Small and mid-sized businesses (SMBs) are considering a switch from national banks to local financial institutions (FIs) like community banks and credit unions (CUs). While the convenience of national banks has traditionally been a strong draw, factors such as personalized service, lower fees, and better access to local support are prompting SMBs, particularly those in rural areas or with lower revenue, to explore local banking options.
But according to a PYMNTS Intelligence report, “Community Banks Appeal to Small Communities, But …,” in collaboration with i2c, smaller FIs need to improve their digital capabilities to compete with larger banks.
Community banks and CUs have gained favor among SMBs, particularly those with lower revenue or located in rural areas. According to the report, nearly 49% of rural SMBs choose a local bank or CU, compared to just 25% opting for national banks. Similarly, 32% of SMBs with revenue under $150,000 choose smaller banks and CUs, whereas only 44% of them favor national institutions.
Location and personalized customer service are cited as the main factors behind these choices. For example, the close-knit relationships local banks can create are seen as a vital advantage for smaller businesses looking for a more tailored experience. Despite these preferences, larger banks still dominate, with 58% of all SMBs selecting them over community FIs.
As many SMBs, especially those with lower revenue, are considering switching their financial institutions, 16% of them are likely to make a change within the next five years, with 22% of businesses earning under $150,000 indicating a strong desire to switch. This creates an opportunity for local banks and credit unions (CUs) to capture market share by offering services that better meet the needs of these businesses.
SMBs are driven to change by factors like lower fees, more favorable loan terms, and a higher level of personalized customer service. While national banks remain the most popular choice for many SMBs, dissatisfaction is growing, particularly among lower-revenue businesses, due to high fees and impersonal service. In contrast, local banks and CUs can provide more customized solutions and closer community ties, making them an attractive alternative for SMBs seeking better value and customer support.
Despite their appeal in terms of community engagement and personalized service, community banks and CUs face challenges when it comes to digital services. According to the report, SMBs expect advanced digital banking features, an area where national banks have a clear advantage. For example, SMBs using local FIs report satisfaction with 12 banking features, whereas those banking with national institutions are satisfied with 11.
But when it comes to digital services such as mobile banking and online financial management tools, community FIs are often behind. This gap leaves SMBs, which rely on smooth digital experiences, feeling underserved.
Local banks and credit unions, however, can leverage their deep community connections to elevate these digital services. By investing in digital improvements, they can offer SMBs a more competitive and comprehensive banking experience that combines the convenience of modern technology with the personalized service these businesses value.
