Small businesses often vex retail bankers. Together, these companies represent 35 to 45 percent of total banking revenues in Europe from all business customers, while they account, at best, for 20 percent of all profits. But a solution may be at hand. A few mass-market retail banks have successfully turned small-business customers into a profit center. They have done so by defining the boundaries of the small-business segment clearly and then subdividing the territory into a handful of smaller groups based on banking needs.

To study how European banks approach small businesses, we looked at the operations of 15 financial institutions. To make more accurate comparisons, we defined small businesses as those with no more than 50 employees and an annual turnover of about €10 million ($11.4 million). This categorization, which includes such operations as farms, shops, hotels, restaurants, and small services firms, covers the bulk of owner-managed businesses that don’t have separate financial officers. (Companies with chief financial officers are normally too large to fit into the small-business segment; in addition, CFOs generally demand more sophisticated financial services than a bank’s small-business unit can provide effectively.) While this definition is appropriate for most European banks, in some cases...