Communication is Key to Attracting Small Businesses

December 2017: Vol 40 No 12
Marcus Rothaar
Credit unions must convey understanding, expertise and the ability to deliver technology and specialized products and services.

young café owner using a tabletThis was first published on the Raddon Report and is used with permission here. 

Small businesses that use community-based financial institutions are typically more loyal—and exhibit higher levels of satisfaction—than those that use larger national banks, according to Raddon Research Insights data. While many small businesses that use community-based institutions are likely to recommend their institution to others, mega-banks still dominate the small business market. Communication of capabilities is one way community banks and credit unions can help boost future market share.

Word of Mouth Potential

Raddon recently surveyed 1,200 small businesses and found that those using a community bank or a credit union as their primary financial institution are more likely to remain with their institution when compared to their big bank counterparts. When presented with a 10-point scale to rank the likelihood of recommending their primary financial institution to family members or friends, 60 percent of small business owners that utilize a community bank selected “9” or “10”—indicating they are a promoter of their bank—and only 18 percent selected less than “7”—indicating they are a detractor. This gives community banks an overall “promoter” score of 37 among small business customers. Small businesses that use a credit union had an even higher percentage of promoters, resulting in a promoter score of 49.

This is certainly good news for community-based institutions, as Raddon Research Insights shows major and regional banks with a promoter score of 17 among small business customers.

These results are particularly encouraging for community institutions that are looking to grow their small business services, but they only tell part of the story. In spite of higher loyalty and satisfaction scores, community banks and credit unions are underrepresented when it comes to small business market share, with only 19 percent of small businesses claiming a community bank or a credit union as their primary financial institution.

Big Banks Dominate the Small Business Market

The majority of small business owners continue to gravitate toward major banks, with more than two-thirds (68 percent) of small businesses using one of the top six largest banks as their primary financial institution. In terms of market concentration, Wells Fargo, Bank of America, and JPMorgan Chase collectively control 53 percent of these primary relationships. Community banks and credit unions are both much better represented with the general consumer population, with 19 percent of consumers claiming a community bank as their primary financial institution and another 19 percent of consumers claiming a credit union as their PFI.

So what is preventing community-based financial institutions from achieving a larger small business market share?

The low net promoter scores of mega-banks suggest that an opening exists for community banks and credit unions to be part of the conversation.

Raddon Research Insights asked approximately 1,000 small business owners that are not currently using a community bank or credit union whether they would consider using one in the future. Overall, 51 percent of these small businesses were extremely or very likely to consider using a community bank in the future, with 38 percent open to using a credit union.

For the small businesses that are unlikely to use a community bank or credit union, simply being satisfied with their current financial institution topped the list of reasons why they would not consider switching. Branch convenience also weighs heavily on the minds of these small business owners, with 31 percent citing the lack of branches as a reason why they wouldn’t use a community bank or a credit union. The product menu and pricing also play a significant role, as many indicated their current financial institution offers a better selection of business products.

Small business owners also placed emphasis on pricing, indicating they may be able to receive more favorable deposit and loan rates and lower fees at their current institution. Community banks and credit unions also need to overcome perceptions of lack of experience and employee knowledge regarding business services.

While only 18 percent of those unlikely to use a community bank and 9 percent of those unlikely to use a credit union cited concerns over online and mobile banking technology, it was more of a significant issue for millennial small business owners. Underscoring the growing importance of technology for younger small business owners, 41 percent of these small businesses led by a millennial said they would not conduct business with a community bank based on their poor perceptions of community banks’ online and mobile banking technology. Likewise, 24 percent of the millennial led credit union detractor group cited concerns over credit union’s technology tools.

Communication is Key

Community-based financial institutions may succeed in winning a greater share of the small business market by demonstrating they understand small business challenges, they have the expertise that small business owners need, and they can deliver the technology and specialized products and services to help them grow.

Having a strong online and mobile presence may also help financial institutions connect with small business owners—especially millennials—while conveying the breadth and depth of business services available to them. Mobile apps geared towards small business owners offer a unique appeal and additional convenience for the faster pace of life today.
Word of mouth promotion should continue to be strong for community-based financial institutions, and incentivizing small business owners to recommend their institution is a great tool to help generate growth. Community-based financial institutions may be able to increase their long-term appeal and progression in the small business market by offering incentives such as cash bonuses to those who help recruit new small business customers.

Marcus Rothaar has more than 10 years of experience with strategic programs at Raddon. In his current role as a senior research analyst, he creates and develops research products that provide strategic guidance for the financial services industry.