Banks know, perhaps all too well, the growth strategy of targeting small-to-midsize business clients (SMBs) to win over more of their fee-generating accounts. That trodden path for banks of all sizes dates to at least the wake of the financial crisis. And it’s not always a path to riches: A recent BAI Industry Insights presentation at the 2018 Barlow Business Banking conference indicates that small business deposit growth dropped 40 percent between 2016 and 2017 (from 5 percent to 3 percent). BAI managing director Karl Dahlgren added that this is less than half the growth rate from 2013, when it tallied 6.1 percent.
Naturally, this business battle pits the “personalized service” of smaller banks against the comprehensive service suite of bigger banks. The story, so it’s often told, is that the little guys win over smaller, local businesses with superior service—while the big boys scoop up larger enterprises by offering a deep set of products and services to meet their complex needs.
But the recently published 2018 FIS PACE study on SMB banking reveals a plot twist: Clients of the top 50 global banks are most likely to switch banks. Roughly one in five (20 percent) indicate they’re ready to leave in the next 12 months. And for regional banks, 11 percent of SMB clients are set to depart with 26 percent reporting dissatisfaction, the low-water mark for bank performance in the study.
While this may point to a huge opportunity for community banks and credit unions (granted they’re prepared to meet the needs of today’s businesses) it really spotlights the reckoning underway in business banking. Why?
Price matters, but so do ‘must-have’ capabilities
When asked why they plan to leave their bank in the next 12 months, SMBs cited “competitive fees from another banking provider” as their top reason (35 percent); followed by a tie between being “unable to customize products to their individual needs” (33 percent); and being “declined for a loan or line of credit” (33 percent).
More reasons for leaving include:
- inconsistent, complicated pricing structure (29 percent)
- failure to resolve problems quickly and courteously (27 percent)
- poor customer service (22 percent)
- outdated banking processes/products (20 percent)
- does not have the product or service my company needs (18 percent)
- don't know (4 percent)
Interestingly, SMBs that plan to switch banking providers report that the capability for digital self-service is most important to them. The top 50 global banks have always excelled in this area while regional banks, community banks and credit unions underperform.
This suggests that these SMB clients aren’t likely to leave top 50 global banks for smaller banking providers, but instead move on to another big bank that can meet their digital needs and promise better fees.
Lost clients versus lost revenue
Among SMBs that work with community banks, the FIS study found that just 3 percent plan to switch banks in the next 12 months and 75 percent have been with their banks for more than five years. Community bank clients are happy and loyal, but that doesn’t mean their needs are being met.
This is emphasized by a clear pain point for SMBs serviced by community banks: digital payments.
According to the PACE study, 46 percent of all SMB transactions are now completed digitally and SMB acceptance of digital payments (online, person-to-person, and mobile) is up 38 percent collectively compared to a year ago. To process these payments, 8 percent of SMBs rely on third parties outside of their banks. But for SMBs that bank with community banks, the proportion that rely on third-party processing jumps to 25 percent.
This means that SMBs with community banks (and most likely credit unions) go elsewhere for the digital payment capabilities they need to run their businesses. Smaller banks may not lose clients outright but they sacrifice critical pieces of their SMB clients’ payment business—and associated fee income—to other banks and providers.
Leveling the ‘paying’ field
When it comes to SMB banking, personalized service does not rule as the great differentiator of old. Today’s business owners not only want to bank digitally, they want to pay and be paid digitally as well in transactions with customers, vendors and employees. To truly serve today’s SMB clients, banks of all sizes must expand beyond the core banking services of debit, credit and lending while they remain true to the ethos of providing responsive, personalized service.
Fortunately, the affordability, speed and convenience has never been greater for banking providers (even smaller ones with limited assets) to add and introduce new commercial products and services. That applies whether done through purchasing vendor solutions or partnering with trusted fintech companies.
Technology partnership potential
Application programming interfaces, or APIs, allow approved partners paid access to a bank’s core data. They use this to develop and integrate ancillary products—insurance, e-invoicing, bookkeeping, etc.—which can they then offer and supply to bank customers within their trusted banking ecosystem. By sharing the costs and effort of development, such API integrations lower the bar in terms of talent, time and investment banking that providers need to add new products and services.
According to our latest PACE data, more than half of SMBs (51 percent) trust their banks more than tech companies; another 35 percent trust both equally. As such, well-chosen technology partnerships can leverage the goodwill of SMB clients and allow for efficient development of new commercial products and solutions—without igniting costumer concerns or push back.
Best of all, such partnerships give banks flexibility and freedom to experiment with:
- AI-driven chatbots
- remote deposit capture
- voice-powered banking
- automatic invoicing, and
- other solutions targeted toward businesses.
To introduce just one single solution, banks were once forced to make sizeable upfront investments in technology and development … and then wait months if not years to see their full impact.
Now, banks in partnership with technology providers can develop and test a host of new products and services with lower entry risk and smaller investments. This allows banks to maximize their IT budgets and better identify projects with the greatest, most-immediate ROI potential. You could call it an ‘ROIT’ that leads to SMB of another kind: a Significant Monetary Boost.
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Bruce Lowthers is the chief operating officer of FIS' Integrated Financial Solutions organization, which includes FIS' banking, wealth, payments and treasury offerings for financial institutions, retail, government and corporate clients in North America. FIS is a financial services technology company.