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Feeling abandoned during crisis, US businesses are switching banks

Disappointment over banks’ responses during the COVID-19 crisis is prompting an unusually large number of small businesses and mid-sized companies in the US to look for new bank providers, according to new data from Greenwich Associates. 

Approximately 16% of small and mid-sized companies have switched banks in the past 12 months, well above the industry’s historic average “churn rate” of 10-11%. In addition, more than one-in-five companies say their satisfaction with their banks took a hit during the pandemic, and 85% of these disaffected companies are either actively seeking a new bank or say they are open to solicitations. 

The Greenwich Associates data shows that companies believe certain banks failed to support them during the crisis. Among the top frustrations cited by company owners and executives were a lack of communication and follow-through from their banks on PPP loans and an unwillingness by banks to provide relief on outstanding loans.  

Among companies that changed banks for all or part of their business in the past year, the top reason for making the switch was disappointment with bank relationship managers for pandemic-related issues. For example, when asked to name their top considerations when hiring a new bank, companies cite loan forgiveness/flexibility on loan terms and conditions as their number-one priority. 

“The COVID-19 crisis served as a flashpoint for many commercial banking relationships," said Chris McDonnell, managing director at Greenwich Associates. "For some companies, their experience was one of frustration, which contributed to a perceived lack of attention and service. Such cases have led to an increased willingness to switch banking providers.”  

Digital differentiation 

The second reason cited for changing business bank providers is 'better online banking capabilities and services'. This is a factor that did not even crack the top five bank-changing drivers until recently. 

“Almost overnight, COVID-19 turned digital banking capabilities from a nice feature to a defining factor,” said Greenwich Associates consultant Dana Schwaeber, who notes that more than nine-out-of-10 small businesses and mid-sized companies report using their banks’ website in the past 90 days, and more than 60% have emailed with their banker.

Economic sentiment turns toward the positive

After six months of pandemic-induced pessimism, business owners and executives have turned optimistic. Small businesses and mid-sized companies participating in a recent Greenwich Market Pulse have been predicting continued economic contraction since March. In September, the Greenwich Optimism Index moved into positive territory, meaning that for the first time since the outbreak of COVID-19, a majority of respondents expect economic growth, as opposed to deterioration, in the six months ahead. 

How do banks survive?

Last week, the white paper, 'Banking After COVID-19: A Look at the Current and Future State of Banking Revenues, Clients and Business Models', from Coalition Greenwich, a CRISIL company, laid out the long-term scenario for banks to remain relevant in corporate and transaction banking.

The white paper noted the issue with relationship managers that the latest data has highlighted, namely that banks will need a complete revamp of coverage and engagement models that includes rethinking the relationship manager role, re-skilling their bankers, and retooling their processes in a way that harnesses technology and data to create real value for clients.

Some tough decisions will also have to be made. The white paper stated that banks will have to hit the reset button on business practices created for a 'normal' interest rate environment. A case in point is cash management, where banks will have to reintroduce fee-based models to preserve profitability. There will be pushback from corporates, but over the long term, there is likely to be an equilibrium in the spirit of 'co-opetition' to preserve the economics of the industry.

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