Dave DeFazio

This Viewpoint first appeared in Bank Director magazine’s fourth quarter 2023 issue.

Even before interest rates rose, community banks and credit unions were battling megabanks, regional banks and the new wave of digital banks and fintechs to keep and attract traditional retail and small business checking account customers.

This battle is for only a small percentage of account holders that are interested in moving their primary accounts— about 11% of accounts, per Morning Consult research.

To acquire new market share, it’s critical to commit to funding an external acquisition strategy over time. Even the megabanks realize that winning the deposit war requires a marketing investment war chest — something most community banks don’t have.

Refocus on Primary Accounts
New high-interest savings accounts are increasing the cost of funds and siphoning off surplus deposits parked at banks. Plus, the digital banks’ and fintechs’ focus on product featurization has materially decreased new account openings at traditional banks.

So, where should community financial institutions turn with this ever-increasing competition? Broadly speaking, the smart place to look isn’t outward, but inward.

There has been a lot of talk recently about the resurgence of relationship banking as the best way to navigate these current market conditions. Organically growing business from existing customers is much less expensive and yields much better results for banks compared to hunting for new customers. The growth that comes from relationships already at the bank are a sweet spot, given bankers have historically delivered more personalized services to their customers compared to larger and digital banks. A prioritized focus on existing customers can be a hedge growth strategy, given the challenges of external account acquisition.

But getting back to relationship banking doesn’t stop with just retail accounts.

Reinventing Business Checking
There is a $400 billion market sector that community banks still maintain a powerful influence over that has largely been untapped: small business checking accounts. Unfortunately, many community banks haven’t upgraded these products in quite a while. The result is they’re not delivering the kind of product experience that modern small and medium businesses (SMBs) want.

We’ve found very encouraging data that shows community banks have what it takes to reassert their relevance in this sector, which we detailed in a recent white paper looking at what modern small businesses want in a checking and banking relationship.

Many small businesses report that they are open to new banking relationships. Overall, two-thirds of SMBs are somewhat or very likely to look for new banking relationships in the next 12 months. Among SMBs with annual revenue between $10 million and $100 million, that percentage rises to 77%.

Many are looking for better business checking account features. When asked why they might consider a new banking relationship, nearly 40% of respondents indicated they wanted to get better business checking account product features and capabilities.

They’re also increasingly open to borrowing from their primary checking account provider. Roughly 80% of SMBs say they will consider their primary business checking account provider for their borrowing needs over the next two years.

What this data underscores is that a relationship banking approach that’s focused on serving existing retail and small business checking customers is more important than ever. And offering small businesses something different and more relevant to their needs is a smart way to pursue deposit growth.

Reinvented SMB checking accounts also have the potential to deliver a lot of interchange revenue and fee income. These accounts will increase a bank’s primacy and market share without needing to go toe-to-toe with megabanks, digital banks and fintechs to land new customers. Megabanks and fintechs will continue to fund and find ways to acquire new customers. Traditional smaller banks can combat this by growing their retail base organically and revamping their small business checking products to keep and acquire new SMB customer relationships.