Read time: 7 minutes
Executive Insights
- Relationships drive initial consideration: 67–69% of SMB applicants cite an existing relationship as a factor in where they applied. But relationship no longer determines where they actually borrow. [1]
- Among online lender applicants, 65% cite speed of decision and 61% cite funding likelihood as their primary drivers. Operational execution wins the transaction. [1]
- Community financial institutions and credit unions hold real satisfaction advantages (79–81%) and stronger approval rates (75–76%) than large financial institutions. That advantage is frequently lost to slow, opaque processes. [1]
- Switching is accelerating: 41% of SMBs are likely to switch primary financial institutions within 12 months, 32% are considering it, and 13% already switched in the prior two years, more than double the 5% rate from McKinsey’s 2022 survey. [2]
- Multi-banking quietly erodes primacy before any formal exit: 34% of small business owners use two financial institutions, and 11% use three or more. [3]
- This is a structural shift, not a post-pandemic disruption. The same behavioral pattern appears in Fed survey data from 2019 forward. [1]
If your retention strategy relies primarily on relationship strength, these findings will show you where borrowers are already making different choices.
Relationship equity is real. The Federal Reserve’s 2023 Small Business Credit Survey found that 67% of large financial institution applicants and 69% of small financial institution applicants cited an existing relationship as a factor in choosing where to apply. [1]
But consider what happens at the moment of decision. Among small businesses that applied to online lenders, 65% cited speed of decision or funding as their primary driver, and 61% cited the perceived likelihood of being funded. [1] The decisive factor shifted from “who do I trust?” to “who will move and who will say yes?”
This is not a recent development. The Fed’s 2020 report, drawing on 2019 survey data, described the same pattern. That continuity over five-plus years of data should reframe how leaders interpret this moment. It is a durable behavioral shift, not disruption still working its way through the system. [1]
Relationship banking remains valuable. What the evidence also shows is that relationship equity is not self-executing. It creates an opening. What happens inside that opening determines the outcome.
What SMBs Say Versus What They Do
The most analytically useful feature of the research is the persistent gap between stated preferences and revealed behavior.
Ask small business owners what matters most and they will say: responsiveness, communication, a lender who knows their business. McKinsey’s 2023 U.S. SME survey found that robust relationship management and servicing remained the most commonly cited reason firms chose a primary financial institution. [2]
Then look at what actually drives switching. The top reasons small businesses moved their primary relationship were easier credit access, better digital experience, and better servicing quality. [2] These are not traditional relationship attributes. They are operational ones.
J.D. Power’s research points in the same direction: small business satisfaction rises when financial institutions improve responsiveness, timeliness, ease of access, and clarity of information. [4] The elements that drive satisfaction are the same elements that, when absent, drive attrition.
Small businesses are not abandoning relationship banking. They are redefining what a good relationship looks like, and the new definition is operational.
The Speed and Clarity Gap: Where Community Institutions Lose Ground
Community financial institutions have real advantages. Approval rates run 75–76% at small financial institutions and credit unions, compared to 66% at large financial institutions. Satisfaction scores follow: 79% at small financial institutions, 81% at credit unions, against 61% at large financial institutions and 40% at online lenders. [1]
But the same data reveals where that advantage gets lost. Financial institution applicants were more likely than online lender applicants to cite long waits and difficult application processes. Online lender complaints centered on pricing and repayment terms. [1] Small businesses willing to tolerate higher rates from online lenders are making a deliberate tradeoff: paying more to get speed and certainty.
McKinsey’s research identified uncertainty and delayed time to funding as the most frequently cited borrower pain point. [2] Clarity is not separate from speed. It is part of how borrowers experience speed. A process feels slow when borrowers do not know where they stand.
The benchmark has also shifted. McKinsey’s research placed traditional financial institution time to decision at three to five weeks. Online and alternative lenders operate at 24–48 hours for many credit decisions, a perception Deloitte’s 2024 U.S. small business banking survey confirmed. [2, 5] The same McKinsey research found that redesigning documentation and decisioning around a single source of truth typically cuts time-to-yes by 50%. [2]
The FDIC’s 2024 Small Business Lending Survey adds an uncomfortable dimension: financial institutions reported customer service, relationships, and speed as their primary competitive advantages, yet only approximately 25% accept a formal small business application through an online portal, and only 6% have a fully online application process. [6] Financial institutions are benchmarking themselves against their own historical process. Small businesses are benchmarking them against the best digital experience available anywhere.
Switching Is Accelerating, and It Starts Before You See It
McKinsey found that 41% of SMBs are likely to switch their primary financial institution within 12 months, 32% are considering it, and 13% already switched in the prior two years, more than double the 5% rate from McKinsey’s 2022 survey. [2] The formal exit, when it comes, is typically not the beginning of the problem.
NFIB’s 2023 survey found that 34% of small business owners use two financial institutions and 11% use three or more. [3] Small businesses do not usually announce a switch. They add a second lender for a credit need their primary institution cannot meet quickly enough. The primary relationship stays on paper while its economic content diminishes.
McKinsey estimates U.S. small business banking represents approximately $150 billion in annual revenue across deposits, loans, cards, cash management, and merchant services. [2] Losing the lending moment weakens deposit primacy, payments, and treasury share alongside it. For community institutions, the stakes are proportionally higher: CSBS reported that as of December 31, 2023, small business loans equaled 8% of assets at community financial institutions, compared to 2% at larger financial institutions. [7] This is not a customer experience issue. It is a balance sheet issue.
Turning Relationship Advantage Into Experience Advantage
The goal is not to replicate fintech. Community financial institutions retain genuine advantages: flexible underwriting, willingness to consider soft information, and trust built over time. FDIC data shows nine in ten small financial institutions have loan decision-makers meet with applicants, compared to four in ten large financial institutions. [6] That human judgment, applied to complex or marginal situations, remains a real differentiator.
The goal is to deliver that judgment inside a process that does not force borrowers to choose between trust and ease.
Deloitte’s 2024 survey found that 68% of SMBs prefer to research financial products digitally, 41% prefer digital loan origination, and more than 80% said they would consider a digital-only banking provider. [5] That last number does not mean 80% of small businesses will switch to a digital-only provider. It means the experience bar has been set by digital providers, and traditional institutions are now measured against it.
Action Framework: Your 30-60-90 Day Path Forward
Days 1–30: Understand the Actual Experience. Map your end-to-end borrower journey for common small business credit products. Pull time-to-decision data by loan type. Identify where borrowers go without status communication for more than 48 hours. Survey recent applicants on process experience, separately from relationship satisfaction.
Days 31–60: Address High-Impact Friction. Prioritize the steps where elapsed time is highest and borrower uncertainty is greatest. Establish proactive communication protocols. Evaluate your digital application capability against borrower expectations. Identify where documentation requirements can be streamlined without reducing credit quality.
Days 61–90: Build the Measurement Framework. Track time-to-decision by loan type, digital origination adoption, application completion rates, and early indicators of multi-banking behavior in your portfolio. Pair every process change with a compliance review. Faster does not mean less controlled. It means better-designed controls.
Small business owners have not stopped valuing relationships. They have started measuring them in operational terms. Relationship equity creates the opening. Speed, clarity, and certainty determine the outcome. Leaders who treat that sequence as operational rather than aspirational are the ones whose relationship advantages will actually show up in retention.
Turn Relationship Equity Into Results
Relationship strength still matters — but it is no longer enough on its own. The institutions that win are the ones that convert trust into action through speed, clarity, and consistent execution at every step of the lending journey. That means designing experiences where borrowers always know what’s happening, what’s next, and how to move forward — without friction. Baker Hill helps financial institutions connect relationship banking with modern lending operations, so you can turn opportunity into funded loans and lasting customer relationships.
Because the relationship may start the conversation — but execution determines who earns the business.
Sources
- Federal Reserve Small Business Credit Survey, 2023 (published 2024). Report on Employer Firms. federalreserve.gov
- McKinsey & Company. U.S. Small Business Banking Insights, 2022–2023. mckinsey.com
- National Federation of Independent Business (NFIB). NFIB Small Business Survey, 2023. nfib.com
- J.D. Power. 2023 U.S. Small Business Banking Satisfaction Study. jdpower.com
- Deloitte. 2024 U.S. Small Business Banking Survey. deloitte.com
- FDIC. 2024 Small Business Lending Survey. fdic.gov
Conference of State Bank Supervisors (CSBS). Community Bank Performance Report, December 31, 2023. csbs.org
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