In today’s economic landscape, small and mid-sized businesses(SMBs) are increasingly reevaluating their banking options. A noticeable trend is emerging where these businesses are contemplating a shift away from the traditional national banks toward local financial institutions and credit unions (CUs). Historically, the convenience and extensive services offered by national banks have been compelling reasons for businesses to remain loyal. However, a growing number of SMBs—especially those situated in rural locations or operating on lower revenue—are discovering a range of benefits offered by local banking alternatives that include personalized services, reduced fees, and improved access to local support. These factors are becoming increasingly significant in their decision-making processes.

According to a recent report from PYMNTS Intelligence, entitled “Community Banks Appeal to Small Communities, But …,” which is a collaborative effort with i2c, there remains a crucial area that smaller financial institutions need to address in their growth strategy. Essentially, these institutions must enhance their digital capabilities to effectively compete with much larger banks that currently dominate the industry.

Local Banks Gaining Favor among Smaller SMBs

Community banks and credit unions are resonating with many SMBs, particularly those that either have lower revenue or are located in rural areas. The PYMNTS report highlights that nearly 49% of rural SMBs actively choose a local bank or credit union, a significant contrast to only 25% who favor national banking options. Furthermore, the study shows that around 32% of SMBs with revenue less than $150,000 prefer to bank with smaller institutions, while 44% still lean toward national banks.

The geographical proximity and the personalized customer service provided by local banks are primary reasons behind these banking preferences. The close-knit relationships that community banks can foster create a strong appeal, especially for smaller businesses seeking tailored financial experiences that larger banks often lack. However, despite these advantages, larger banks continue to maintain a dominant market presence, with 58% of all SMBs still gravitating toward them instead of community financial institutions.

SMBs Transitioning to Alternative Banking Options

A noteworthy trend is emerging as many SMBs, particularly those with lower revenue brackets, are contemplating a switch in their financial institutions. Specifically, 16% of SMBs indicate they are likely to change their banking services within the next five years. Intriguingly, this sentiment is even stronger among businesses earning under $150,000, where 22% express an eagerness to find new banking partners. This presents a golden opportunity for local banks and credit unions to seize increased market share by offering services that are finely tailored to meet the unique needs of these businesses.

The motivations behind this shift are predominantly linked to several factors, such as lower fees, more attractive loan terms, and a higher degree of personalized customer service. Although national banks remain a popular preference for many SMBs, there has been a noticeable rise in dissatisfaction, especially among lower-revenue businesses, primarily due to high fees and the increasingly impersonal nature of service. In contrast, local banks and credit unions offer customizable solutions and establish deeper community relationships, making them a more enticing choice for SMBs aiming for enhanced value and customer support.

Digital Features: A Discrepancy that Needs Attention

While community banks and credit unions present noteworthy advantages in customer engagement and personalized services, they face considerable hurdles regarding their digital offerings. The report reveals that SMBs not only demand but expect advanced digital banking functionalities, an area where national banks continue to outshine their smaller counterparts. For example, SMBs banking with local FIs generally express satisfaction with 12 distinct banking features, compared to 11 features provided by national institutions.

However, in critical areas concerning digital banking services—including mobile banking solutions and online financial management tools—community financial institutions often lag behind. This gap creates an unsettling dynamic for SMBs that depend heavily on efficient digital experiences and innovative technologies. Nonetheless, local banks and credit unions have a promising path ahead. By leveraging their strong community ties, they can enhance these digital offerings. Investing in digital infrastructure can enable local FIs to provide SMBs with a more competitive, hybrid banking experience that combines the efficiency of modern technology with the personalized service that businesses are eager to cultivate.

Empower Your Decision-Making with AI legalese decoder

In navigating this evolving landscape, SMBs may face complex decisions regarding banking contracts, fees, and digital service agreements. This is where the AI legalese decoder comes into play. This innovative tool can demystify legal jargon, allowing SMB owners to better understand the terms and conditions presented by various financial institutions. By utilizing the AI legalese decoder, businesses can make informed choices regarding their banking options, ensuring they select the best fit for their unique needs without getting lost in the fine print.

As SMBs consider switching banks for enhanced service and digital features, the AI legalese decoder stands out as an essential resource. By simplifying complex banking language, it alleviates confusion and equips business owners with the knowledge necessary to engage in discussions with local banks and credit unions. With this tool, SMBs can navigate their options more confidently, paving the way for both optimal service and meaningful savings.