MARKET COMMENTARY Community and Credit Unions have a Specialty Banking Home-Field Advantage in the Small Business Market

Small- and mid-sized businesses (SMBs) represent an overlooked opportunity for most community banks and credit unions. Currently, the majority of SMBs, two out of three to be exact, with large institutions.1 However, 51 percent said they are likely or extremely likely to consider a smaller local financial institution in the near future.2

Small- and mid-sized businesses (SMBs) Understanding the Home-field Edge account for 99 percent of all business in Specialty Banking activity across the U.S. Comprised of When it comes to selecting a banking 99% companies with under 500 employees,3 partner, SMBs go with what they know. of all business activity in the U.S. is this sector is a growing part of the fabric For nearly half of business owners, done by companies with less than of the nation, driving economic fortune location is the primary factor in selecting 500 employees and offering employment to nearly half the a bank, and 47 percent take their business country’s workforce.4 to the same institution holding their personal accounts.7 Fortunately, the future looks strong for many SMBs. Revenue growth was up Local and nearby resonates for community for 35 percent in 2018,5 according to the banks and credit unions as well. 79 percent Small Business Credit Survey (SBCS), a of SMBs report satisfaction with smaller collaboration of the 12 Federal Reserve banks compared to 67 percent for large Banks. In addition, nearly a third of institutions,8 but familiarity isn’t the only employer firms are growing and 53 percent factor turning community banks and credit have ambitions to be larger than they unions into hometown heroes. are now.6 Smaller banks are more agile than larger Due to the nature of small business, local institutions and can react quickly to SMB banks and credit unions have a ready needs. That’s an important factor for many opportunity in the market, particularly small- and mid-sized businesses, as they as they build upon their specialty operate lean, and cash flow problems may lending edge. arise quickly.

FINASTRA Market Commentary 1 The inherent agility of smaller banks But in the end, it’s about relationships and result in faster turnaround times on loans. shared values. The branch manager’s son Community banks and credit unions also may play soccer on the same team as a 75% approve nearly twice as many SMB loan small business owner’s child. They see of small- and mid-sized businesses requests as large banks do,9 an important each other around town and interact at say that personalized advice is key in point as SMBs consider growth options. community events. selecting a banking partner Beyond practical considerations, These deep community connections community banks and credit unions turn local banks and credit unions into are more in touch with local culture and hometown specialty lenders as SMBs business conditions, making them better search for a financial partner—someone lending partners for SMBs. This was a they can trust to advise them on critical factor in the wake of the 2018 maintaining the economic stability of financial crisis. their business and the best way to handle financial matters. During the initial phase of economic recovery, real estate remained depressed According to 75 percent of SMBs, the across much of the country. As the ability to obtain personalized advice is key economy began to gain traction, however, in a banking partner and 40 percent would the real estate market trended upward switch banks to get it.11 faster in some areas than others. While large banks were limiting the number of How Community Banks and Credit real estate or construction loans based on Unions Can Attract and Retain SMB overall national trends, many community Business financial institutions were willing to invest Small banks and small business have a lot in area development projects based on in common. Executives at community and the strength of the local economy and regional institutions wear many hats. Your construction market. CFO might also be your technology expert, while your CEO does double time as your According to research conducted by marketing lead. With a small- or mid-sized JPMorgan Chase and Company, the business, owners are also responsible for median SMB holds only 27 cash buffer multiple moving pieces of daily operation. days in reserve.10 When a SMB needs financing, it’s often for the little things or This connection builds understanding and to float their operations for a short period helps community banks and credit unions of time. In these circumstances, specialty to play up their home-field specialty lending lenders are more likely to understand edge. However, since most business specific SMB woes and be willing to owners turn first to their own bank when provide loans. In many ways, community it comes to taking out a loan,12 attracting banks and credit unions are like specialty borrowers starts long before the business lenders, thanks to their deep community considers borrowing. ties and connections with the customers Thanks to technology advancements and and members they serve. the advent of cloud-based services, small- Consider a local restaurant in Eugene, and mid-sized businesses have a host Oregon, focused on serving vegan and of options for simplifying daily financial gluten-free dishes. A bank located in New tasks. For instance, a business can now York City is less likely to understand the go online and in a matter of minutes unique nuances of the region and may not complete a loan application and receive be as easily convinced of the restaurant’s an approval. “The check is in the mail” has probability for success. A local bank never been more apropos or simple. As a or credit union, however, is inherently in result, demand for digital online services touch with these community preferences, is growing. because they live and work with the same people the business is serving every day.

FINASTRA Market Commentary 2 Simultaneously, 40 percent of SMBs Payments is another area where SMBs would consider switching banks to receive value services from their bank. Real-time more personalized service.13 Since digital payment solutions simplify the AP cycle While smaller banks have interactions by nature are distant and for small businesses and their vendors by require little engagement, community automating many payment procedures. “traditionally been recognized for banks and credit unions must use digital Digitizing the loan application process rapid underwriting, their business in a way that builds and strengthens and combining it with automation in is at risk from online-only new relationships with small business owners. underwriting is another area where It comes down to finding the digital entrants. community banks and credit unions can ” services that SMB owners want the most make strides to attract and retain more as well as those that add value to the bank. small business customers. While smaller banks have traditionally been recognized Finding the Right Digital Approach for rapid underwriting, their record is SMB owners need to streamline their day- at risk from online-only new financial to-day operations and offload tasks where technology entrants. they can, and they’re looking for banks to provide some of the tools they need to Lending services from PayPal, for example, save time and improve efficiency: have been integrated into the online purchasing transaction so seamlessly •• 70% of SMBs prefer to open a deposit that a small business hardly recognizes account via online channels14 that they’ve taken out a loan. In contrast, •• 50% of SMBs would like to apply for a traditional banks require on average a total loan on the web15 of 12 non-contiguous hours to process an application and up to 7-10 days before the •• 67% rank sophisticated online and paperwork is signed and check is in hand.19 mobile banking capabilities on their wish list16 Replacing manual loan underwriting with digital decisioning allows banks to process •• 67% relish online tools for cash flow applications faster, with less risk and at management, forecasting and budgeting a lower cost. Banks have improved and directly integrated into online banking funding turnaround times by as much features to minimize data entry17 as 50 percent while boosting internal •• 64% want to integrate online banking efficiency by 30-50 percent.20 with accounting systems such as Quicken18 Consider Connected Banking The concept of connected banking Pushing routine tasks to digital channels can be simplified in a few words: data is one way banks can improve customer sharing. Through the use of an application or member relationships while also programming interface (API), data from generating cost efficiencies. Change of different, usually unrelated, parties flows address, balance inquiries, transaction seamlessly, allowing the end-user to records and the like can all be accessed experience it as if it were coming from a via lower-cost online channels or mobile single entity, in this case, the bank. apps. Placing these tasks in an online environment means that they can be completed when it’s most convenient for the business owner, while allowing the bank to dedicate personnel to higher value assignments.

FINASTRA Market Commentary 3 By partnering with technology providers However, just as SMBs need their bank that offer a connected banking solution, to provide sound financial advice and community banks and credit unions realize expertise, community banks and credit 68% a world of opportunity. Not only are they unions shouldn’t be afraid to seek out a of business respondents to Accenture’s able to gain the functionality of digital partner to help them gain the digital and global survey would prefer to participate services, such as payments processing, online services they need to maintain their in an open banking ecosystem through but they can integrate their core offerings specialty lending edge. their bank into the platform, providing a seamless A third-party partner can guide community solution to their customers and members. banks and credit unions on a digital Creating an ecosystem that small- and journey that meets the needs of SMBs mid-sized businesses access to fulfill and enhances the financial institution’s a variety of needs helps time-starved community standing as a home-field business owners to quickly and efficiently specialty lender. When looking for a partner accomplish many of the tasks that eat in digital transformation, community away at their day. banks and credit unions should consider the following: For example, SMBs would be delighted to find that their provider •• Can the provider deploy the solution offers online banking, but when that same quickly, with minimal downtime and bank or credit union also provides services interruption to your current systems and that simplify supply chain management, operations? payments or a host of other time-saving •• Does the provider meet all of your needs implementations, all from the same portal while minding your budget? where they do their banking, that’s when loyalty starts to skyrocket. •• Does the partner provide a wide suite of capabilities that can be added over time In fact, 68 percent of business respondents as needed and budgets permit? to Accenture’s global survey would prefer to participate in an open banking •• Are the solutions connected, allowing ecosystem through their bank.21 Trust is complete visibility of the customer the main reason SMBs prefer to work with across all applications? their established financial service provider. •• Does the provider support the integration Banks also win when connecting of third-parties into the provided customers to open banking portals. platform, to allow seamless operation As customers and members interact with your existing software or with new with open platforms they create a wealth systems that could bring value to SMBs of data that provides banks with a more or the bank? complete view of the financial picture. •• Is the partner continuously innovating With such detailed data and the insights and bringing new capabilities to market? from platform analytics, the bank can Providers should be looking toward the better advise on financial products and future and working on how to address reduce risk when lending to SMBs. the emerging challenges on the horizon. Look for a Partner Above all, the partner needs to be flexible Across the board, digitizing the most and able to meet your needs. They should important customer journeys can increase also understand your position as a bank revenues by as much as 20 percent home-field specialty lender and work and decrease costs by 30 percent.22 with you on a solution that maintains That alone should be enough to make your standing as a community partner. community banks and credit unions consider the importance of developing a digital strategy.

FINASTRA Market Commentary 4 For More Information Visit Being the SMB Hometown Hero Footnotes finastra.com in Your Community 1. Jeffry Pilcher. “How to Win the Small Business With the right digital capabilities, it isn’t Banking Market.” The Financial Brand, June 13, 2017. Web. hard for most community banks and 2. Ibid. credit unions to capture and maintain Telephone 3. “Frequently Asked Questions About Small the home-field specialty lending edge. Business.” U.S. Small Business Administration +1 800 989 9009 In the end, it comes down to being true Office of Advocacy, Aug. 2018. Web. to your brand. 4. “2018 Small Business Profile.” U.S. Small Business Administration Office of Advocacy, 2018. Web. Are you the next-door neighbor who 5. “Small Business Credit Survey: Report on Employer welcomes one and all with a friendly face? Firms.” Federal Reserve Banks, 2019. Web. 6. ibid. Or maybe you’re known as a partner to 7. Ben Ashworth. “Nav’s 2018 Business Banking farmers, an institution that goes out of its Study.” Nav, Nov. 12, 2018. Web. way to support the heartland? 8. “Small Business Credit Survey: Report on Employer Firms.” Federal Reserve Banks, 2019. Web. A community bank in Wisconsin will have 9. “Dear Bank, Will You Be My Small Business a different set of core philosophies than Financial Partner?” Personetics, Mar. 21, 2019. Web. a credit union in California, but these core 10. “Cash Is King: Flows, Balances, and Buffer Days.” guiding principles should be based on and JPMorgan Chase & Co., Sept. 2016. Web. 11. ibid. aligned to the needs of the community it 12. “BAI Banking Outlook: Business Banking Insights.” serves. After all, serving the community BAI Research. Retrieved from https://www.bai.org/ is at the heart of the home-field specialty research/bai-banking-outlook/banking-business- lending edge. insights-infographic 13. ibid. 14. Andrew Martins. Business Owners Want More Convenient Banking Services.” Business News Daily, Apr. 12, 2019. Web. 15. ibid. 16. “Five Banks and Credit Unions Rocking the Small Business Market.” The Financial Brand, May 24, 2018. Web. 17. ibid. 18. Ibid. 19. “Total Lending Commercial: End-to-End Lending Solutions.” Finastra, 2019. https://www.finastra. com/solutions/lending/commercial-lending/total- lending-commercial. 20. “The Four Pillars of Digital Transformation in Banking.” The Financial Brand, Mar. 27, 2018. Web. 21. “Digital Transformation Readiness Survey.” Center for Creative Leadership, 2018. Web.

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