32% of SMBs Favor Community Banks Over National Banks

With 16% of small and mid-sized businesses (SMBs) considering switching banks, many are turning to community banks and credit unions (CUs) for their personalized service and local accessibility. While these smaller financial institutions (FIs) hold appeal, they face challenges in digital banking that may hinder broader adoption among SMBs, particularly those with higher revenue needs.

A PYMNTS Intelligence SMB Growth Monitor report, “Community Banks Appeal to Small Businesses, But …,” in collaboration with i2c and based on a survey of 525 SMBs, sheds light on the dynamics driving SMB banking choices and the widening gap in digital services.

Location, Reputation Drive SMB Banking

For many SMBs, location and reputation are paramount when selecting a bank. Among all SMBs, 23% choose local banks or CUs, while 58% opt for larger national banks. This trend shifts for rural and lower-revenue businesses. Rural SMBs, for example, are more likely to choose local institutions (49%) than national banks (25%).

According to the report, 32% of lower-revenue SMBs favor community banks and CUs, citing personalized service and the convenience of nearby branches as major factors. In addition to location, reputation plays a crucial role. SMBs selecting either local or national banks often highlight the reputation of the FI as the leading factor in their decision — 25% for local banks and 27% for national banks.

Small businesses with lower revenue are particularly open to switching financial institutions. Around 22% of SMBs earning $150,000 or less annually are very likely to switch banks within the next five years. Meanwhile, SMBs with higher revenue show less inclination to move, with only 12% indicating a high likelihood of changing banks.

Among the reasons for considering a switch, lower fees and personalized customer service are highly valued by smaller businesses. For instance, 14% of lower-revenue SMBs prioritize branch proximity when switching, while 17% of higher-revenue businesses seek better rates and custom loan terms from community banks or CUs.

Digital Services Lag

Although community banks and credit unions excel in personalized service and local engagement, their digital offerings fall short compared to national banks. Many SMBs report higher satisfaction with features like fraud prevention and customer service from smaller FIs, yet the digital experience remains an area of concern.

Local banks’ digital platforms often do not meet the same standards as those of larger banks, leaving SMBs less satisfied with online banking services. To compete more effectively, community banks and CUs will need to enhance their digital platforms to match the expectations of SMBs, especially those with higher revenue or growing digital needs.

Community banks and credit unions offer appealing alternatives for SMBs, especially in rural areas or for those seeking personalized service. But their lack of advanced digital services remains a major drawback. With 16% of SMBs considering a switch, smaller FIs can leverage their local engagement and reputation, but must improve digital offerings to attract and retain clients. Their success will depend on balancing personalized service with the technological needs of modern business owners.