Can Credit Unions Win in Small Businesses?

Currently, two out of three small- to medium-sized businesses, or SMBs, do their banking with large institutions. It is a story well known by credit unions as they go up against heavy hitters for SMB business.

The story, however, does not end there. More than half of SMBs responding to a recent survey said they were likely to consider a smaller financial institution for their business needs in the near future, making SMBs better opportunities than ever for credit unions.

There are many reasons why SMBs prefer smaller financial institutions to large banks. One of them is responsiveness. The inherent agility of smaller institutions results in faster turnaround times on loans, for instance, an important consideration when cash needs arise quickly.

Credit unions are also more in touch with local culture and business conditions. Often times, account holders become numbers in a large institution. But a credit union understands that a strong, local economy relies on the strength of the small businesses. For example, a credit union based in a farming community may have a better grasp on crop cycles, the need for specific loans and likelihood of pay-back.

By building on their common connections, credit unions can win SMB business and build long-lasting relationships. As they consider their acquisition strategies, they should keep three main points in mind.

1.  Don’t Be Afraid to Go Small

When thinking about the SMB market, credit unions can easily torpedo their engagement efforts if they overlook the fact that 80% of businesses in the U.S. are non-employer firms, according to the U.S. Small Business Administration Office of Advocacy, meaning they have no employees. In this segment, we are talking about solopreneurs, freelancers and gig workers.

While they may be small now, this increasing list of SMBs has growth in mind. The “2018 Small Business Credit Survey Report on Nonemployer Firms” revealed 62% of non-employers expect to increase revenue, and 28% anticipate hiring employees at some point in the future.

When a credit union engages with the small, one-person show, it begins to build a relationship that can easily transition into a prosperous opportunity as the business grows and banking needs change.

2.  Think Beyond Loans

It is important to note that 20% of employer firms have sales well below $500,000 annually, according to the Small Business Credit Survey. For non-employer firms, the number jumps to 71%.

SMBs have traditionally been strong lending prospects for credit unions, but businesses operating at this scale are less likely to take out loans. That doesn’t mean they won’t be putting money in the bank. To gain new business, credit unions will need to look past lending as a point of entry with SMBs and consider other avenues of engagement.

For example, 23% of SMB owners said they plan to open a deposit account in the coming year, providing smaller financial institutions with an easy way to engage local businesses. For 45% of non-employer firms, borrowing is not completely off the table either, as they rely on credit cards as a regular source of business financing. When it comes to card borrowing, nearly a quarter use their personal card for business purchases, according to the Federal Reserve Bank’s Small Business Credit Survey.

Furthermore, when business stability and sales accelerate to the point where SMBs are ready to seek a loan, 66% borrow from the same institution where they keep their other business accounts. Again, the financial institution that has been with the SMB through the lean startup years is more likely to be the first point of contact as business owners seek financing or other financial services.

3.  Help Them Grow and Manage Their Business

As revealed in ath Power’s small business survey, 67% of SMB owners would change financial institutions to obtain tools that would help them better manage and grow their business. More than half would consider an alternative provider for these expanded capabilities, intensifying the competition for SMB accounts.

The survey also provided a clue for credit unions when it comes to developing or implementing new capabilities. More than half of SMBs prefer to conduct their banking business online. SMBs are also clear on the types of digital tools and services they need from their banking partners:

• 70% of SMBs prefer to open a deposit account via online channels;
• 50% of SMBs would like to apply for a loan on the web;
• 67% relish online tools for cash flow management, forecasting and budgeting directly integrated into online banking features to minimize data entry; and
• 64% want to integrate online banking with accounting systems such as Quicken.

Given the priorities on the SMB wish list, it is easy to envision a use for Open Banking. The opportunity can be summed up in two words: Data sharing. Through the use of an application programming interface (API), Open Banking allows data to flow freely from different, usually unrelated, parties.

This means credit unions can partner with third-party providers on the tools and capabilities that SMBs want and present them as integrated banking solutions. For the SMB that wants to continue using the familiar tools already in their arsenal, APIs can support the integration of trusted cloud-based software as well.

It is not plug-and-play exactly, but close enough to significantly improve the innovation status of credit unions and provide a clear way to help them gain more SMB customers and members.

At the End of the Day

When all is said and done, 92% of SMBs select their primary business financial institution based on the service they receive. This is an area where credit unions can shine by using their community connections to personalize member relationships and provide individualized attention to SMB owners.

Michael Abare is Principal Product Manager, Digital Business Banking for Finastra in Austin, Texas.