Why Banks Should Still Fear AltFin Competition

Will alternative lending platforms eat away at traditional banks’ market share? That’s been the question for the past few years, with many analysts agreeing that alternative finance won’t rise as a threat against banks. With financial institutions beginning to collaborate and partner with these alternative players, it seems even less likely that the two sides of the SME lending space will challenge each other.

But the latest analysis from J.D. Power finds that small businesses are increasingly willing to switch banks, and that means alternative players can snatch clients away from banks.

Released last week, J.D. Power’s 2016 U.S. Small Business Banking Satisfaction Study found that, as small businesses in the nation continue to grow, they’re more likely to seek out working capital financing. That search makes it easier for a small business to switch financial service providers should they find a better deal.

More than a fifth of SMEs surveyed that are ranked as fast-growing said they have switched banks in the last year, compared to just 5 percent of slower-growing SMEs. Meanwhile, a quarter of fast-growing small businesses said they plan to switch financial service providers in the year ahead.

The small business loan is considered a “moment of truth” for SME banking customers, researchers found. Nearly three-quarters of small businesses surveyed said they are looking at nonbank loan alternatives. The likelihood that a SME applicant of a loan will switch providers more than doubles when a problem arises, like challenging application processes.

“If the business is growing, the owner is more likely to need new loans and banking products, and that makes them look around at other options,” J.D. Power Senior Director of Banking Jim Miller said in a statement. “Once they start exploring, it often doesn’t take long to move from considering switching banks to actually switching.”

How Banks Can Fight Back

The findings suggest that traditional banks need to take a proactive stance in their small business services strategies.

“To retain their business, it is critical to develop a strong relationship before they need a loan or experience a problem,” Miller explained. “Banks can do this through proactive outreach, understanding their business and providing advice.”

J.D. Power identified two other key factors in retaining small business clients.

First impressions are crucial. The vast majority of small businesses said the banks they chose were able to completely identify all of their needs before a product was recommended, while adequately explaining fees and pricing is also a key priority for small businesses at first interactions. Second, J.D. Power found that banks must have a “digital edge,” offering innovative, electronic solutions to their small business clients.

But the threat of bank switching remains. The survey revealed that, while millennial business owners are most satisfied with their banking experiences, they are also more likely than other groups to say they will “definitely” switch banks.

“For the banks, that means the risk of potentially losing customers,” Miller noted, “but it also creates the opportunity to acquire new customers from competitors. It’s critical that the banks consistently communicate the other products and services they have to help businesses continue to grow.”