BOSTON — As banks continue to look beyond their traditional markets for more revenue streams, at least one bread and butter mainstay as well as a burgeoning area for credit unions will be targeted more aggressively this year.

According to a new report from Aite Group that looks at the top 10 trends for 2007, banks are expected to allocate more of their budgets to courting the small business and underserved markets. Revenue growth for banks will require greater emphasis on the underserved customer segments, tools for more effective cross-selling and new technology deployments that will enable differentiation and new product offerings, the report said. As with credit unions, consumer protection issues will also remain a challenge throughout 2007, the report noted.

One trend that is expected to pick up steam is the courting of smaller businesses. This once-ignored segment has become a major target market for most financial institutions over the last few years and this year could see even more focus. According to the Top Ten Banking Trends for 2007: The Focus on Revenue report, small businesses that generate between $1 million and $10 million in annual revenues will continue to be migrated over to business banking solutions that offer more of the capabilities they need as they grow in sophistication. Online banking adoption rates by small businesses reached approximately 40% by the end of last year, and they are expected to continue to rise.

“It's a segment that's a lot easier to reach,” said Christine Barry, a research director at Aite Group and co-author of the trends report. “It used to be small businesses didn't like to bank online. They would go into the branches. Now, they're increasingly going online and it's becoming less expensive to reach them.”

This year, banks are also expected to pay greater attention to drawing small business customers to their sites for services such as electronic bill payment, cash management, and invoicing, the report noted. Likewise, the addition of new products and services and a greater emphasis on understanding small business needs will result in small business spending on financial products that could exceed $350 billion during 2007.

Banks are playing catch-up with their technologies geared toward small businesses as they become more motivated by the greater potential for generating fee-based revenues and cross-selling in business banking, Barry pointed out. A November 2006 Aite Group survey of 207 U.S. community banks–defined as those banks with under $5 billion in assets and representing approximately 98% of all U.S. commercial banks–showed that 80% of respondents stated that they are now allocating a greater percentage of revenue toward business banking initiatives than they did two years ago. Business banking initiatives typically receive between 25% and 35% of total bank IT budgets, according to the survey.

“This allocation will equal retail spending over the next few years, and in some cases, it could even surpass that amount,” Barry said.

Increased spending is likely to go toward small-business banking solutions, enhanced domestic and international cash management and payment capabilities, more sophisticated imaging solutions, fraud detection, and better customer profitability tools.

Meanwhile, credit unions are traditionally known for their financial outreach toward the underbanked and unserved, but banks are stepping up their efforts to offer a plethora of tailor-made products for these once-ignored groups. One of the trends expected this year is more rollout of prepaid cards, savings accounts, and online bill payment-types of products that are supported behind the scenes by a bank, according to the report.

“We call it 'banking-lite,'” Barry said. “In a push to increase revenue, banks are starting to realize that there are more markets out there than their traditional ones.”

While alternative financial services providers, such as check cashers, have primarily benefited, the convergence between banks' and check cashers' products and services will be a boon for mainstream financial institutions that have struggled to reach out to the unbanked and underbanked on their own, Barry said.

Data on credit unions was not included in the trends report, but Barry said she is currently conducting research for studies on comparing credit unions to banks and community banks' increased penetration in business banking.

“One of my questions for community bankers is do they feel credit unions are [more of a competitive threat] and I'm hearing that they are,” Barry said. –[email protected]