Community banks & credit unions poised to attract more SMBs, study shows

By Gloria Methri

Local banks and credit unions (CUs) are on the brink of a significant opportunity to capture a larger share of the small-to-medium-sized business (SMB) market, according to the latest SMB Growth Report released by i2c Inc. in collaboration with PYMNTS. The report highlights the increasing appeal of community banks and CUs to SMBs seeking a blend of digital solutions and personalised services—key drivers of modern banking relationships.

Al Taylor, Senior Vice President of FI Solutions at i2c Inc., summarised the findings, saying, “With the right technology solutions, these institutions can overcome traditional limitations by enhancing their digital platforms and offering more personalised services, delivering the competitive, customer-focused experiences that SMBs increasingly expect from their financial partners.”

The report, which surveyed over 500 SMBs across the United States, sheds light on trends shaping the relationship between SMBs and their financial institutions:

• Strong Demand for Local Banks: While national banks currently dominate the SMB market, with 58% of businesses using them as their primary financial institution, 23% of SMBs, particularly smaller businesses in rural areas, prefer local banks or CUs. These institutions are prized for their personalised service, even as national banks are favoured for their competitive loan rates and broader product offerings.
• Switching Interest Among SMBs: Approximately 15% of SMBs are highly likely to switch to a local bank or CU within the next five years, driven by the promise of better customer service and personalised banking. Among smaller SMBs, the consideration rate rises to two in ten.
• Community Involvement Matters: Local banks and CUs excel in fostering strong ties with their communities, a factor highly valued by SMBs looking for financial partners with a personal touch. However, the report notes that these institutions must strengthen their digital capabilities to remain competitive.
• The Digital Divide: National banks have a clear edge when it comes to advanced financial tools and digital services. Conversely, local banks struggle with geographic limitations and digital offerings, factors that SMBs cite as significant drawbacks. Despite this, national banks face criticism for their high fees and lack of personalised service, creating an opening for local banks to differentiate themselves.
• Personalisation is Key: For SMBs, particularly those with higher revenues, the availability of tailored banking solutions is becoming a decisive factor. Smaller financial institutions that invest in customised offerings stand a better chance of attracting and retaining larger SMBs.

The findings underscore the potential for local banks and credit unions to expand their SMB customer base by addressing gaps in digital infrastructure while leveraging their strengths in community involvement and personalised service.

“Local banks and credit unions are well positioned to capture a larger share of the SMB market, especially if they can address the current gaps in digital banking and geographic reach,” Taylor emphasised.

The Road Ahead for Local Banks

To succeed, these institutions must balance their traditional strengths—high-touch customer service and community engagement—with the growing demand for advanced digital banking tools. Investments in technology will be critical to ensuring long-term competitiveness in an evolving financial landscape.

As SMBs evolve in their financial needs, community banks and CUs have a golden opportunity to redefine their role in the sector. By addressing their shortcomings and building on their unique strengths, these institutions can position themselves as the go-to choice for SMBs looking for modern, relationship-based banking.