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The traditional banking industry may need to improve its small business product offerings to avoid losing customers to a new crop of competitors.
A new survey conducted by US banker Arizen has found that companies such as PayPal, Square and Chime have taken a significant share of the market.
“While small businesses remain loyal to their primary banking providers and exhibit relatively low levels of switching, most still use more than one organization to access banking services, providing a competitive entry point for new entrants,” the report said.
The report was released Monday at the start of the American Banker Small Business Banking Conference in Nashville, Tennessee.
Of the 358 businesses surveyed, 45% said their banking services include PayPal. A similar proportion reported using online banks like Discover and American Express or non-bank fintechs like Chime, with 30% saying they work with Square.
Small businesses are weighing those options, with 67% of respondents saying they’d consider using online banking, 55% saying they’d use PayPal and 53% considering a credit union.
According to the report, business owners are “taking a broader view of banking,” with some respondents considering tech giants like Google, Apple or Amazon for their banking needs.
Banks that can retain more customers can increase their investments in many underperforming areas, the report said.
For small businesses, the top five issues identified in the survey were digital banking tools, cyber security and fraud protection, low fees, easy access to bankers and a wide variety of products to choose from.
In each of these priorities, the banking industry’s performance is “impressive,” the report said. About 60% of customers were “very satisfied” with their main bank’s digital tools, staff access and breadth of commercial banking products, while half gave their bank’s cyber attack protection and payments a thumbs up.
Improving access to bankers does not mean building more branches, which was the “decisive” factor for choosing a provider for only 9% of businesses. Instead, small businesses want banks to make it easy for them to communicate with their employees — via phone, chat, video or other means.
That one-on-one advice is where community banks and credit unions can have an advantage over big banks, said Ian Benton, senior analyst for small business banking and payments at Javelin Strategy & Research.
Smaller depositors often have “better, more extensive knowledge of regions and communities” and the ability to provide more personalized assistance, Benton said in a report last month. They can also “combat the digital dominance of big banks” by adopting partnerships with their core providers or third-party providers, he wrote.
“By offering digital account opening, cash flow tools, invoicing features, products tailored to freelancers and sole proprietors, and powerful digital customer service, small [financial institutions] It can ensure that they are hot on the heels of the big banks,” Benton wrote.
About half of respondents to the Aricent survey said they use their bank’s mobile app daily, while 28% said they use it weekly. Fewer of them reported visiting a branch or ATM every day, but one in three said they did so weekly, the report found.
Banks and credit unions can’t rely on providing the four main products used by small businesses, the report said. Those traditional products are business checking, credit and debit cards, payroll processing, and payment card processing.
“Financial institutions should not stop at their product offering, because as the business grows and the relationship becomes stronger, they may lose other, more profitable loan products,” the report said.
Such additional products include retirement accounts, currency exchange services, treasury and money management, money market accounts and even investment banking.
Banks’ Weaknesses According to the survey, small businesses seem to be satisfied with the services their banks provide. Two-thirds of small businesses said they were “very satisfied” with their main bank, and 30% were “somewhat satisfied.”
Overall, business owners reported feeling positive about the future, with 86% of respondents saying they were somewhat optimistic or very positive about the future of their business. Ninety percent of respondents with 20 or more employees said they were profitable, compared to 71% of small businesses.
Three out of four respondents said their top three challenges were cost inflation, supply chain disruptions, and workforce recruitment and retention.
According to the report, the top priority for small businesses in the coming year will be acquiring new customers. “However, the threat of inflation is driving them to invest in technology and take steps to reduce costs and increase efficiency,” he said.
Arizen conducted a poll of small business stakeholders across a range of industries from July 18 to August 5. Respondents either own the business or are directly involved in their company’s banking relationship.
The average number of employees in the firms was 129, and their average revenue was $8 million, although nearly a third of them had revenue of less than $1 million.
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