How banks can avoid competition for small business customers

Traditional banks may need to improve their small business offerings to avoid losing customers to new competitors.

That’s according to a new survey by Aricent, the parent company of American Banker, which found that companies like PayPal, Square and Chime already command a sizable market share.

“While small businesses are loyal to their primary banking provider and have relatively low conversion rates, most businesses still use multiple organisations to access banking services, providing a welcome competitive interface for new entrants,” the report said. Enter.”

The report will be released Monday at the American Bankers Small Bank Conference in Nashville, Tennessee.

Of the 358 businesses surveyed, 45% said their banking provider included PayPal. A similar number reported using an online bank (such as Discover and American Express) or a non-banking fintech company (such as Chime), while 30% said they work with Square.

Small businesses are increasingly weighing these options, with 67% of respondents saying they would consider online banking, 55% saying they would consider PayPal and 53% considering a credit union.

Business owners are also “taking a broader view of banking,” with some respondents saying they would consider tech giants such as Google, Apple or Amazon for their banking needs, the report said.

If banks can increase investment in a few underperforming areas, they may be able to retain more customers, the report said.

The top five priorities for small businesses surveyed were digital banking tools, cybersecurity and fraud protection, low fees, easy access to bank staff, and having a wide range of products to choose from.

On every priority, the banking sector has performed “disappointingly”, the report said. About 60% of customers are “very satisfied” with their major bank’s breadth of digital tools, access to people and commercial banking products, while about half appreciate their bank’s cyberattack protection and charges.

Improving access to bank staff doesn’t necessarily mean building more branches, a “critical” factor for only 9% of businesses choosing a provider. Instead, small businesses want banks to make it easier to talk to their employees — by phone, chat, video or otherwise.

Ian Benton, senior analyst for small business banking and payments at Javelin Strategy & Research, said this kind of one-on-one advice is where community banks and credit unions may have an advantage over larger banks.

In a report last month, Benton wrote that smaller depository institutions generally “have a better, more detailed understanding of their area and community” and the ability to provide more personalized assistance. They could also “counter the digital hegemony of the big banks” by forming partnerships with core or third-party suppliers, he wrote.

“By offering digital account opening, cash flow tools, invoicing capabilities, tailored products for freelancers and sole proprietors, and robust digital customer service, [financial institutions] can ensure they keep up with the big banks,” Benton wrote.

Nearly half of respondents to the Aricent survey said they use their bank provider’s mobile app daily, while 28% said they use it weekly. Few of them reported visiting a branch or ATM daily, but a third said they did so on a weekly basis, the report found.

Banks and credit unions cannot be relied upon to provide four main products used by small businesses, the report said. These traditional products are business checks, credit and debit cards, payroll processing, and payment card processing.

“Financial institutions should not stop at offering products, as they may miss out on other, more lucrative loan products as their businesses grow and relationships deepen,” the report said.

Such add-ons include retirement accounts, wire transfer services, treasury and cash management, money market accounts and even investment banking.

Despite the bank’s flaws, the survey found that small businesses appear to be largely satisfied with the services provided by their banks. Two-thirds of small businesses said they were “very satisfied” with major banks and 30 percent were “somewhat satisfied”.

Overall, business owners report being optimistic about the future, with 86% of respondents saying they are somewhat or very optimistic about the future of their business. Ninety percent of respondents with 20 or more employees say they are profitable, compared with 71 percent of small businesses.

About three-quarters of respondents said inflation was one of their top three challenges, with supply chain disruptions and workforce recruitment and retention also receiving significant attention.

The top priority for small businesses next year will be acquiring new customers, the report said. “However, concerns about inflation have led them to act to reduce costs and increase efficiency by investing in technology,” it said.

Arizent conducted the online survey between July 18 and August. 5. Conduct polls of small business stakeholders in various industries. Respondents either owned businesses or were directly involved in their company’s banking relationships.

The average number of employees at these companies was 129 and the average revenue was $8 million, although nearly a third of them earned less than $1 million.

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