Rewriting the Commercial Banking Playbook: Landing and Expanding Commercial Relationships through Digital Banking

Fintech disruptors have been rapidly redefining banking experiences for consumers for nearly two decades now. The pace of change has been even faster for small business, and well— many of those players are coming for your bread-and-butter commercial banking clients now too.

The Q4 2024 earnings release for Block (parent company of Square), highlighted Square's significant traction in moving upmarket:

Block's CEO Jack Dorsey specifically emphasized that Square is seeing "accelerated adoption among larger sellers," defining these as businesses generating more than $500,000 in annual GPV (Gross Payment Volume). This segment now represents their fastest-growing customer cohort, increasing 24% year-over-year.

The earnings call noted that mid-market businesses (those with $500K-$2M annual revenue) are particularly attracted to Square's integrated ecosystem of financial tools, with special mention of their banking, payroll, and inventory management capabilities being key drivers of this upmarket migration.

Perhaps most telling was their CFO's comment that the average deposit balance in Square Banking accounts for mid-market businesses has grown to over $35,000– representing a substantial portion of operating funds that would traditionally have been held at community banks.

Community banks face a critical strategic inflection point. Over the past few months, we have been talking to bank executives from across the country to tackle this challenge head-on through our Commercial Banking (co)Lab, our Concept Lab, and in one-on-one interviews, producing insights that are both sobering and actionable.

What began as exploratory conversations quickly revealed a shared experience across diverse markets, members are all witnessing the same competitive patterns regardless of geography. Our ongoing research reveals a clear pattern: commercial banking customers are increasingly splitting their financial activities between traditional banks and specialized fintech platforms that integrate seamlessly with their business operations.

Treasury officers from multiple participating banks shared concrete examples, including one mid-sized business that still maintains deposit accounts at their community bank while running over $40,000 in monthly transaction volume through Square and Ramp. This "silent switching" represents significant revenue leakage that many banks aren't fully tracking.

The cross-institutional dialogue helped crystallize the emerging concept of Small Business Operating Systems (SBOS), as Alex Johnson from Fintech Takes has coined them– platforms like QuickBooks, Square, and industry-specific solutions that manage comprehensive business workflows. Banking services increasingly need to find ways to embed themselves within customer workflows rather than expecting customers to use separate tools for banking and all those other jobs to be done at the Edge of Money.

This real-world perspective changed the conversation from theoretical digital transformation to practical competitive response. Multiple participants described successful niche strategies targeting specific verticals like law firms, medical practices, and property management companies – creating opportunities to share best practices across institutions.

One unexpected insight came from contrasting the different organizational structures at participating banks. Some are seeing significant success with Treasury and Lending working together in client acquisition, and some are leading with Treasury, while others struggle with internal competition and fee discounting when these divisions operate independently.

The collaborative approach yielded some emerging frameworks for banks to evaluate their own strategic positions and identify high-impact areas for immediate action, including ideas for vertical-specific solution templates, customer journey mapping, and competitive analysis frameworks they could immediately apply within their institutions.

This is the power of the Alliance.

Each bank would have needed to invest significantly to develop these insights independently. By pooling their collective experience, they've accelerated their strategic development while creating opportunities for joint action going forward.

We will release a report of our findings and recommendations in a live executive briefing on April 16. Click here to register. Alloy Labs members will get a sneak peek on March 19 that will include a discussion on how members want to prioritize our future work on this important part of the business. More information in our Member Hub.