In a financial landscape dominated by major institutions, small banks face a unique challenge when competing against the larger players, especially the "Big Four" (JP Morgan Chase, Bank of America, Wells Fargo, and Citibank), which collectively control a significant percentage of business accounts.

Small banks can carve out a niche by capitalizing on their strengths—customer relationships, personalized service, and local market knowledge. To remain competitive, it’s critical for small banks to focus on becoming the primary banking provider for their clients, a goal that can be achieved through strategies that leverage multiple accounts, increased customer engagement, and enhanced offerings.

Understanding the Flow of Funds

One of the first signs that a small bank is not fully meeting a customer’s needs is when a client’s funds are flowing out to fintechs or larger banks. When businesses or individuals regularly move money to external accounts for bill payments, loans, or investment services, it indicates that the smaller bank lacks the full range of financial solutions the customer requires. This leaves room for larger competitors or fintechs to step in and offer more comprehensive services, leading to customer attrition.

To counteract this, small banks must expand their product offerings to match their customers' needs. This could involve partnering with FinTech companies to offer integrated payment solutions, wealth management services, or lending products, thereby keeping funds within the bank’s ecosystem. By providing a seamless, all-in-one financial experience, small banks can increase customer loyalty and reduce the need for external banking relationships.

Multi-Account Relationships

Research has shown that customers with multiple accounts at a single bank are far more likely to remain loyal. A 2021 McKinsey study noted that 60% of customers who held more than two accounts at a bank considered it their primary financial institution. For small banks, encouraging customers to open multiple accounts is key to becoming their primary bank. Offering bundled services—such as packages that combine a business checking account, merchant services, and small business loans—can entice customers to centralize their financial activity at one institution. The more accounts a customer holds, the more difficult it becomes for them to switch banks or use external providers for banking services.

Capitalizing on Personalized Service

A small bank’s competitive advantage lies in its ability to offer a level of personalized service that large banks simply cannot match. The 2024 J.D. Power U.S. Retail Banking Satisfaction Study found that smaller banks consistently outperform larger institutions in terms of customer satisfaction, particularly in the areas of service quality and relationship management. Small banks have the flexibility to offer tailored solutions, build stronger personal connections with clients, and provide face-to-face interactions.   For small banks, the key is to highlight these strengths while offering solutions that larger banks might not. Leveraging local knowledge to offer more relevant loan products, for example, or responding more quickly to local economic conditions, can make small banks indispensable to local businesses. Ensuring that relationship managers proactively engage with clients—especially in periods of financial uncertainty—will also boost loyalty.

Digital Banking as an Equalizer

While small banks may not have the technological resources of larger competitors, they can embrace digital transformation to close the gap. By partnering with FinTech companies or adopting cloud-based solutions, small banks can offer robust digital services such as mobile banking, online account management, and instant payment services that today’s customers expect.

A LexisNexis study reported that the rise of digital services has narrowed the competitive gap between large and small banks, especially in lending and payments. Through strategic investments in technology, smaller banks can offer FinTech forward user experiences, which appeal to a younger, tech-savvy customer base. This also allows small banks to retain control of the customer experience without ceding ground to third-party providers.

Tailored Solutions for SMBs

Small and medium-sized businesses (SMBs) are a crucial customer base for small banks. By offering specialized solutions tailored to SMB needs, such as working capital loans, equipment financing, or cash management services, smaller banks can distinguish themselves from larger competitors who often lack the agility to provide such focused attention.

The Big Four banks hold a large percentage of business accounts, but they often fail to provide the level of care and customization SMBs need. Small banks can outcompete these giants by offering more personalized financial products and support, building lasting relationships with local businesses, and providing the kind of customer service that large institutions cannot replicate.

To compete with larger institutions, small banks must prioritize building deep, multi-account relationships and offering a suite of digital tools and services that meet modern expectations. By focusing on personalized service, capitalizing on digital transformation, and offering comprehensive solutions for SMBs, small banks can position themselves as the primary financial provider for their clients, ensuring long-term loyalty and minimizing customer attrition.

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Sources:

• McKinsey & Co.: 2021 U.S. Retail Banking Satisfaction Study

• J.D. Power U.S. Retail Banking Satisfaction Study 2024

• LexisNexis: 2024 Small Business Lending Fraud Study