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Post-COVID SMB Banking Needs: The New Normal

Small business banking: is the new normal less “new” and more “normal”?

Over the past year, there has been lots of talk about Covid’s impact on how small businesses bank and manage their finances. And while it’s certainly true that small businesses have been doing more of their banking in digital channels, has the pandemic changed what small businesses need and want from their financial institutions?

Research we (Phase 5) conducted over the past 24 months shows that the pandemic has impacted channel use and capital needs for small and medium businesses (SMBs). But what’s important to them - their experience as customers – has not shifted much at all. Moreover, many small businesses, especially the very small, think their banks could be doing better on this front.

Let's start with what has changed for small businesses in terms of banking.

  • Capital needs. A Spring 2021 survey of North American small businesses (defined as fewer than 100 employees) we conducted in partnership with Cargo shows that the pandemic has had an impact on many small businesses’ balance sheets. Just over half of small businesses (51%) indicated that their sales had been negatively impacted during the pandemic. For some, this has created a need to borrow more. Our research found that just over 1 in 5 small businesses (22%) had increased their borrowing during the pandemic and for most of these, the additional amounts were in excess of $20,000.

    While greater debt loads make survival a more precarious proposition for some small businesses, a large majority – two-thirds – reported no change in capital needs. And another 11% said they borrowed less. So it’s important to keep in mind that the impacts of Covid have been different for different small businesses.

  • Digital banking. Like consumers, small businesses’ use of online and mobile banking accelerated during the pandemic. A small business survey we conducted in 2020 found that 24% were doing more online banking than before the pandemic while 29% were doing less in person and 18% had stopped in person banking altogether. This increasing reliance on digital seems to have stuck. Follow-up research in 2021 showed that, while a segment of small businesses still prefers in-person interactions for many of their banking needs, 86% of them were now banking online and 55% were using mobile banking (with only 12% not using any digital channels).

While COVID has impacted small businesses, their perceptions of banks have not changed dramatically, nor has what they want from their financial institutions:

  • Low NPS but low likelihood to switch. When we look at banking NPS scores, unfortunately there are more bank detractors (33%) than promoters among small businesses (25%). In aggregate, small businesses give their FIs a -8 NPS. But this isn’t new: low NPS scores have persisted for years. At the same time, less than 10% of small businesses indicate any imminent desire to switch banks. Our research has shown that switching costs and a perceived lack of differentiation among business banking providers underpins this “loyalty.”
  • Products meet their needs. For the most part, SMBs have straightforward banking needs that are met through standard deposit, credit and cash management solutions. While only 16% “strongly agree” that their business bank offers innovative solutions, this does not seem to matter to most small business owners – 61% feel that the quality of the banking products they have access to are good or very good.

  • Fee averse. Small businesses have historically been price sensitive and the pandemic has done nothing to increase their perception of the value of banking services they receive. Only 14% rate the overall cost-to-benefit ratio of their banking services as “very good” and just 11% feel their bank’s pricing model does a very good job of meeting their needs. A similarly small minority 16% agree that their bank does a very good job in being transparent about their fees.

  • Feeling ignored and treated like a number. On a battery of customer experience (CX) metrics, banks were least likely to do well in terms of demonstrating that they care about small businesses (only 10% of businesses surveyed gave top marks to their bank on this measure). Another CX pain point for small business is the perceived lack of flexibility in how banks deal with them. Only 16% of small business decision-makers gave their bank top marks on this. While this is not a new sentiment, it may have been exacerbated for some small businesses in terms of how banks administered government support programs during the pandemic, and to what degree they were willing to offer relief on loan payments.

Despite all this, small businesses continue to trust their FIs. More than 6 in 10 small businesses say they trust their business bank, a rating that has been consistent over time. This foundation of trust offers a platform for FIs to strengthen their relationship with small businesses.

Watch for my future posts regarding specific opportunities to deepen customer relationships with small businesses. For now, I’ll leave you to ponder the French saying “plus ça change…”

Please contact us to learn more about any of the above studies, or to schedule a discussion about your specific business challenges.

Written by Michael Dolenko

Michael Dolenko, MA, is a partner at Phase 5 and the co-lead of the Innovation and Product Development practice. Michael is a sought-after moderator and survey researcher for clients in financial services, retail, technology, education and publishing. He and his team focus on product and service innovation and studies that support go-to-market initiatives.