Small businesses are the backbone of the economy, with an average of 430,000 new business applications submitted monthly in 2024, a 50% increase from 2019.¹ This surge underscores the growing importance of small businesses and their relationships with financial institutions. However, as competition from fintechs and other non-traditional providers increases, banks must adapt to retain their primary role in supporting small businesses.
By integrating value-added services—such as payroll solutions—into their offerings, banks can strengthen trust and establish long-term relationships with small business clients. These insights are drawn from the American Banker white paper, Growing Small Business Banking Relationships with Value-Added Services. This blog explores key insights from a recent American Banker and Gusto Embedded study to identify how banks can grow alongside their small business customers.
Key Takeaways:
- Trust is paramount. The primary drivers of trust are Acting in a client’s best interest, ensuring security, protecting against fraud, and keeping up with competitive alternatives.
- Banks face challenges in meeting expectations: While banks are well-positioned as primary providers, many small businesses seek additional providers for services like payroll.
- Integrated services matter: Embedding value-added solutions, such as payroll, can foster more substantial, more resilient relationships.
- Digital experience is critical: A seamless, modern digital interface can help banks compete with fintech and neobank offerings.
The Role of Trust in Small Business Banking Relationships
Trust underpins the relationship between banks and small businesses, with 97% of banking leaders identifying it as critical to customer retention. According to the research, four trust pillars explain 80% of the variance in overall trust:
Although banks generally score well in ensuring safety and fraud protection, the ability to “keep up with customer demands” emerged as a notable gap. This shortfall often leads businesses to seek secondary providers for services beyond basic banking.
Where Banks Fall Short
Despite trusting their primary banking providers, small businesses often diversify their financial services. Seven in ten small businesses use two or more financial providers, and only 29% rely on their primary bank for payroll services. For these needs, the remainder turn to fintechs, online banks, or specialized providers.
This shortfall highlights an opportunity for banks to bridge the gap by offering integrated services that meet evolving small business needs, particularly as businesses scale. As Gusto’s CEO, Josh Reeves, notes, “We’re not bankers, but we help solve related pains in highly regulated industries. By partnering closely with banks via embedded payroll, we want to invest in understanding how to help us all create better solutions for our shared customers.”
The Importance of Digital Experiences
A well-designed digital experience is crucial for attracting and retaining small business clients. For many small businesses, particularly sole proprietorships, the ease of opening accounts and accessing basic financial tools is a deciding factor when selecting a provider. One survey participant explained, “With my credit union, you can open new personal accounts within minutes, yet not new business accounts. My [neo] bank lets you open new business accounts in seconds, not minutes.”
Neobanks and fintechs have capitalized on this gap by offering user-friendly, streamlined digital services, raising the bar for traditional banks. To compete, banks must deliver superior digital experiences while maintaining the trust and reliability that have traditionally set them apart.
Opportunities for Banks to Build Stronger Relationships
The complexity of small business banking relationships means these clients rarely switch providers. Only 27% of small businesses are likely to change their primary banking relationship within the next two years. However, among companies with 10 to 49 employees, this likelihood rises to 30%, and it increases further to 39% for businesses with 250 to 1,499 employees.
As businesses grow, their financial needs become more sophisticated, creating opportunities for banks to deepen their relationships. Offering integrated solutions that grow alongside the business can make banks indispensable partners.
For example, embedded payroll solutions represent a critical area for improvement. Although 66% of small businesses use payroll, less than one-third rely on their primary bank for this service. Offering payroll as part of a comprehensive suite of services can foster stronger relationships, as businesses are more likely to stay with providers that meet their evolving needs.
Leveraging Integrated Offerings to Meet Business Needs
Banks can differentiate themselves by embedding value-added services into their core offerings. These services address immediate needs and help banks position themselves as long-term partners. As Reeves emphasizes, “It’s important to meet small businesses where they are regarding product needs today and where they will be in the future. Embedded fintech allows banks to seamlessly integrate add-on products, such as payroll, creating stickier, long-term relationships.”
Integrated offerings extend beyond payroll. Banks can tailor services such as retirement planning, payment solutions, and lending access to small businesses’ needs at every growth stage. These offerings also help banks align their value proposition with the four pillars of trust, particularly in terms of keeping up with customer demands and providing a seamless experience.
Building Bridges for Long-Term Growth
Trust is earned over time through consistent, meaningful interactions. For banks, the path to fostering deeper relationships with small businesses lies in understanding their client’s unique needs and responding with innovative, integrated solutions. Digital transformation and value-added services like payroll can help banks bridge gaps and deliver the experience small businesses expect.
- September 3, 2024. U.S. Department of the Treasury, “Small Business and Entrepreneurship in the Post-COVID Expansion.” home.treasury.gov/news/featured-stories/small-business-and-entrepreneurship-in-the-post-covid-expansion
