Small Business Lending Survey 29

SECTION 4. 

Competitive Practices and 

Advantages 

37 Banks were also given a write-in option.

This section investigates the overall approaches that 

small and large banks take to small business lending 

by looking closely at the competitive practices each 

type of bank customarily uses and at each type’s 

perceived competitive advantages. The preceding 

section presents evidence of partial segmentation in 

the lending market by size: small and large banks 

often view each other as competitors, but at the same 

time they rarely view each other as top competitors. 

This suggests that their customer bases partly 

overlap, with some small businesses able and willing 

to borrow from a bank of either size, whereas other 

small businesses are much better suited to small 

banks or to large ones.

Therefore, the survey considers the extent to which 

the approaches of these organizations overlap and 

the extent to which they diverge, and whether these 

approaches correspond to the understanding that 

small banks are relationship lenders and large 

banks are transactional lenders. The answer to this 

question is important for small businesses in the 

context of the recent trend toward fewer small banks. 

For instance, if small banks approach small business 

lending in a more personalized manner than large 

banks, small businesses that need more personalized 

engagement through the loan application process 

may lose access to credit if trends continue.

4.1 How Does Your Bank Maintain and 

Generate Relationships with Small 

Businesses?

The partly overlapping competition between banks 

of different sizes that is discussed in Section 3 may 

be mirrored in an overlapping of practices between 

small and large banks. However, small and large 

banks might also be expected to use different 

practices, with small banks using relationship-based 

practices that focus on individual contact between 

staff and potential customers, whereas large banks 

may take advantage of economies of scale and scope 

to offer customers a greater range of products and 

greater convenience.

Accordingly, the survey asked banks to mark which of 

20 different practices they use to generate new small 

business lending relationships and maintain existing 

ones.37 The survey also asked banks to designate up 

to 3 practices as their top practices. The survey results 

show that there is a core set of practices for small 

business lending that is common to both small and 

large banks. Further, this core set contains practices 

that are high-touch and personal in nature. Figure 

4.1, Panel A, presents the shares of small banks and 

large banks that selected each practice as one that 

the bank uses. The figure shows that the ability to 

talk to a live person, acceptance of walk-in customers, 

community involvement, and customer referrals are 

practices cited by more than 85 percent of both small 

and large banks. Conversely, practices that outsource 

or automate small business lending are relatively 

unpopular, even among large banks. Brokers, indirect 

lending, and online applications are used by less than 

25 percent of both small banks and large banks, and 

lead generators are used by only 31.1 percent of large 

banks and a much smaller proportion of small banks. 

Together, these results suggest that for both small 

and large banks, small business lending is inherently 

relationship-focused.

Beyond these common practices, large banks appear 

to take advantage of their economies of scale and 

scope in several ways. Large banks, on average, 

use 2.8 more practices than small banks, possibly 
30 FEDERAL DEPOSIT INSURANCE CORPORATION

Section 4

reflecting their greater resources.38 Nearly all large 

banks (95.8 percent) use their branch networks to 

generate new relationships and maintain existing 

ones, whereas only slightly over half (53.7 percent) 

of small banks do. This, along with the findings 

38 The survey finds that small banks use 8.9 different practices on average, whereas large banks use 11.7, which is a statistically 

significant difference.

of Section 3 about markets and competitors, 

underscores the crucial role that physical proximity 

plays in small business lending, and suggests 

that having multiple branches is a powerful tool 

for large banks. Large banks are also more than 

Figure 4.1: Percentage of Banks That Use This Practice to Generate New and Maintain Existing 

Small Business Lending Relationships

Source: SBLS Question 24.

Notes: Entries marked with a “w” indicate that the number of responses falls below the allowable reporting threshold for 

protecting respondents’ identities. At the statistical significance of 10 percent, “*” denotes that small banks are more likely than 

large banks to use this practice to generate new and maintain existing small business lending relationships; “+” that large banks 

are more likely than small banks. Banks may select multiple answers; results will not sum to 100.0 percent.

A. Uses Practice B. Top Three Practice

25.0

33.5 +

52.2 +

27.1

20.7 +

18.7

95.8 +

64.8

60.4 +

81.3 +

89.4 +

85.3

10.2

31.1 +

12.4

93.6 +

93.6 +

85.4 +

89.5

95.7

14.9

15.6

16.9

17.1

5.9

11.2

53.7

55.0

38.8

57.5

69.2

86.1

4.8

8.8

13.3

72.9

86.6

63.1

92.6

96.5

0.0 20.0 40.0 60.0 80.0 100.0

Transfer Services

Payroll Services

Card Payment Processing

Check Cashing Services

Online Applications

Loan Production Ofces

Branch Network

Hours Open

Marketing,

New Customers

Marketing,

Existing Customers

Staff Outreach

Community Involvement

Indirect Lending

Lead Generators

Brokers

Referrals, Professionals

Referrals, Customers

Staff Knowledge

Walk-ins

Ability to Talk

with Someone

Small Large

Personal Interaction

Outreach

External Sources

Convenience

Business Services

0.0

0.0

w 

0.0

0.0

w 

39.5 +

w 

w 

29.4

29.2

12.3

0.0

w 

w 

56.2 +

33.3

14.6

0.0

28.9

0.0

w 

w 

w 

0.4

0.8

8.9

4.4

4.8

21.1

19.9

32.6 *

w 

1.2

1.4

30.3

51.6 *

13.8

21.4

49.9 *

0.0 20.0 40.0 60.0 80.0 100.0

(Mark All That Apply) (Mark Only Three)
 Small Business Lending Survey 31

Section 4

20 percentage points more likely than small 

banks to engage in active marketing to both their 

existing customers and potential new customers, a 

divergence that could arise from large banks’ greater 

economies of scale. Finally, large banks are more 

likely than small banks to use their other business 

services, such as payroll services and, especially, 

card processing, to attract small business borrowers, 

thus leveraging economies of scope to provide 

customers with greater convenience.

Whereas there is substantial overlap in the practices 

that small and large banks use, there is less overlap 

in the practices they prioritize. Figure 4.1, Panel 

B, presents the shares of small and large banks 

that selected each practice as one of the bank’s 

top three practices. Small banks are between 18 

and 21 percentage points more likely than large 

banks to prioritize the common high-touch 

practices—live person, walk-ins, community 

involvement, and customer referrals.39 Many small 

banks also prioritize other practices that rely on 

strong connections to the community, including 

professional referrals (30.3 percent), marketing to 

existing customers (21.1 percent), and staff outreach 

(19.9 percent). 

By contrast, large banks are 30 percentage points 

more likely than small banks to view the use of their 

branch networks as one of their most important 

practices, once again highlighting the importance of 

location in small business lending. Large banks also 

rely more heavily than small banks on professional 

referrals (56.2 percent versus 30.3 percent). 

In terms of similarities, both small and large banks 

prioritize staff outreach and marketing to existing 

customers at similar rates, and although large 

banks do use their other business services to attract 

borrowers, they rarely consider the provision of 

these services to be crucial practices.40 Overall, both 

39 The number of large banks reporting walk-ins as a top three practice fell below the reporting threshold for protecting 

respondents’ identities.

40 The number of small and large banks that report card processing as a top three practice fell below the reporting threshold for 

protecting respondents’ identities; the number of large banks that report check cashing and payroll services also fell below 

the threshold.

41 Top competitors for small business lending are discussed above in Section 3.3.

42 Banks were also given a write-in option. 

small and large organizations do tend to prioritize 

different practices, with small banks using hightouch practices somewhat more intensively than 

large banks; but for banks of both sizes, relationships 

are important.

4.2 What Are the Competitive 

Advantages of Your Bank and of 

Your Number One Competitor?

In order to gain more insight into the priorities of 

banks of each size and the potentially different types 

of value they provide to their customers, the survey 

focused on how banks of both sizes view themselves 

and how other banks view them. The understanding 

that small banks are relationship lenders and large 

banks are transactional lenders could lead one to 

expect that each size has distinct advantages in small 

business lending. For example, small banks might 

be better at customer service and at customizing 

their approach for different customers, whereas 

large banks might offer more convenience and 

lower interest rates. The similarities discussed in the 

preceding section, however, allow the possibility that 

the two sizes of banks may in fact not have strongly 

distinct advantages. 

The survey asked banks to list both their own 

competitive advantages and the competitive 

advantages of their top competitor.41 In both cases, 

banks selected from a list of 18 possible advantages, 

and designated up to 3 as top three advantages.42 The 

results are broadly consistent with the findings of 

the previous subsection that, even for large banks, 

small business lending is rarely fully transactional. 

Figure 4.2 groups into six broad categories the 

individual advantages that banks selected, and shows 

that an overwhelming majority of both types of 

banks—86.5 percent of small banks and 83.5 percent 
32 FEDERAL DEPOSIT INSURANCE CORPORATION

Section 4

Figure 4.2: Percentage of Banks That Consider Themselves to Have a Top Three Competitive 

Advantage in This Category

Source: SBLS Question 18.

Notes: Entries marked with a 

“w” indicate that the number of 

responses falls below the allowable 

reporting threshold for protecting 

respondents’ identities. At the 

statistical significance of 10 percent, 

“*” denotes that small banks are 

more likely than large banks to 

consider themselves to have a top 

three competitive advantage in this 

category; “+” denotes that large 

banks are more likely than small 

banks. Banks may select answers in 

multiple categories; results will not 

sum to 100.0 percent.

0.0

w 

53.1 +

24.3

24.3

83.5

2.2

2.2

22.5

35.2 *

56.6 *

86.5

0.0 20.0 40.0 60.0 80.0 100.0

Underwriting

Technology

Convenience

Pricing/Structure

Speed of Service

Customer Service

Small Large

Table 4.1: Percentage of Banks That Consider This Competitive Advantage One of Their Own Top 

Three

Category Advantage Small Banks Large Banks

Customer Service

Relationship 58.6 57.1

Personal attention 58.2* 42.7

Staff quality 29.6 32.5

Speed of Service Decision speed 48.6* 24.3

Funding speed 20.3 w

Pricing or Structure

Loan structure flexibility 24.7 20.3

Fees 8.0 w

Interest rates 4.3 w

Term 0.8 0.0

Convenience

Convenient location 11.0 16.3

Credit products 7.8 18.4+

Other services 5.4 24.5+

Number of locations 1.6 22.3+

Technology Mobile banking 1.8 w

Remote deposit 0.5 w

Underwriting

Collateral requirements 0.9 0.0

Debt service coverage 0.9 0.0

Loan-to-value 0.7 0.0

Source: SBLS Question 18.

Notes: Entries marked with a “w” indicate that the number of responses falls below the allowable reporting threshold for protecting 

respondents’ identities. At the statistical significance of 10 percent, “*” denotes that small banks are more likely than large banks 

to list this as a top three competitive advantage; “+” that large banks are more likely than small banks. Banks may select multiple 

answers; results will not sum to 100.0 percent.
 Small Business Lending Survey 33

Section 4

of large banks—list some aspect of customer service 

as one of their own top advantages. Table 4.1 breaks 

out the categories into their specific individual 

advantages and presents the proportion of small and 

large banks that selected each individual advantage 

as one of their top three. The table shows that a 

majority of both sizes of banks consider established 

relationships with their borrowers to be their most 

important competitive advantage (58.6 percent of 

small banks and 57.1 percent of large banks), making 

it the most commonly selected advantage for both 

groups. Further, there is a set of self-reported top 

advantages that are common to both small and large 

banks, mirroring the results from Section 4.1. After 

established relationships, three of the next four most 

common top advantages of small banks are also 

among the next four most common top advantages 

of large banks: personal attention from the bank, 

decision speed, and staff quality.43

Yet, while small banks and large banks both 

perceive their customer relationships to be their 

own most important advantage, their competitors 

are much more likely to view small banks as having 

superior customer service. Table 4.2 presents banks’ 

views of the top advantages for their number one 

competitor, be it a small bank, a large bank, or a 

credit union.44 The table shows that nearly half (47.5 

percent) of those who compete with small banks 

view customer relationships as one of small banks’ 

top advantages, compared with 16.2 percent of those 

who compete with large banks. Figure 4.3 shows that 

this pattern continues into the broader measures 

of advantage—the categories within which the 

individual advantages are grouped. The figure shows 

that a majority (58.8 percent) of the banks competing 

43 The fifth most common top advantage of small banks—loan structure flexibility—is the seventh most common for large banks, but 

the difference between small and large banks is small and statistically insignificant (24.7 percent of small banks compared with 

20.3 percent of large banks).The fourth most likely advantage for large banks is other services offered, and large banks are much 

more likely than small banks to list this as a top advantage (24.5 percent of large banks compared with 5.4 percent of small banks).

44 As shown in Section 3, almost all banks selected one of these organizations as their number one competitor. Banks that did not 

select one of these organizations as their number one competitor are excluded from this analysis.

45 As discussed in Stein, “Information Production,” both capital allocation and loan quality decisions are made locally at small 

banks, whereas at large banks capital allocation decisions are made at a distant central office, although loan quality is determined locally. The overall speed of small business loan decisions appears to be due partly to lack of distance between the 

officials who determine resource allocation and those who determine loan quality.

46 The 2016 Small Business Credit Survey found that small businesses cite long waits for loans as one of their most frequent issues when receiving bank loans. See Federal Reserve Bank of Cleveland, 2016 Small Business Credit Survey Report on Microbusinesses: Nonemployer and Small Employer Firms, November 2017, https://clevelandfed.org/global%20

with small banks consider them to have an aspect of 

customer service as a top advantage, compared with 

only 17.3 percent of those that compete with large 

banks. This suggests that small banks do have some 

advantages in relationship lending, consistent with 

the higher emphasis they place on the components of 

customer service relative to large banks, as shown in 

Section 4.1.

The clearest advantage of small banks, however, 

across both internal and external evaluations, is 

speed. Figure 4.2 shows that a majority of small 

banks (56.6 percent) consider an aspect of speed of 

service—either decision speed or funding speed—to 

be one of their own top three advantages, compared 

with slightly less than one-quarter of large banks 

(24.3 percent). Further, small banks are viewed as 

similarly advantaged by their competitors. Figure 4.3 

shows that over one-quarter (26.2 percent) of small 

banks’ competitors view speed as one of small banks’ 

top advantages, compared with only 7 percent of 

large banks’ competitors.

This speed advantage for small banks is particularly 

noteworthy because one might expect large banks, 

using quantitative data, to have a more standardized 

decisionmaking process resulting in quicker 

decisions. In practice, however, it appears that the 

flatter organizational structure of small banks, with 

fewer layers of management separating loan officers 

from bank owners, allows for faster decisionmaking 

and loan processing.45 The importance of this 

advantage should not be underestimated, because 

funding speed is often an important consideration 

for small business borrowers.46 This advantage also 

suggests, however, that if technological advances 
34 FEDERAL DEPOSIT INSURANCE CORPORATION

Section 4

Figure 4.3: Percentage of Banks That Consider Their Number One Competitor to Have a Top Three 

Competitive Advantage in This Category

Source: SBLS Questions 16 and 17.

Notes: At the statistical significance 

of 10 percent, “*” denotes that small 

banks are more likely than large banks 

to be considered by their competitor 

banks to have a top three competitive 

advantage in this category; “+” that 

large banks are more likely than small 

banks. Banks may select answers in 

multiple categories; results will not 

sum to 100.0 percent.

11.6 +

15.8

7.0

69.9 +

70.5 +

17.3

5.5

12.7

26.2 *

51.2

52.4

58.8 *

0.0 20.0 40.0 60.0 80.0 100.0

Technology

Underwriting

Speed of Service

Pricing/Structure

Convenience

Customer Service

Number One Competitor Is a Small Bank (<$10 Billion)

Number One Competitor Is a Large Bank (=> $10 Billion)

Table 4.2: Percentage of Banks That Consider This Competitive Advantage One of Their Number One 

Competitor’s Top Three

Category Advantage

Top Competitor is a ...

Small Bank Large Bank Credit Union

Customer Service

Relationship 47.5* 16.2 w

Personal attention 26.1 w 0.0

Staff quality 12.1 w 0.0

Speed of Service Decision speed 21.7* 6.0 0.0

Funding speed 9.7* 5.0 0.0

Pricing or Structure

Loan structure flexibility 24.2 22.7 40.8φφ

Fees 7.0 6.5 13.1

Interest rates 29.6 59.3+ 85.1φφ

Term 8.0 22.6+ 39.1φφ

Convenience

Convenient location 25.9 28.2 w

Credit products 15.4 23.8+ w

Other services 15.8 21.7 w

Number of locations 17.8 33.7++ 17.7

Technology Mobile banking 3.5 7.7+ 0.0

Remote deposit 3.0 w 0.0

Underwriting

Collateral requirements 6.9 10.9 18.5φ

Debt service coverage 3.2 2.4 w

Loan-to-value 5.4 5.6 w

Source: SBLS Questions 16 and 17.

Notes: Entries marked with a “w” indicate that the number of responses falls below the allowable reporting threshold for protecting 

respondents’ identities. At the statistical significance of 10 percent, “*” denotes that small banks are more likely than large banks to 

be considered by their competitor banks to have this competitive advantage as one of their top three; “+” that large banks are more 

likely than small banks; “++” that large banks are more likely than both small banks and credit unions; “φ” that credit unions are more 

likely than small banks; “φφ” that credit unions are more likely than both small and large banks. Banks may select multiple answers; 

results will not sum to 100.0 percent.
 Small Business Lending Survey 35

Section 4

allow large banks or FinTech firms to increase 

their decision speed, small banks may face more 

competitive pressures in the future.

In contrast to small banks, large banks are viewed 

both internally and externally as offering greater 

convenience to their customers, with a broader 

range of services offered and a larger number of 

branches. Figure 4.2 shows that slightly more than 

half (53.1 percent) of large banks believe some 

form of convenience to be one of their own top 

advantages, compared with slightly less than a 

quarter (22.5 percent) of small banks. Similarly, 

Figure 4.3 shows that more than 70 percent of large 

banks’ competitors view them as having convenience 

advantages, compared with just over half (52.4 

percent) of small banks’ competitors. These 

convenience advantages include number of locations. 

Table 4.1 shows that 22.3 percent of large banks 

consider number of locations to be one of their own 

top three advantages, whereas the comparable figure 

for small banks is only 1.6 percent. Table 4.2 shows 

that 33.7 percent of large banks’ competitors view 

number of locations as one of large banks’ top three 

advantages, compared with 17.8 percent of small 

banks’ competitors for small banks’ advantages. 

This once again shows the importance of physical 

branches in small business lending. 

As for price advantages, evaluations vary depending 

on whether banks are rating themselves or whether 

competitors are rating them. Table 4.1 shows that 

very few banks of any size consider interest rates or 

fees to be one of their own top advantages. However, 

many banks do view interest rates as being a top 

advantage of their number one competitor. This is 

especially true for the competitors of large banks. As 

Table 4.2 shows, 59.3 percent of the competitors of 

large banks view interest rates as a top advantage of 

their large-bank competitor. By a large margin, this 

is the most common perceived top advantage for 

large banks, and large banks are twice as likely as 

small banks to be perceived as having this advantage. 

The frequency of this perception suggests that large 

banks do possess some advantages in pricing, but the 

evidence is surprisingly mixed, given the important 

search?q=2016+Small+Business+Survey%3A+Report+on+Microbusinesses%3A+Nonemployer+and+Small+Employer+Firms.+-

Published+November+2017.+Federal+Reserve+Bank+of+Cleveland.

role pricing usually plays in competitive markets.

As discussed in Section 3, few banks have a nonbank 

as their number one competitor. Nevertheless, it is 

possible to make some observations about banks’ 

perceptions of credit unions, for the latter are listed 

as the number one competitor by 4.5 percent of 

banks (overwhelmingly small banks). Table 4.2 

shows that the top perceived advantages of credit 

unions are pricing (85.1 percent) and, to a lesser 

extent, other elements of loan structure. This 

perception of advantages likely stems from the 

perceived tax-advantaged status of credit unions. 

Although pricing and loan structure are advantages 

more commonly associated with large banks rather 

than small banks, it appears that credit unions 

are more likely than large or small banks to be 

perceived as having advantages on these dimensions. 

Furthermore, despite their community focus and 

small average size, credit unions are viewed as 

having very different advantages from the ones small 

banks are perceived to have.

4.3 Conclusions

The survey finds that relationship lending practices 

are highly important for both small and large 

banks—a finding that suggests that small business 

lending is, to some extent, inherently relationship 

focused. With near universality, both small and large 

banks report using relationship lending practices, 

and they believe that their customer relationships, 

and their customer service in general, are among 

their top advantages. 

Small banks, however, appear to focus more heavily 

on these practices and are more likely to view them 

as their most important practices. Small banks are 

also more likely to be viewed by their competitors 

as having advantages in customer relationships 

and in customer service in general. In addition, 

small banks consistently perceive themselves and 

are perceived by others as having a significant 

advantage in decision and funding speed. Given that 

large banks are thought to make lending decisions 

based on evaluating quantifiable data against preset 
36 FEDERAL DEPOSIT INSURANCE CORPORATION

Section 4

limits, one might assume that they would be able to 

analyze the data and come to decisions faster. Large 

banks’ advantage of relying on quantifiable data, 

however, is evidently less important than the flatter 

organizational structure of small banks, where fewer 

managerial layers separate loan officers from bank 

owners. The importance of this speed advantage may 

be considerable, for speed in decisionmaking and 

funding is one of the top concerns of small businesses.

Large banks, by contrast, provide more convenience, 

both by offering a greater variety of products and 

services and by having a larger number of branches. 

Branches are consistently shown to be among the 

most important advantages of large banks, with 

branch networks serving as small business lending 

hubs. The advantages large banks derive from these 

networks further emphasize the importance of 

physical presence and proximity in the practice of 

small business lending (as discussed in Section 3). 

Large banks are also viewed as being able to offer 

lower interest rates than their competitors, although 

large banks themselves do not view this as an 

important advantage.

Overall, the results of the survey confirm the widely 

held belief that small banks focus on relationship 

lending practices and view their relationships with 

their clients as essential to their business model. 

Somewhat contrary to expectations, however, large 

banks are also heavy users of relationship lending 

practices when lending to small businesses. But 

small banks are shown to focus more intensively 

on relationship lending than large banks do, and 

this finding suggests that small banks’ approach to 

small business lending is distinct from the approach 

of large banks. If that is the case, the decreasing 

number of small banks in the country may 

disadvantage the small businesses that prefer a less 

transactional approach.