Three Reasons Why Small Banks Are a Big Hit

The banking industry’s problems are well known–perhaps too much so. Fortunately, though, consumers have choices that go beyond big, super-sized financial institutions: community banks.

There are nearly 8,000 community banks in the U.S., with over 50,000 branch locations, and many of them are growing, innovating and challenging their larger competitors for customers. This new movement among smaller banks comes after more than a decade of losing out to national, name-brand banking firms. In 1994, for instance, community banks held the majority of U.S. deposits–70%, that is. Today, only 30% of U.S. deposits sit in community institutions. Experts believe consumers flocked to the larger banks because they offered more active products such as online banking, free ATM use, and free checking–at a time when community banks were hesitant to modernize.

Community banks see this as a perfect time to make their move. Many are offering the same innovative products as the big boys, without any of the worries. “Consumers are definitely waking up. And they’re realizing that the TARP-ridden mega-banks may not be the most beneficial banking relationship for them over the long term, notes Gabe Krajicek, CEO of BancVue, a consultancy that helps community banks modernize. Bancvue provides software, marketing, and other services for more than 550 community banks.

Although some community banks have run into trouble, “Most of them avoided the crazy loans made by so many larger banks,” says Greg McBride, senior financial analyst, Thus, many community banks (including credit unions) are still making loans. A good number are also offering higher yields and lower fees than their larger competitors in order to attract deposits. Here are the three main reasons consumers are giving community banks a closer look: