Small and medium-sized businesses (SMBs) are reassessing their relationships with financial institutions as digital transformation reshapes the banking landscape. While national banks dominate the sector, many SMBs express dissatisfaction with high fees and impersonal services. This situation has created an opportunity for community banks and credit unions (CUs) to position themselves as strong alternatives. These institutions emphasize personal relationships and localized support, which many SMBs find preferable. However, their ability to compete depends on their adoption of digital banking solutions, which have traditionally been a challenge for smaller financial entities.
In previous years, national banks had a technological advantage, offering robust digital platforms while community banks struggled to keep up. The rise of banking-as-a-service (BaaS) providers and FinTech collaborations has altered this landscape, enabling smaller institutions to access advanced digital tools. This has allowed community banks to compete by providing both digital efficiency and personalized customer service. Despite these improvements, national banks continue to hold a significant share of the SMB market, leveraging their scale and established infrastructures.
What Is Driving SMBs Toward Community Banks?
Many SMBs seek financial partners that offer more than just transactions. Personalized service, local expertise, and flexibility are key factors influencing their banking decisions.
“SMBs don’t just want a bank — they want a partner,” said David Durovy, SVP of transformation at i2c. “And community banks and credit unions are uniquely positioned to be that partner.”
Unlike national banks, which may lack a deep understanding of regional markets, community banks can offer tailored solutions that align with local business needs. This level of service builds trust and fosters long-term relationships.
However, digital services remain a critical component. SMBs, particularly those operated by younger entrepreneurs, expect seamless digital banking experiences. Online lending, real-time payments, and AI-driven customer service are becoming essential. Community banks that integrate these services while maintaining a personal touch stand to benefit the most in this competitive space.
How Can Community Banks Overcome Digital Challenges?
Despite their focus on customer relationships, many community banks lag behind larger institutions in digital offerings. Addressing this gap requires strategic investments in technology. Partnerships with BaaS providers and FinTech firms allow smaller banks to implement modern banking solutions without the high costs of in-house development.
“By leveraging next-gen providers, community banks and credit unions can now access the same real-time payments, digital lending, and AI-driven customer support tools that were once reserved for big players,” Durovy stated.
Enhancing digital capabilities without losing the human element remains a key challenge.
Reputation also plays a significant role in attracting SMB clients. Trust in financial institutions is built over time through consistent service and reliability. While national banks rely heavily on brand recognition, community banks cultivate trust through direct engagement and customer support. A strong reputation for responsiveness and personalized service can differentiate local banks from larger competitors.
The competition between community banks and national institutions is expected to intensify as digital transformation progresses. SMBs will continue seeking financial partners that offer both convenience and personalized support. While national banks have the advantage of scale and resources, local institutions can leverage their community presence and tailored services to attract business clients. The ability to balance digital innovation with customer-centric banking will determine the success of community banks in this evolving landscape.
