Small business owners are notoriously resilient, adapting to ever-changing economic conditions and challenges. This resiliency is currently being put to the test against the backdrop of inflation and transformative shifts in consumer behavior. These challenges are evident when looking at the depressed levels of small business optimism. According to the National Federation of Independent Business’ (NFIB) Small Business Optimism Index, the October 2023 index score of 90.7 was the 22^nd consecutive month below the 50-year average. While small businesses are farther removed from the pandemic fueled volatility of 2020, business owners are even more cynical today about their economic outlook.  

Figure 1: Economic Outlook of Small Businesses

NFIB Small Business Optimism Index 

Source: NFIB Small Business Economic Trends Survey, www.NFIB.com/sboi

As small businesses enter 2024, they are likely to continue facing economic uncertainty coupled with rising costs and high interest rates. With these challenges in mind, here are five considerations for financial institutions looking to strengthen market share and help small businesses manage through the uncertainty.

1.      Evaluate Loan Processes When Addressing Credit Needs

Even while the cost of borrowing remains elevated, many small businesses will continue turning toward credit markets to fund their growth and survival. Raddon Research Insights finds that nearly two-thirds (64%) of small businesses traditionally carry business loans. But while the demand for loans is there, concerns over the lending process may make them less attractive to small business owners. In our most recent survey of 1,200 small businesses, 54% of businesses described obtaining a business loan as a long and difficult process. In the same vein, 53% of businesses felt that it is easier to obtain financing through an online lender than a traditional financial institution.

Key question: Are there aspects of your loan application processes that are inefficient or likely to contribute to application abandonment?

2.      Adding the Human Touch to Digital Banking

As small businesses become more reliant on digital tools for their banking needs, technology will continue to play an important role in determining what financial institution a small business opts to use. Raddon Research Insights finds that 51% of small businesses are more reliant on digital transactions today compared to two years ago. However, even with this understandable increase in digital usage, small business owners still express a need for face-to-face interactions for some activities. Our research finds that while branch usage has not returned to pre-pandemic levels, it has not gone away completely. Six out of 10 small businesses (61%) report visiting a financial institution’s branch lobby in a typical month, most often for cash-related needs. And while 67% of small businesses view the branch primarily as a place to conduct banking transactions, another 19% describe a financial institution branch as a place to get financial advice, followed by 13% that describe the branch as a place to open new banking accounts.

Key question: Is your branch staff equipped with the tools needed to effectively service the unique needs of small businesses?

Figure 2: Types of Transactions Small Business Rely on

Small Businesses’ Interactions With Financial Institutions Over Last Two Years

4.      Competing With Major Banks

The majority of small business owners continues to gravitate toward major banks, with 78% using one of the top six largest banks as their primary financial institution (PFI). In terms of market concentration, Bank of America, JPMorgan Chase and Wells Fargo collectively control 61 percent of these primary relationships. While this PFI dominance is not necessarily a new trend, what has recently changed is the customer satisfaction and likelihood to recommend. Gaps between major banks and community-based institutions have all but disappeared. As an example, major banks had a small business Net Promoter Score (NPS) of 18 back in 2015, compared with small business NPSs of 37 and 40 for community banks and credit unions, respectively. Today, the NPS sits at 33 for major banks and 36 for community banks and credit unions, according to our most recent Raddon Research Insights poll.

While the NPS gap shrinks, there is still hope for community-based financial institutions. One in four (25%) small businesses using a major bank is extremely likely to switch to a community-based financial institution if they offered the same technology capabilities as their current provider.

Key question: For community banks and credit unions, how do you overcome any real or perceived technology and digital services gaps?

5.      Becoming the Single Trusted Provider

Nearly three out of every four (72%) small businesses would prefer to use a single provider for all their financial services needs. However, in practice, Raddon Research Insights finds that 48% of small businesses use multiple institutions, not even counting credit-card-only issuers. These data suggest there is an unmet need for many small businesses. Small businesses are seeking a single trusted partner to help them navigate their financial affairs, yet they often have to fragment the relationships they have with financial institutions.

As alluded to earlier, small business owners are a resilient and passionate group. In our Raddon Research Insights survey, 80% of business owners stated that owning a small business is more fulfilling than other career paths, and they would encourage their children or other family members to pursue a similar path. The final key question is whether your financial institution can match and demonstrate that same enthusiasm and passion for small businesses, to ultimately earn their trust and business.