Why SMBs Change Banks and What You Can Do About It

It’s said that those who fail to learn from history are doomed to repeat it. The most infamous tragedies in NASA’s history are the explosions of the Challenger and Columbia space shuttles. In 1986, Challenger's O-ring seals failed in cold temperatures, despite engineers' warnings, leading to an explosion 73 seconds after liftoff and the loss of seven lives. In 2003, Columbia disintegrated during reentry after foam debris damaged its wing at launch, a hazard NASA had long overlooked. These tragedies, set decades apart, underscore the critical need to learn from history to prevent avoidable mistakes.Although your community financial institution (CFI) is unlikely to learn many practical strategies from space shuttle catastrophes, the concept of taking one’s lessons from others’ past missteps is still a critical foundation for planning success. When your CFI gets a new small- or medium-sized business (SMB) customer, there’s a good chance that your new customer is some other financial institution’s former client. Historically, about 10% of SMBs change banks every year, but that number has been growing. A Greenwich Market Pulse report from last August says that about 15% of SMBs changed banks in the preceding 12 months, and 35% said that they were open to the possibility. That’s a big opportunity for your CFI to capture new market share — if you can solve the problems that led new customers to leave their old banking relationships. Every customer has a unique story, of course, but some pain points repeat themselves often enough to appear in the list of reasons that many SMBs have for seeking out new banking relationships. Reasons SMBs Look for a New CFIRunning a small business is complex. Helping a small business manage its finances can often be just as complicated, and it takes a lot of work and time to build and maintain relationships with these business clients. So why might one want to leave their current financial institution and start the process over from scratch elsewhere? Here are some reasons SMBs seek out a different financial institution and how you can avoid these pitfalls from new clients’ prior banking relationships.High fees, especially over multiple banking relationships. FDIC data shows that banks’ cost of funds rose from 0.74% in December 2020 to 2.24% in December 2023. According to Freddie Mac, the cost of funds index was at 3.67% in January 2025. Banks are also competing with one another for customer deposits; 49% were using brokered deposits last year, up from 39% in 2023. These additional financial pressures have funneled down to customers in the form of higher fees. Clients that have relationships with multiple financial institutions may find that they’re on the hook for larger fee totals than if they banked in just one place. The fix: Offer new and existing customers, both large and small, lower fees for bringing you a greater percentage of their banking business. You can use a profitability tool to analyze customer data and help you determine a fee that balances your institution’s liquidity needs with your customers’ desires.Desire for new services and capabilities. As digitalization continues and new tech-driven financial solutions crop up daily, traditional financial institutions are increasingly competing for SMBs’ business. A Cornerstone Advisors report revealed that just 45% of banks and 38% of credit unions offer real-time payments, tempting businesses to choose consumer payment apps like PayPal, Cash App, or Venmo instead. Accounting and payment processing providers, such as Intuit and Square, are also increasingly dipping into the space traditionally occupied by banks by offering payments and financing. “For many small businesses, accounting platforms have already become a de facto primary bank,” says a report from Javelin Strategy & Research. “That should be alarming for bankers.”The fix: Assess your customer base’s service needs to see if investing in new capabilities or technology will bring ROI. Ask your best customers if there are any services they’re still getting elsewhere; try to bring those services in-house or develop a relationship with a third party that can help you offer them. Hard to find a banking partner that truly stands out. CFIs may not always have the latest technology or the resources to be deeply involved in the daily operations of small businesses, but what they do offer is something just as valuable: trusted relationships and a commitment to local success. However, in a competitive landscape, SMBs with multiple banking options may still explore alternatives if they don’t see a strong reason to stay.The fix: Strengthen your connection to the small businesses in your community by developing a deeper understanding of their industries, challenges, and financial needs. Consider creating a niche within your local market — whether by specializing in financing for certain industries, offering tailored advisory services, or structuring banking solutions that address the unique cash flow cycles of small businesses. Long-standing banking relationships disrupted by mergers. Bank M&A activity picked up in 2024, with six deals valued at more than $1B announced, and many expect the trend to continue. But for SMBs, mergers can mean instability — familiar bankers leave, services change, and the personalized experience they relied on disappears. When that happens, businesses may start looking elsewhere. The fix: If a merger or acquisition is on the horizon, focus on preserving the relationships that set your institution apart. Keep business clients informed throughout the transition, minimize service disruptions, and ensure they still have access to the bankers they trust. A smooth, transparent transition can reinforce loyalty rather than drive customers away.A better grasp of the reasons SMBs leave banks can help readers both understand the frustrations that may be driving new SMB customers and avoid making the same mistakes in new relationships.