Small Banks: Advantages,Disadvantages, and a Key Role in Future Small Business Growth

Small Banks: Advantages,Disadvantages, and a Key Role in Future Small Business Growth

By: Ken Chase.

When most people think about the banking industry, their minds tend to focus on big national and multinational financial institutions. However, America’s banks come in all sizes, and they all have their own vital roles to play in maintaining a stable and successful financial environment for the nation’s businesses and consumers. For their part, the country’s small banks continue to be one of the man drivers for ensuring small business growth across the U.S.

Defining “small bank”

To fully understand these banks’ important role in the financial ecosystem, it is critical to first define them. According to the Federal Reserve, the current definition of “small bank”applies to any banking institution that had assets of no more than $1.384 billion at the end of 2021. That definition reflects the current asset guidelines, which are updated annually to reflect changes in the inflation rate.

Small banks: advantages and disadvantages

For consumers and businesses trying to decide between various banking options, the choices can sometimes be confusing. While larger banks with greater assets may seem to be a better and more reliable option, small banks have many advantages over their larger peers. To make a sound decision, customers need to weigh those advantages against the smaller banks’ potential weaknesses. Making the wrong choice could hinder a customer’s ability to quickly get a mortgage or slow an entrepreneur’s efforts to keep a business afloat.

Smaller community banks do have some disadvantages, of course. Because they have fewer assets, they may not be able to service every type of lending activity. In addition, many of them have a limited number of branches, and may offer fewer financial services than their larger competitors. And while small, community banks have been finding creative ways to offer services like insurance and investments, the small bank niche continues to trail those larger banks in that area.

Despite those obvious disadvantages, small banks have many clear advantages over larger financial service providers. For example:

  • Small banks generally provide a more personalized experience for their customers. The tellers and executives who live in the community often know their customers firsthand. They shop in the same stores. Their children go to the same schools. Those connections can be powerful and create a strong sense of community between the bank and its clientele.
  • Local community bank employees may have greater autonomy when it comes to processing loan applications for individuals and businesses. While larger banks tend to rely on strict processing guidelines that focus entirely on credit scores, many small bank lending officers can review the entire loan application and exercise a greater degree of personal judgment. In many instances, local lenders can meet with a prospective borrower to ensure that they fully understand their unique circumstances and needs.
  • Most small banks have access to the same levels of technology used by larger institutions, so the divide between small and large banks is scarcely noticeable. Like their larger competitors, community banks generally offer online banking services, access to ATMs, and card services that are comparable to those offered by larger firms.

Why smaller community banks continue to be trusted entities

It is also important to note that customers consistently report trust in their local banking institutions. That trend has been true for many decades but appears to have grown even stronger in recent years, largely due to the Covid-19 pandemic. According to reports, smaller banks played an outsized role in helping small businesses gain access to the critical PPP lending they needed to survive the nation’s Covid-related lockdowns. Those smaller banks’ nimble response to the crisis resulted in some businesses rethinking their relationships with larger financial entities.

Meanwhile, many of the nation’s largest banks reportedly gave priority to their wealthiest customers, who were allegedly allowed to avoid online application portals and instead submitted their applications directly to their bankers. According to reporting from the New York Times, that unequal treatment enabled almost all of the super-wealthy applicants to obtain approval for PPP loans, while only one of every-fifteen smaller retail banking clients got the help they needed.

Smaller banks across the United States appear to have served their customers better during the crisis, and that is likely to translate into even greater client trust in the future. Small business owners will continue to remember who stood by them during their most trying times, which will only serve to ensure strong bank-client relations in the coming years.

Managing growth in an ever-evolving economy

According to estimates, small banks represent a clear minority of banking institutions in the U.S. At the same time, however, these banks reportedly account for more than half of all small business lending in the country. They are also proving to be critical partners for fintech company growth, as that sector has seen a dramatic surge in startups in the last few years.

Small banks can continue to enjoy growth in the coming years by focusing on maintaining their core strengths, leveraging new technologies, and expanding their service offerings to meet changing customer expectations. Savvy banks will also increase their reliance on customer data to ensure that they provide the financial products clients want and need.

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