Attracting and retaining small and medium-sized business customers for community banks is as competitive as it’s ever been, if not more so.
It’s a multi-front battle for community banks as new products, platforms and old-school brick and mortar institutions — both big and small — vie for your clients. But community banks are responding by getting ever-more creative to find solutions for their clients and strengthening their relationships with them.
Mike Killeen, the chief financial officer of iconic Minneapolis performance venue First Avenue, is often on the receiving end of those calls. He said banks “regularly” reach out to First Avenue.
But his experience during the pandemic reaffirmed for him that doing business with a community bank — in his case, Edina, Minn.-based Crown Bank — was the right choice. He vividly recalls the day First Avenue was told to immediately shut down and cancel that night’s shows because of the fast-spreading pandemic.
“It was terrifying,” he said. “I was at work on Friday, March 13, 2020, so I guess that tells you something — I know the day, right?”
Within days, his banker at Crown had reached out to him and was working with him consistently through the unprecedented situation. She took steps over the coming weeks that far exceeded his expectations and illustrated to Killeen that First Avenue was a top priority for her.
“So, no matter what, I associate that behavior with Crown,” Killeen said. “It had a big impact on me and the business owner.”
Crown Bank President and Chief Operating Officer Jeff Wessels said that’s in the bank’s DNA.
“Being a small, family-owned bank, we know what our customers are looking for because we’re able to partner with our customers, work closely with our customers, build the relationships to help them, figure out ways to get things done that they maybe wouldn’t be able to get done at a big bank,” Wessels said.
Community banks and small businesses seem like a natural, almost symbiotic fit, but community bankers have to be nimble and creative to keep them on their banks’ customer rolls. It’s a combination of staying true to their roots while also adapting to market demands and their customers’ needs.
Stakes are high
A report from PYMNTS Intelligence, a data and analytics platform company, said 16 percent of small to mid-sized businesses are poised to switch banks. Many are considering a community bank or a credit union, citing their local ties and good reputation as strong draws.
That type of local connection could prove critical. It’s tough sledding for small business owners. Less than 80 percent of businesses nationwide survive their first year, according to an analysis of data from the U.S. Bureau of Labor Statistics by Simply Business. For those that do, roughly 85 percent make it to the next. Having the support and network a community bank can provide presents a strong safety net.
“The stakes are high if you are a small business owner: You likely have almost all of your personal wealth, most of your personal time, maybe family wealth, your reputation, all tied up in the success of that business,” said Rick Wall, chief executive officer at Highland Bank in Minnetonka, Minn. “So it is critical for you to make it work. So when all of that’s riding on the line, you really want to be able to talk to somebody who can have a dialogue with you to try to figure out what the issues are.”
Wall said his bank has adapted as its customers’ needs have shifted. One was finding ways to fill the void left as retail loan originations migrated toward entities that exclusively focus on those product lines.
“As those have become more and more specialized, it’s been harder to compete in some of those areas,” Wall said. “You never used to get your car loan from Ford Finance. You went to your local bank. People still do that, but a lot of that market has been taken up by the big auto industries. As those kinds of things have continued on, small business lending is one area where we have been able to really do a great job of serving our customers with the kind of scale we have.”
As a result, his bank has evolved from an emphasis on retail loans and deposits 30 years ago to a bank that’s now much more focused on small businesses. Over the past eight years, Highland has also stepped in to finance acquisitions as private equity has become more interested in the acquisition of smaller firms.
“And we hired people with expertise in that area, so we had the skills to do it,” Wall said.
Wessels of Crown Bank said that as the competition for commercial customers has grown more intense, his bank has responded by developing the flexibility to find more ways to say “yes” than “no” to loan applications from small businesses.
“If they’re going to a big bank, the big bank’s going to probably just look at their inventory, their receivables, their cash flow from their company,” he said. “And if it doesn’t fit into that box, they’re not going to do anything for them. We’re going to take a look at some of their other sources.”
But one approach that has remained the same at Crown since Day One is looking beyond the numbers. “I’d say we’re probably doing it pretty much the same way we’ve done it since we started,” Wessels said. “One of the Cs of credit is character, and I’d say that a lot of times we might rely a little more on character than some of the other classical Cs. Cash flow is king, but a lot of times in our case the final decision is the character piece. Big banks are not lending on character. They’re just lending on the numbers.”
Dynamic competitive factors
Chris Grimm, chief executive officer of Des Moines, Iowa-based BANK, agrees that banking has gotten more competitive when it comes to small businesses. He attributes that to several factors, including consolidation in the banking sector, expansion and contraction of branches, competition from credit unions, technological advancements and more.
“That technology sometimes makes it a little harder for the small bank to compete because (the big banks) are so good at the transaction,” Grimm said. “But I’d argue all day long that you don’t have to be the best from a transactional standpoint if you can provide an acceptable or good level of customer service and a strong relationship so someone can pick up the phone and aska question when it comes to finances or banking.”
Indeed, a consistent theme heard from leadership at community banks was that building strong relationships is one factor solidly in their favor when competing against big banks. Having lower employee turnover and familiar faces in the branch, knowledge of their community and in many cases being a small business themselves makes them an attractive option when local businesses are bank shopping.
“Now, is it easy for small community banks to grow and build new relationships?” asked Grimm. “No, it’s hard as heck. There’s a lot of competition and it’s hard, but it’s doable. It just takes a lot of elbow grease and shoe leather to get out there.”
Grimm cited statistics that said 60 to 65 percent of small businesses were happy with their bank, compared with 90 percent-plus for retail banking customers.
“That will tell you that there’s a gap there and that there is opportunity there, but you can’t sit behind your desk and expect it to come in,” Grimm said. “It just takes a lot of work to go out and identify those that are dissatisfied and encourage them or counsel them or sell them on coming to your bank.”
Technology has always played a key component in the industry, and that has only become more apparent as artificial intelligence and other tools catch the eye of bankers in the name of efficiency.
For Todd Lee at Fargo, N.D.-based Bell Bank, it means bringing on staff with experience in AI to see how they can leverage it to help with productivity. The bank has a working group looking at different tools that are connected to some of the services it already uses.
“And, honestly, it’s exciting,” Lee said. “Because I think that it will make us more productive and help us to be more cost effective in the kind of roles that we need and how we do just some of the blocking and tackling of portfolio management, underwriting new opportunities, even organizing things as mundane as summarizing meetings.”
Bell has also brought on a platform that has sliced the time it takes to issue Small Business
Administration loans from weeks to days. “SBA has historically been perceived as a hassle, a lot of red tape,” Lee said. “And it’s a barrier for borrowers to sign up for. And now in this streamlined, tech-enabled system, it’s honestly one of the best customer experiences we can deliver.”
Lee said Bell is also focusing on small commercial banking customers that need relatively simple treasury management products and services. “They may or may not need any credit or loans,” Lee said. “They just need a good bank that is going to sell them safe and secure products at a reasonable price. And as simple as that sounds, what we’re finding is that sub-segment of commercial is underserved, at least in the big markets that we’re in.”
Ben Udell is senior vice president of product marketing and innovation at Marquis, a financial services company, and is a former community banker himself who has long tracked technological advancements in the industry. In recent years, that’s been AI.
“What I think is going to be really fascinating for somebody is if they can crack this nut that is small business,” Udell said. “It’s probably the hardest area to bank in community banking, right? They’re generally not large enough where the commercial bankers get excited for the opportunities, or the loans are more complex.”
He said that bankers can lean on AI in those circumstances to answer customer questions and solve some problems, or help train bankers to better understand what small business owners are looking for.
“That can be a pretty big win,” Udell said. “And that’s not even getting into some of the underwriting solutions that could potentially come out of this.”
But that is likely on a distant horizon. For now, a majority of community bankers are content with waiting for FDIC guidance, watching as early adopters work through AI pitfalls or quietly exploring the technology.
“I think there is still extremely limited adoption,” Udell said.
Platinum Bank, based in Oakdale, Minn., is staying its course in terms of its overall strategy to court small businesses, and is instead investing in people to capture more of the small business market. “I wouldn’t say we had to do anything differently,” said Jeff Bajek, chief credit officer. “I would say we’ve made a strategic decision to double down on our SBA lending because we think that is a really valuable tool for small businesses and small business lending.”
Platinum has expanded its SBA department from one person to 10 in the past five years, and now it’s one of the top SBA lenders in Minnesota.
The decision falls in line with Platinum’s strategy of staying laser-focused on banking, said Dave Faust, president and chief executive officer.
“We have a really simple business model: We’re not trying to do insurance. We’re not trying to do wealth management or any other thing,” Faust said. “We’re a small business bank, so 97 percent of our balance sheet is small business customers.
“We have not veered from the simplicity of our model because I do think you can get distracted trying to chase a trust solution or wealth management solution or whatever,” Faust said. “We’ve just said, this is who we are, this is what we’re going to do, and we’re going to try to be the best bankers we can at it.”
Platinum also saw opportunity in smaller deposit accounts that get overlooked by its larger, national competitors.
“I do think with treasury management and helping people with their cash management needs and that other side of the balance sheet is important, too,” Faust said. “I think that gets lost at some of the larger organizations. We try to really stay on top of that and try to help customers when they have a need to move money around or do different things automatically.”
Bajek sums up and echoes the sentiment of many of his community banking counterparts about the value they bring to their business customers when a competitor comes calling.
“We try to get in front of them and say, ‘Hey, we’re going to work with you on what’s in the best interest of your business and what’s going to help you based on the years and years of experience some of our bankers bring to the table.’”
That’s especially evident when they call the bank for guidance or advice or a decision to be made.
“They don’t have to navigate this labyrinth of people and queues and all this other stuff,” Faust said. “They can go right to people who know them, who can solve their problem.”