Emerging Trends in Small Business Banking

Thursday, January 13, 2022  |  Marcus Rothaar

Over the past year, small businesses transitioned out of survival mode and into a more optimistic position. In our latest Raddon Research Insights survey, 63 percent of small businesses said they expect sales to increase over the prior year, and nearly half expect the economy to improve.

That’s not to say everything is back to “normal.” Challenges from the COVID-19 pandemic persist, with supply chain shortages and hiring difficulties topping a long and varied list of challenges cited by small businesses in our survey.

As small businesses juggle these challenges with an eye toward growth and expansion, financial institutions looking to capture market share need to demonstrate what sets them apart from competitors. To that end, a few consistent themes emerged from our latest Raddon Research Insights report, Small Business Insights: Expansion and Opportunity.

Major Banks’ PFI Market Share Has Risen in the Past 10 Years

While not a new theme, it’s an important one to highlight: Major banks continue to strengthen their market share. Three in four small businesses are using one of just six banks as their primary financial institution. The major bank group is comprised of Bank of America, JPMorgan Chase, Wells Fargo, PNC Bank, U.S. Bank and Truist.

While small businesses using community banks and credit unions are more likely to recommend their institution to others and achieve better net promoter scores, this loyalty has not translated to increased market share. Furthermore, opinions of major banks have improved significantly since the onset of the pandemic, perhaps buoyed by shepherding their small business clients through the Paycheck Protection Program (PPP) application process.

Overall, 52 percent of small businesses using a major bank as their primary institution stated their opinion of the bank changed for the better based on the amount of help provided since the onset of the pandemic. Comparatively, only 9 percent of small businesses using other types of financial institutions expressed that same sentiment.

Similarly, 50 percent of businesses using major banks reported customer service has improved for the better since the onset of the pandemic. Only 10 percent of nonmajor bank businesses experienced customer service improvement. While some of these differences may reflect the community-based group already having better opinions of and higher service level expectations based on prior experiences, the service perception gap appears to be narrowing.

Perception of Technology and Digital Tools Are Key Differentiators

Another reoccurring theme in our small business survey findings is the increased reliance on digital tools and services since the onset of the pandemic. While it’s not surprising that 58 percent of businesses have become more reliant on digital forms of communication when conducting banking transactions, it is noteworthy as this is another area with significant gaps between businesses using major banks and those using other types of financial institutions. A few areas with differences include:

  • 41 percent of businesses using a major bank prefer to conduct most of their banking business through online, mobile or ATM channels. Comparatively, 24 percent of nonmajor bank customers have those preferences
  • 30 percent of businesses using a major bank claim the bank’s technology resources impact their decision to use that institution. Compare this to the 10 percent of nonmajor bank businesses claiming the same
  • 39 percent of major bank businesses self-identify their businesses as early tech –adopters, compared to only 10 percent of their nonmajor bank counterparts
  • Small businesses using major banks are more likely to use the digital tools that may be available. As an example, 79 percent of this group use mobile banking in a typical month, compared to the 57 percent usage among their nonmajor bank brethren

These data points paint a clear picture that community-based financial institutions must evaluate ways to compete more effectively on the technology front. The opportunity is represented by the 27 percent of major bank PFI businesses that would be extremely likely to switch to a community financial institution if it offered the same technology capabilities.

The Next Technology Frontier

In addition to the more traditional areas of business-facing technology, such as mobile banking, demonstrating an expertise and understanding of emerging trends will also factor into which institution small businesses elect to use. Emerging trends such as accepting cryptocurrency for payment and offering buy-now-pay-later (BNPL) options are two examples that we explore in our research.

As shown in the chart below, 14 percent of small businesses currently accept cryptocurrency as a form of payment. While cryptocurrency may not be a significant portion of total small business receivables today, even among those that are able to accept it as a form of payment, it is of growing interest. An additional 33 percent of businesses anticipate accepting it as a means of payment in the future (very or extremely likely).

The capabilities of the business’ merchant payment processor will factor into this future adoption of cryptocurrency, so financial institutions should consider their role in offering merchant card services to their small business clients. Of the small businesses surveyed by Raddon, 43 percent are leveraging a financial institution for their merchant card services processing. Along those same lines, among businesses with point-of-sale (POS) payment systems, 39 percent have not made any major updates or improvements to their POS systems within the past three years. As these businesses eventually seek upgrades to newer technology, opportunities exist for financial institutions to facilitate that process.

BNPL is another area piquing the interest of small businesses, with 12 percent currently offering some sort of BNPL option to customers, and another 35 percent extremely or very interested in offering this option in the future. For both cryptocurrency and BNPL, the differences in the usage between small businesses using major banks and those using other types of financial institutions are quite staggering, as shown in the chart below.

To remain relevant to small businesses in an increasingly technology-driven environment, financial institutions need to show they can provide the technology and digital tools the businesses need to grow. Competing effectively in the small business space and capturing market share is dependent on it, now more than ever.

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