PYMNTS Intelligence’s data suggests that some small to mid-sized businesses (SMBs) are ready to make the switch from banking with national banks to local banks or credit unions (CUs). We find SMBs with lower revenues are especially likely to consider switching. One factor? They believe a bank embedded in their community may offer more personal customer service and more convenient locations.
These are some of the findings detailed in “SMB Growth Report: Small Banks Appeal to Small Businesses, But…,” a PYMNTS Intelligence and i2c collaboration. This edition examines the benefits and opportunities smaller banks and CUs offer SMBs. The brief draws on insights from a survey of 525 SMBs conducted Sept. 9 to Sept. 29.
Key Findings
Many rural and lower-revenue SMBs choose a local bank or CU over a big national bank for more personalized service and easy access.
When SMBs choose where to bank, location matters. This is particularly true for the smallest SMBs and those located in rural areas. The personalized service and local access provided by small banks or CUs are key reasons SMBs select them. Among all SMBs, 23% use a local bank or CU, while 58% opt for a larger national bank. This pattern flips for lower-revenue and rural SMBs. Forty-nine percent of rural SMBs choose a local bank or CU, while 25% choose a national bank. Similarly, 32% of small businesses with lower revenues SMBs choose local banks and CUs, while 44% choose national banks.
Choosing a bank is not just about location and service. Most SMBs also factor the financial institution’s (FI’s) reputation when considering where to bank. SMBs that opt for local banks or CUs and those choosing larger national banks both report that reputation is the most important factor leading them to choose their bank, at 25% and 27%, respectively. SMBs that choose large national banks say better loan terms and advanced products also influence their FI choice. For SMBs that choose local banks or CUs, lower fees are an added attraction on top of personalized service and convenient locations. This highlights that the local and personal nature of these FIs can attract SMBs.
Two in 10 SMBs with lower revenues consider switching banks.
Data shows that 16% of SMBs say they will likely switch FIs in the next five years. Revenue plays a factor, with lower-revenue SMBs saying they are more likely to switch. Twenty-two percent of SMBs with lower revenues — those generating $150,000 or less per year — say they are very likely to switch.
While national banks remain the most popular choice for SMBs, many are finding good reasons to switch to local banks. The appeal of smaller banks or CUs is twofold. Lower fees attract SMBs with higher revenues, while features that provide more personalization draw SMBs with lower revenues. Attractive features include everything from the convenience of having easy access to a local bank to customized terms and conditions or better rates on loans.
SMBs have somewhat different needs based on how much revenue they generate. Smaller banks or CUs can cater to these different SMBs by understanding what the businesses seek. 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 bank 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 FI. In turn, 14% of SMBs with lower revenues cite branches close to their business as the most important draw.
Smaller FIs stand out for community involvement but lag in digital service offerings.
Is the appeal of small banks or CUs worth the switch? SMBs currently using them would say yes. SMBs using these smaller FIs are equally or more satisfied with many banking features compared to SMBs using larger FIs. Those using smaller FIs report being highly satisfied with 12 banking features, on average. SMBs using national banks report being highly satisfied with 11 features, on average. We find that loyalty is the biggest predictor of satisfaction. SMBs extremely loyal to their FIs report satisfaction with 15 features. In contrast, SMBs with moderate or low loyalty report satisfaction with just six features. This implies that if local banks and CUs utilize their advantages to create loyalty, they can create satisfaction as high, if not higher, than their much larger competitors.
Local banks and CUs have plenty to offer SMBs. Smaller FIs can shine with local community involvement and offer personalized customer service at a level national banks cannot. When it comes to reliability, fraud prevention and overall reputation, smaller FIs may have an edge over national banks. More SMBs using smaller FIs say they are highly satisfied with these features than those using national banks.
Smaller FIs have room to improve when it comes to digital services. Their digital platforms often lag behind those offered by national and regional banks, leaving SMBs less satisfied with these features. However, local banks and credit unions can leverage their strong community connections to enhance their digital offerings and compete more effectively with larger banks by strategically expending resources on factors that improve satisfaction and loyalty.
SMBs cite high fees and lack of personalized solutions as drawbacks of using national banks.
SMBs using national and regional banks report drawbacks with both. For example, 25% of SMBs using national banks report that the most important drawback is high fees. In addition, 11% cite a lack of personalized products as drawbacks. Geographic limitations are the biggest drawback for local banks and CUs. In fact, 26% of SMBs report smaller FIs have a limited number of branches, and 21% cite geographic limitations. This suggests smaller FIs must be strategic about where they build new locations. Putting locations near business districts or other strategically chosen locations may help these FIs attract more SMBs.
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Methodology
“SMB Growth Report: Small Banks Appeal to Small Businesses, But…,” a PYMNTS Intelligence and i2c collaboration, is 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. The report explores the benefits and opportunities local banks and CUs can offer SMBs compared to larger, national banks.
