The Low Hanging Fruit You Might be Missing: Why Serving Local Businesses Is More Critical Than Ever for Community Financial Institutions

In an era of mega-banks and fintech disruptors, community banks and credit unions face a differentiation crisis, how can you stand out with so many options? While you usually can’t compete on size or technology alone, you can double down on your unique super power: knowing and serving your community. This includes the local businesses that form the economic backbone of those communities, an often overlooked avenue for growth among community FIs.

The Overlooked Powerhouse: Small Businesses by the Numbers

Small and micro businesses represent more than 99% of all U.S. businesses according to Investopedia, yet they remain one of the most underserved segments in financial services. With over 37 million small businesses nationwide, they aren’t a niche audience, they’re the majority. More than four out of five small businesses operate with no employees, representing solopreneurs and micro-enterprises that often fall into a gap between retail and commercial banking offerings.

The coffee shop on Main Street, the independent contractor helping local homeowners, the family-owned restaurant that's been serving the community for generations all want a bank who understands their unique needs and market, one that exists where they do. They employ our neighbors, sponsor local sports teams, and keep dollars circulating within our communities rather than flowing to distant corporate headquarters and want a banking experience that can say the same.

David vs. Goliath: Doubling Down on Your Superpower

80% of banks and credit unions plan to expand services for small businesses, up from 65% just two years ago according to Jack Henry. This increased strategic focus reflects a growing recognition that small business banking is both a competitive necessity and a growth opportunity for community financial institutions.

Large banks are increasingly focused on bigger commercial clients, or at least tailor better offerings towards larger businesses, leaving an opening for community financial institutions where it has always existed, serving the underserved. Meanwhile, relationship-based lending remains highly valued by small business owners, and community banks uniquely are positioned to leverage soft information gathered through personal interactions.

Why Local Businesses Choose Community Financial Institutions

Small business owners select their banking partners based on trust, relationship quality, and understanding of their unique needs. A 2024 JD Power survey indicates that only 37% of small business owners believe their bank fully understands their requirements, highlighting a significant gap that community institutions can fill.

Community banks and credit unions excel at relationship lending, particularly for the smaller loans that drive local business growth. Community FIs are uniquely positioned in this way, which gives them the ability to offer faster loan decisioning thanks to streamlined processes and local decision-making authority.

This speed and personal service matters most when a business owner needs working capital to seize an opportunity or bridge a cash flow gap, which impacts the smallest businesses more than larger ones. Unlike large banks that rely heavily on quantitative credit scoring for smaller loans, community institutions can consider the full picture including the business owner's character, community standing, and long-term potential to make more comprehensive judgment calls and truly serve their community’s needs.

A Win-Win-Win Situation: How Growing Together Builds Communities

Serving local businesses is, simply put, a smart business strategy. Small business customers tend to be sticky, reliable clients who look to their banks for proactive advice and partnership. They often maintain multiple accounts, use various services from checking to lending to merchant services, and refer other business owners in their networks. This is especially true of modern community business owners who belong to more online communities and attend both in person and online events more frequently.

Plus, supporting local businesses creates a virtuous cycle. When community businesses thrive, they hire local residents, purchase from other local suppliers, and deposit their earnings locally. This strengthens the entire community's economic foundation, which in turn benefits the financial institutions serving them.

Beyond the Basics: Meeting Evolving Needs

Today's small business owners expect digital capabilities comparable to their personal banking experiences, with over 80% of individuals stating that they prefer digital-only banking according to a 2024 Ofido Survey. However, this doesn't mean abandoning the high-touch service model. Instead, successful community institutions are blending personal relationships with modern digital tools.

Small businesses need business banking platforms that offer the mobile access they are accustomed to in their personal banking experience with added business functionality such as quick and simple treasury management capabilities, advisory support, and integrations with the business tools they already use. 

The key is using technology to enhance the personal relationships and trust you’ve spent years building, without overcomplicating the user experience. A recent survey showed that 76% of small businesses prioritize ease of use when selecting banking services. Digital tools should handle routine transactions efficiently while freeing relationship managers to provide strategic guidance and support.

TLDR: Business Banking as a Growth Engine

For community banks and credit unions, providing small business services is an essential strategy for growth. In the face of growing competition from both larger banks and fintech companies offering specialized business services, community FIs still hold significant competitive advantages in trust, local knowledge, and relationship quality, all values that community businesses care about and benefit from. By expanding and enhancing business banking services, community banks and credit unions strengthen our communities and create opportunities for growth, creating a competitive moat that technology alone cannot breach. The question, and key to capitalizing on this opportunity, is how quickly we can move to capture this market before competitors do.