Open for business(es): How technology helps community institutions compete for small business accounts

Technology

Key points:

  • Today’s small businesses have high expectations for online interactions, and they want their financial services to be as fast and convenient as possible.
  • By taking a strategic approach and working with the right technology vendors, community banks can streamline their operations to offer superior digital experiences and attract new business customers.
  • The right technology can unlock an advantage over money-center banks who haven’t focused as closely on building the same connections with customers.

Over the past 20 years, the banking industry has seen a rapid shift of market share away from community financial institutions (FIs) towards money-center banks. Today, the top 15 banks alone hold 56.2 percent of market share, up 40 percent from just 25 years ago. This can be attributed to the differences in how these money-center banks and community FIs prioritize resources, as well as bets they’ve hedged to continue attracting a wider pool of customers. 

While money-center banks with deep pockets spent resources developing and deploying new banking technology solutions, many community institutions doubled down on traditional relationship banking. Their goal was to create first-rate customer experiences for community members who come into a branch looking for hands-on service and a real person to talk to.

These diverging strategies have resulted in a digital technology gap that poses an existential threat to many community institutions. 

The question then becomes: how can we level the playing field?

The good news is that community banks are already providing customers and small businesses with outstanding products, great service, and other important advantages over larger financial institutions. They’re also providing lifelines when the going gets tough.

According to the 2021 Banking Impact Report conducted by Wakefield Research and commissioned by MANTL, community bank executives across the country reported that over a quarter (26 percent) of the small businesses they served would’ve gone out of business without their assistance during the COVID-19 pandemic. Additionally, 95 percent of community banks have provided a loan for a small business denied by a larger bank. 

So it’s not the service keeping customers from engaging with community institutions. It’s simpler than that. Consumers and small business owners (SBOs) are just accustomed to being able to do everything online. They’re so accustomed, in fact, that when surveyed, 57 percent of SBOs said they wouldn’t even consider using a bank or credit union that didn’t offer online account opening. 

When you factor in that 45 percent of community institutions report not having the infrastructure in place to support online account opening at all, it illustrates the large gap between a definitive customer demand and a large-scale inability to meet that demand. The impact of this gap is often felt most when community banks attempt to start new relationships with customers—one of the most important moments in any customer journey.

Fortunately, by taking a strategic approach and working with the right technology vendors, community banks can streamline their operations to offer superior digital experiences and attract new customers. By adopting useful, simple technology they can build on the strong relationship-banking investments they’ve already made and unlock an advantage over the money-center banks who haven’t focused as closely on building the same connections with customers. 

Good tech + good relationships = the highest-performing banks. No question about it. 

Support growth with the right digital investments

The work to close this technology gap between community institutions and money-center banks is well underway, mainly because of the growth potential it presents. Across the country, community FIs are building the capabilities to meet customer technology demands and maintain prosperity in the current economic climate. 

As banks dedicate resources to prepare for the future of customer experiences, digital channels provide a safety net of 24/7 service that’s good for growth and good for customers.

Flushing Bank in New York, for instance, has reported that 20 percent of its new accounts in the second quarter of 2020 came from a digital channel that had only gone live in March. In just a few short months, Flushing was able to thrive in an especially challenging environment due to its digital investment. This success shows that community banks can use technology to drive real economic outcomes.

Happy State Bank in Texas saw a 167 percent rise in new checking accounts over the course of several months as a result of their digital investment. As they focused on helping small businesses with the Paycheck Protection Program (PPP) in Spring 2020, Happy State was able to keep adding new accounts through digital channels without sacrificing valuable resources in physical branches.

Happy State Bank also demonstrates something important about the relationship between digital investment and relationship banking as you grow your institution. The right digital tools are the support system for your mission. They don’t replace it. Happy State was always focused on helping small businesses. Rolling out digital resources for their customers was never going to change that. They invested in digital tools because it allowed them to worry less about day-to-day housekeeping and focus on what matters to them: helping those small businesses get better and better each day.

Digital investment helps community institutions clear the last hurdle

Once community institutions close the technology gap between themselves and money-center banks, the sky’s the limit. 

Consumers are already aware that community institutions will do more for them even outside of the core products and surveys they provide.

According to the 2021 Banking Impact Report, more than half of consumers (55 percent) said a community bank or credit union had the biggest positive impact on their community over large national banks (22 percent), regional banks (15 percent), and neobanks (8 percent). Small business owners agreed that community banks had the biggest positive impact in the local area (37 percent), followed by large national banks (23 percent), regional banks (18 percent), credit unions (17 percent), and neobanks (5 percent).

Even if your balance sheets don’t need an influx of deposits right now, it’s still the right time to embrace digital services. Investing in digital infrastructure will continue to support aggressive deposit growth strategies if and when current trends of nationwide deposit growth start to slow down.

It’s also a strategic advantage for community banks to focus on their small business customers in the coming months. This customer segment will contribute a great deal to a community institution’s bottom line, and figuring out how to serve them best during a time when you might not be as dependent on a large influx of deposits will allow you to build more sustainable relationships that’ll pay off in the long run. 

Additionally, neobanks are becoming more and more focused on attracting small business owners as part of their growth strategies, oftentimes using promotions to get them to open an account. Community institutions have the products and services in place to provide more substantive, long-term value than a cheap sign-up promotion, and now’s the time to prove it. 

“Set it and forget it” won’t be enough

Community institutions must demand returns from their digital investments. 

Today, the average conversion rate for online account opening at community FIs stands at just 12 percent. Many neobanks, on the other hand, have a 70 to 80 percent rate of conversion for opening accounts online. Given this sevenfold disadvantage on conversion rates, a community bank would need to spend $7 more in marketing for every dollar that a neobank spends.

So how can community banks compete and actually get the most out of the technology they choose to strengthen their relationships with customers? By viewing technology as an investment, not an expense.

This means setting ambitious targets that merit the buy-in and resources needed to expedite digital transformation efforts. The goal is to generate excitement for the opportunities that come with building new capabilities. Additionally, community banks should be mindful of where neobanks fall short, specifically as the businesses they serve increase in complexity, size, and scale of operation. 

Digital channels are a critical way to attract and retain customers and ensure long-term success. Today’s consumers and small businesses have high expectations for online interactions, and they want their financial services to be as fast and convenient as possible. 

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