North American banks are becoming more attentive to midsize companies now that a soft market and fierce competition are cutting the profits to be made from serving big corporations. But pursuing the middle market with credit offerings, as most banks are, and investing in industry and investment-banking expertise in hopes of generating future business may not be the way to go, recent McKinsey research shows.¹ For many midsize companies are not primarily interested in such offerings or expertise. But by giving these companies what they do want—and nothing more—a bank will improve its performance for customers and shareholders alike.

Midsize companies (those that have annual sales from $10 million to $250 million) generate an estimated $20 billion in profits for North American financial institutions every year—about equal to the profits from the large corporate market, though the middle market is, of course, more fragmented. The current approach of the banks is based on their historic practice of making loan officers the main point of contact for midsize companies. Banks are now attempting to capture a larger share of this business, but they haven’t changed that fundamental focus on loans. This means that, in addition to pushing credit, some banks have made efforts to differentiate themselves and to bolster their credibility by adding expertise in the industries in which their middle-market customers compete. Others are trying to tap into the estimated $1.2 billion in investment-banking profits that these companies generate annually. Meanwhile, for most banks, cash-management activities (basic payment, disbursement, and collections services, for example) have remained within the sleepy purview of lower-level product specialists, despite the fact that such work actually generates about a third of the banks’ economic profit from middle-market companies.

Our survey, however, revealed that almost half of all midsize companies consider cash management at least as important as credit (Exhibit 1). Moreover, an analysis of which relationships are most profitable for banks shows that the two groups of companies with a significant interest in cash management generate almost as much profit per company for their lead banks as do companies in the much smaller group that is most interested in investment banking (Exhibit 2).

Some banks, largely by changing the way their relationship managers work, are already capturing higher revenues from midsize companies that care about cash management. These banks use total customer profitability rather than credit revenue (or, even worse, loan volume) alone to measure and reward their relationship managers. Indeed, to serve the 20 percent of customers whose overriding concern is cash management, some banks have gone so far as to substitute relationship managers with expertise in cash management for traditional lending officers. Such banks can generate up to half of their middle-market revenue from cash management, compared with about a third for typical banks.

In order to meet the needs of the segment of midsize companies interested in a complex mix of cash- and credit-management services, banks can expand their existing offerings. Here, too, the role of the relationship manager is changing, toward a model similar to that of the large corporate market. Some banks are now using credit specialists to handle the details of loans, thereby freeing relationship managers to concentrate on the overall needs of customers and to develop the industry expertise necessary to integrate those needs. Banks taking the lead in serving such customers have created teams of specialists, all of whom interact with them, across product lines. This approach further frees relationship managers to focus on generating new business, while customers get the expertise they most need at any given time (Exhibit 3). These banks are far more successful in selling new products to existing customers, thus generating higher revenues.

To be sure, there is a segment of companies that do meet the expectations of banks: smaller companies whose need for credit predominates. Although they deliver the lowest average profits, they represent almost half of all midsize companies, and banks can’t ignore them. Some banks are learning to serve such companies more profitably by assigning junior, generalist bankers, who are less expensive, as relationship managers for these uncomplicated customers. Other banks have created small, centrally located teams that work primarily by telephone. Either way, each banker serves as many as 200 companies rather than the 20 to 50 possible under traditional approaches. The companies, given their relatively straightforward needs, prefer effective alternative solutions to invariably being the lowest priority for bankers with greater expertise.

Finally, banks should do less, not more, for the few midsize companies that have not only sophisticated investment-banking needs but also a great many banking relationships. Our research shows that these companies simply do not regard their commercial banks as a credible source of investment-banking expertise—indeed, they notify their lead banks of a potential transaction only about half of the time. Most of these companies generate their ideas internally and depend upon industry contacts for investment-banking referrals—an approach making it more likely that the significant investments commercial banks have made to build expertise in this area may never show returns. Given the capriciousness of these sophisticated customers, banks should treat each experience with them as a one-off tryst and never underprice in hopes of cementing meaningful relationships.

Middle-market companies have failed to receive their fair share of attention from banks. Those institutions that manage to succeed in altering their sales approach to serve the needs of these companies in a more satisfactory manner can go on to build portfolios of loyal and profitable customers.