By Roy Urrico
Finopotamus aims to highlight white papers, surveys and reports that provide a glimpse into what is taking place and/or impacting credit unions and other organizations in the financial services industry.
Approximately 16% of small to mid-sized businesses (SMBs) are highly likely to switch within the next five years to a community-oriented credit union or bank. But credit unions and other community institutions need to add or improve features, such as digital banking, to draw in more SMBs. That is one of the key takeaways of a PYMNTS Intelligence and i2c report SMB Growth Report: Community Banks Appeal to Small Businesses.
The report explores the benefits and opportunities credit unions and local banks have to grow their SMB accountholder base by also addressing the growing demand for digital and personalized banking. According to Redwood City, Calif.-based banking and payment solutions provider i2c, if financial institutions focus on adapting their services, they stand to become increasingly attractive choices for SMBs seeking modern, relationship-based banking services.
“With the right technology solutions, these institutions can overcome traditional limitations by enhancing their digital platforms and offering more personalized services, delivering the competitive, customer-focused experiences that SMBs increasingly expect from their financial partners,” said Al Taylor, senior vice president, FI Solutions at i2c Inc.
Highlights of the Report
The report – based on a survey of 525 Main Street SMBs in the U.S. generating annual revenues of $10 million or less conducted from Sept. 9 to Sept 24, 2024 – highlights several key findings:
Strong demand for local financial institutions. National banks dominate the SMB market, with 58% of businesses opting for them as their primary financial institution. However, 23% of SMBs already use a credit union or local bank, particularly businesses in rural areas or with less than $150,000 in revenue. Local financial institutions are valued for their personalized service, while national banks are preferred for their better loan rates and advanced product offerings.
SMBs are open to switching to a local bank. Key motivators for considering a new provider include better service, more personalized banking experiences, and the local nature of these institutions.
Community involvement is highly valued. Credit unions and local banks stand out for their strong community involvement, a factor that resonates with SMBs looking for a more personal connection with their financial institutions. However, these smaller institutions are at a disadvantage when it comes to digital offerings, an area they must improve to compete effectively with larger institutions.
National banks have the edge in digital services. While local financial institutions excel in service and community engagement, they lag behind national banks in offering advanced financial tools and digital services. Geographic limitations also pose a challenge, with SMBs citing a lack of branches and ATMs as a drawback. Meanwhile, national banks face criticism for high fees and a lack of personalized banking solutions.
Personalized services are a key driver: SMBs, particularly those generating higher revenues, are increasingly looking for financial institutions that can offer customized solutions tailored to their specific needs. Offering personalized services will be crucial for smaller financial institutions aiming to attract larger businesses.
Catering to Different Needs
SMBs have different needs based on how much revenue they generate, suggests the survey. “Smaller banks or CUs can cater to these different SMBs by understanding what the businesses seek,” said the report. Factors such as better rates on loans and custom terms and conditions are a draw for SMBs with higher revenues. For lower-revenue SMBs, having branches nearby and tailored perks stand out as reasons to switch.
For instance, 17% of SMBs generating more than $1 million in revenue view lower rates as the most important factor influencing their decision to change to a local financial institution, according to the report. In turn, 14% of SMBs with lower revenues cite branches close to their business as the most important draw.
"Local banks and credit unions are well positioned to capture a larger share of the SMB market, especially if they can address the current gaps in digital banking and geographic reach," said Taylor. "Personalized banking experiences and community-focused approaches are significant differentiators for these smaller institutions."
As SMBs continue to evolve in their financial needs, the ability of smaller banks and CUs to offer both high-touch service and modern digital capabilities will be key to their future success. The report underscores the importance of investing in digital infrastructure while maintaining the personal, community-driven approach that makes local institutions attractive to many small businesses.