Prioritizing small business as the new retail customer

There’s a big opportunity for community banks to capitalize on the trust and goodwill they built with SMBs during the pandemic.

Since the start of the pandemic, traditional banks in the U.S. have faced intensifying challenges: tougher competition from neobanks and others, shifting consumer and business banking behaviors, and a record number of bank branch closures. There was, however, one enduring constant: rising digital banking expectations from consumers and businesses alike.

Because fintechs are driving innovative experiences and the largest banks are pouring resources into new products, community and regional banks are fighting an uphill battle for the consumer market in 2022. But there is an opportunity for community banks to capitalize on the trust and goodwill they built with the small-business community during the pandemic.

In order to transition PPP loan relationships into long-term deposit relationships, community financial institutions must prioritize offering innovative, omnichannel products — such as invoicing, online account opening and digital lending — as the modern business owner becomes the new retail banking customer.

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Community banks are widely championed by small-business owners (SBOs) as drivers of economic mobility, financial inclusion and access to financial services. According to Mantl’s 2021 Banking Impact Report, 88% of SBOs agree that community financial institutions played a role in economic recovery from the pandemic. Bank executives report a quarter of their business customers, on average, would have gone out of service during the pandemic had it not been for their assistance.

According to a study by Cornerstone Advisors, small-business deposit accounts are a top priority for 41% of community banks in 2022 – almost twice as important as retail deposit accounts, which were a top priority for only 21% of respondents. For community banks that have fallen behind the digital transformation curve, growing these deposits will prove difficult.

The neobank threat

Competition for the small-business market is growing as fintechs and digital-only banks recognize that this banking sector is prime for disruption. Some 40% of banks rate their business account opening process as “somewhat or very poor” and more than half of banks say their account opening process limits their ability to grow business deposits.

Despite the fact that SBOs rank neobanks lowest on a long list of banking priorities — trust, providing personalized service, a positive impact to local communities, convenience and better access to underrepresented communities — they are still considering digital-only offerings. More than 40% of small-business owners say they are “likely” to open an account at a financial technology company in the next 12 months.

Community banks have traditionally approached small-business banking with the assumption that small-business owners are looking for in-person, in-branch experiences. However, small business banking expectations have also changed during the pandemic.

Small businesses want superior digital experiences, starting with their first touchpoint with a financial institution. Most say they will not do business with an institution that doesn’t offer online account opening, regardless of whether they prefer to open an account online or in-person. This is most notably the case for larger small businesses: 77% of SBOs with more than 50 employees and 59% with $1M to $25M in revenue require online account opening to do business.

Small business owners also want digital features — like mobile transfers and mobile check deposits and instant notifications for large purchases or potential fraud — that many community banks cannot provide. Nearly half of community banks are currently unable to deliver what their business customers want, in large part because they don’t have the infrastructure to support it.

While digital transformation is well underway for retail customers, it is just beginning for business customers. Community banks will be increasingly competing with neobanks and digitally-savvy fintech companies for this banking sector as a result. The goodwill that community banks built with the small business community during the pandemic — and their excellent customer service, good rates and low fees — provides an advantage but, ultimately, will not be enough to grow and retain business relationships in today’s digital landscape.

There is a relatively short runway for community banks to provide the digital experiences that small businesses expect from a financial institution before modern business owners consider opening accounts at a digital-only bank or fintech company. Community banks must double down on the basics, like providing a quick and seamless omnichannel business account opening, to close the digital expectation gap.

Nathaniel Harley is CEO and co-founder of Mantl.