As casualties of a constantly changing market, Community Banks have always had to weather storms that can impact their revenue and profitability. However, in the last few years, they have seen numerous trends that have created a challenging environment for them to overcome.
Experts have identified rising interest rates as the top risk facing financial institutions in 2024, followed by economic conditions (including inflationary pressures), heightened regulatory changes, cybersecurity threats, and third-party risks. All of these risks have grown since 2022, suggesting that they aren’t going away anytime soon.
Still, Community Banks need to soldier on by finding ways to navigate the complexities of their current environment, including the challenges stemming from rising interest rates and an inverted yield curve. One way is by increasing their small business customer base to add stability and low-cost deposits.
Impact of an Inverted Yield Curve on Community Banks
Financial institutions of all sizes are adjusting to the current inverted yield curve. When interest rates for long-term loans are lower than the interest rates paid on deposits, Community Banks with already slim profit margins feel the squeeze even more. And this has been going on for some time now. The US Treasury inverted yield curve has hit a record for the longest inversion on record, with a start date of July 2022.
But despite all the doom and gloom, there is some optimism. The most recent Community Bank Sentiment Index (CBSI), released by the Conference of State Bank Supervisors in April 2024, shows that Community Banks are feeling slightly more confident about upcoming economic conditions than they have in a few years. These economic factors are impacting financial institutions of all kinds in the US. However, the FDIC reports that Community Banks have had the most growth, with year-over-year deposit growth of 1 percent from 2022 to 2023. Meanwhile, noncommunity bank deposits dropped by 5.6 percent during that same timeframe.
Even so, there is no indication that interest rates will start falling anytime soon. That’s why it’s important for Community Banks to stay focused on driving profitability for their institutions by gaining more small business customers.
Why Small Business Customers are Ideal for Community Banks
While many Community Banks already focus on commercial banking services, targeting small businesses in particular can be an excellent way to increase revenue and profitability, especially in our current environment. Here are a few reasons why.
Lower cost of deposits
Compared with other types of customers, small business customers tend to have lower deposit costs. In fact, one study found that financial institutions spend about 50% less acquiring small business deposits than consumer deposits.
Potential for long-term growth
As we’ve mentioned before, small businesses have great potential for long-term growth, (every big business was once a small business…). Switching financial institutions can be time-consuming and expensive. Small business customers who have multiple products from a Community Bank, such as a checking account, savings account, credit card, and line of credit, are more likely to stick around for the long term.
Looking to switch
Now is the time to attract small business customers, as one-third of small and mid-size businesses are looking to make a switch. Most (60%) are looking to move at least half of their balances to deposit into a new bank, and about 20% are specifically looking to switch from a larger financial institution to a smaller Community Bank or Credit Union. Among the top concerns for these customers is better customer service, which is something Community Banks are positioned to excel at.
How to Attract Small Business Customers for Your Community Bank
Knowing that a lot of small businesses are actively looking to switch financial institutions is good news for Community Banks. Make sure you stand out from the crowd. Here are a few ways to do it.
Get detailed insights
Most Community Banks can have general discussions about small businesses and their needs. But the ones that truly stand out are those that can give personalized recommendations based on what an individual small business needs. With Crux Analytics, you can get these detailed insights to help you have more productive conversations that help small businesses feel confident that you have their best interest in mind.
Make personal connections
Having detailed insights into a small business can help Community Bankers start forming personal relationships and bridge the engagement gap. These connections can deepen through local ties, which are more likely to happen with Community Banks than with national banks. Having a personal familiarity with a Community Bank can help small businesses feel more comfortable expanding their financial portfolio.
Get a complete view
In addition to providing targeted insights into specific small businesses, Crux Analytics can give Community Banks an overview of the state of their small businesses portfolio and find high-performer ‘look-alikes’ within their market. Having this complete view of the small business landscape can help Community Banks provide more helpful advice to small businesses, helping them determine the best financial products for the short and long term.
See How Crux Analytics Can Help Your Community Bank
Crux Analytics is helping catalyze Community Banks to acquire more small business customers, gain more deposits, and drive profitable growth through expanded services with targeted insights that speak directly to the needs of individual small businesses. Contact us to learn more about our unique technology and see how it can benefit your Community Bank.
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