The traditional banking industry may need to improve its small business product offerings to avoid losing customers to a new set of competitors.
That’s according to a new survey from Arizent, the parent company of American Banker, which found that companies such as PayPal, Square and Chime have already taken significant market share.
“While small businesses are loyal to their main banking providers and show relatively low levels of switching, most still use more than one organization to access banking services, which provides a competitive entry point welcoming new entrants” , the report says.
The report will be released Monday in conjunction with the start of American Banker’s Small Biz Banking Conference in Nashville, Tennessee.
Of the 358 businesses surveyed, 45% said their banking providers include PayPal. A similar amount reported using online banks such as Discover and American Express or non-bank fintechs 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 using an online bank, 55% saying they would consider using PayPal, and 53% saying they would consider a credit union.
According to the report, business owners are “taking a broader view of banking,” with some respondents saying they would consider tech giants like Google, Apple or Amazon for their banking needs.
Banks may be able to retain more customers if they can increase their investment in some areas where they are not underperforming, the report said.
The top five priorities for small businesses surveyed were digital banking tools, cyber security and fraud protection, low fees, easy access to bank staff and having a wide range of products to choose from.
On each of these priorities, the banking industry’s performance has been “poor”, the report said. Around 60% of customers were “very satisfied” with their primary bank’s digital tools, their access to staff and the breadth of business banking products, while around half gave their bank’s protections and fees a high rating cyber attacks.
Improving access to bank staff does not necessarily mean building more branches, which was a “critical” factor for only 9% of businesses in choosing a provider. Instead, small businesses want banks to make it easier to talk to their staff — by phone, chat, video or other methods.
That one-on-one advice is where community banks and credit unions can have an advantage over larger banks, according to Ian Benton, senior analyst for small business banking and payments at Javelin Strategy & Research.
Smaller depositors often have “better, more detailed knowledge of their regions and communities” and an ability to provide more personalized assistance, Benton wrote in a report last month. They can also “combat the digital supremacy of big banks” by embracing partnerships with their core providers or third-party vendors, he wrote.
“Offering digital account opening, cash flow tools, invoicing features, products tailored for freelancers and sole proprietorships, and powerful digital customer service, smaller [financial institutions] may ensure they are hot on the heels of the bigger banks,” Benton wrote.
Almost half of Arizent’s survey respondents said they use their banking provider’s mobile app daily, while 28% reported using it weekly. Few reported visiting a branch or ATM every day, but one in three said they do so on a weekly basis, the report found.
Banks and credit unions can’t be relied on to provide the four main products that small businesses use, according to the report. These traditional products are business checking, credit and debit cards, payroll processing, and payment card processing.
“Financial institutions should not stop there in their product offerings, as they may lose other, more profitable lending products as the business grows and the relationship deepens,” the report said.
Such additional products include retirement accounts, wire transfer services, treasury and cash management, money market accounts and even investment banking.
Despite the banks’ shortcomings, the survey found that small businesses appear to be largely 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 optimistic about the future, with 86% of respondents saying they were somewhat optimistic or very optimistic about the future of their business. Ninety percent of respondents with 20 or more employees said they were profitable, compared to 71% of smaller businesses.
About three in four respondents said inflation was among their top three challenges, with supply chain disruptions and workforce recruitment and retention also cited as significant.
The top priority for small businesses over the next year is acquiring new customers, according to the report. “However, the fear of inflation is forcing them to take action to reduce costs and increase efficiency by investing in technology,” the statement said.
Arizent conducted the online survey between July 18 and August 5, surveying small business stakeholders in a variety of industries. Respondents either own the business or directly participate in their company’s banking relationships.
The average number of employees at the firms was 129, and their average revenue was $8 million, although nearly a third of them had less than $1 million in revenue.