Community banks and credit unions (CUs) are becoming increasingly attractive to small and medium-sized businesses (SMBs). These smaller financial institutions (FIs) offer personalized service, easier access, and lower fees—qualities that resonate strongly with many SMBs. However, despite their appeal, smaller financial institutions face challenges, particularly in their digital services and the limited number of branches available to customers.
The SMB Growth Monitor Report by PYMNTS Intelligence surveyed 525 SMBs and highlighted the growing interest in smaller FIs. Approximately 16% of SMBs are considering switching banks within the next five years, with many looking at community banks or CUs. Currently, 23% already utilize a local bank or CU, and the numbers are even higher among rural SMBs, where 49% prefer smaller FIs. Among lower-revenue businesses earning less than $150,000 annually, 32% choose local banks or CUs, emphasizing their importance in serving smaller businesses.
Many SMBs are drawn to community banks and credit unions for a multitude of reasons. Personalized customer service, lower fees, and convenient locations often drive these preferences. For rural businesses and those with smaller revenues, having a bank that feels embedded in the community offers a level of trust and accessibility that national banks often cannot match.
However, despite their strengths, there are clear drawbacks that smaller FIs must address to remain competitive. Outdated or less effective digital platforms are a significant disadvantage, particularly for younger, tech-savvy business owners who prioritize seamless online banking and integrations with their financial systems. Enhancing these platforms could substantially improve customer satisfaction and draw more businesses.
Additionally, the limited number of branches poses another obstacle. Twenty-six percent of SMBs cite this as a significant drawback, highlighting the need for smaller FIs to strategically expand their physical presence. Locating new branches in high-density business areas or underserved regions could make these institutions more appealing while maintaining the personalized touch that sets them apart.
By addressing these challenges, smaller financial institutions can further capitalize on their strengths. Investments in modernizing digital services and thoughtful branch expansions could solidify their position as the go-to choice for SMBs seeking a mix of accessibility, affordability, and personal service. For many businesses, a well-rounded community bank or credit union offers not only financial support but also a trusted partner in their growth journey.
