higher level of support to those account holders by helping them separate the two.

But there are other reasons — those that affect the financial institution, not just the account holder — that might not be as obvious.

• Compliance with old and new regulations. Federally insured financial institutions may need to differentiate between business and consumer accounts to comply with consumer protection regulations, or for the sake of their institutional charter. Guidelines and compliance requirements state that financial institutions meet a certain bar of lending to women-and-minority-owned businesses, for instance. You might already be meeting that bar and not know it if those businesses are funneled through personal accounts.
• Risk assessment. Business banking accounts typically have different risk profiles than consumer accounts because of their high transaction volume, loans and larger balances.
• Transaction limits and other account terms of use. Consumer accounts may have daily, weekly or monthly transaction limits. If they do at your institution, it could mean headaches for businesses that are bumping up against those limits regularly. Serving account holders to the fullest means preventing those issues which will minimize customer service calls.

A deep dive into business spending via consumer accounts

Identifying transactions through data analysis is a strategic way to uncover businesses that are already at your institution. To look deeper into this issue, Alkami analyzed the transactions from more than 1,700 retail accounts showing business activity, and found:

• It’s not just micro businesses or the self-employed. It’s easy to assume account holders use their retail accounts for business when that business activity is small. That may not be the case. Data shows that of the businesses in the data panel operating out of consumer accounts, the median monthly business expenditure was $114K. In other words, half of the businesses in the sample are spending $114K or more each month, equating to $1.36M per year. The top 25 percent of businesses in the sample are spending more than $364K per month or $4.37M per year. The largest businesses found operating out of consumer accounts had more than $15M in business expenditures each month.
• Payroll and benefits debits are a tell-tale sign of businesses inside retail accounts. Alkami research found that 74.6 percent of the businesses in the data panel found operating out of consumer accounts had payroll payments, averaging $1.6M per year in total. Those accounts had an average of $5.3M in other expenditures. But payroll isn’t the only indicator. Some businesses may have no employees to pay, just a sole proprietor, a gig worker or a very small business. The research found these types of accounts with no payroll had an average of $5.3M in other expenditures.
• Of those with payroll expenses, size can vary. Some of the smaller businesses analyzed in this study averaged just above $300K in payroll expenses, about 10 percent of overall business spend. But some larger businesses paid an average of $5.5M in payroll annually, which worked out to about 30 percent of their overall spend. The largest in the study paid $100M on payroll in one year!
• What kinds of other business expenses are typically running through consumer accounts? While the hypothesis was that research would uncover small operations, possibly craftsmen, gig economy workers or consultants, the research revealed very different types of operations. Ones with large amounts of payroll and benefits, wholesale vendor expenses, and insurance indicate a much larger operational footprint.

Are any of your account holders operating businesses out of their retail accounts? It’s likely, and the funds flowing through those retail accounts for business could be significant. They are ideal candidates for business solutions. Using transaction enrichment, you can identify these accounts and drilling down further, understanding each business’s unique spend structure will be the foundation for you to craft unique, tailored messaging.