Bank’s decline starts with small business
Small business owners are no longer finding the traditional bank meeting their needs.
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The rise of Neobanks and their ultimate threat to traditional banks has focused endless debate over the past several years. These newly created digital-first banks often target traditional banking products with more cleanly designed experiences. In parallel, embedded banking services have seen an explosion in growth, and companies across all industries are working to build financial services products into their platform. These trends have also prompted a growing need for data “connectors” such as MX, Plaid and Akoya, to help consumers share their data cross-platform. Despite all this progress, banks are seeing a significant component of the banking relationship slip away, and this has an adverse impact on smaller regional banks and credit unions. Those small businesses are losing customers.
small businesses drive the economy
One of the biggest revenue sources for small financial institutions is the interest spread — that is, the difference between the interest rate that a bank charges a borrower and the interest rate a bank pays you to keep your money there. Financial institutions can not only collect deposits and earn revenue from debit interchange and fees to thrive. They need to lend huge amounts of cash to increase profitability and thrive. For most small financial institutions, this means lending money to small businesses, and those small businesses are increasingly consuming financial service products from non-banks.
The development of embedded finance has increased the availability of products provided by non-bank providers. As small businesses shop for these products, they often find that a product they are already using, such as their accounting software or shopping cart provider, offers lending and other more tailored products. It’s not just about better experiences. These products often offer more relevant features or customized pricing as they are provided by companies with a more holistic understanding of their customers’ business needs.
Additionally, the ubiquity of mobile means that many small business owners want to be able to manage as much of their business as possible through their phone. Landscar might want to send an invoice completing an onsite job or a cleaning service owner might want to send a quick quote for a custom cleaning. These new ways of engagement are shaping the behavior and expectations of small business owners, and banks are not keeping up.
taking the digital
For many financial institutions, reaching small business customers can be difficult. With 98 percent of small businesses having fewer than 20 employees or being sole proprietorships, these businesses often look like retail customers in a bank system. This lack of customer visibility means there may be limited ability to target SMBs and offer them financial products they may find helpful. The good news is that many small community banks and credit unions use their local community engagement to build strong customer relationships and identify needs. Until recently, it usually meant lending, merchant acquisition or providing insurance services. Meanwhile, large financial institutions developed marketing programs to target potential customers and bring them to the bank.
The challenge is that these traditional methods are beginning to lose their effectiveness with businesses. Increasingly, digital trends mean SMBs spend less time talking to their banker and more time interacting digitally. This has made them more willing to explore solutions from existing product or service and customized and optimized for convenience and value-added features on the relationship with their banker. Financial institutions are losing their grip on customers.
opportunity
According to industry analyst Ron Shelvin’s Cornerstone Advisory Survey 2020, SMEs spend more than $500 billion On accounting/bookkeeping, invoicing, bill payment and payment acceptance services from third party providers. generate more than the bank $11 billion From accounting and payment services provided to small businesses, yet only 6% of small businesses receive their accounting and payment services from a bank. Ron nicely pointed to an opportunity for banks to generate additional revenue. Still, I think changes in the industry have shifted it from a revenue opportunity to a business imperative, especially for smaller financial institutions.
Perhaps the most significant opportunity is for financial institutions to use the data they already have about their small business customers to more actively drive value-added services. All financial institutions have information such as when you typically pay recurring bills, your typical income pattern, how you’ve managed your cash flow over time, and how the business is growing. Yet very few people use this information to offer products such as short-term loans, bill prepayment, auto loan payments, and additional cross-selling opportunities. Instead, non-traditional financial service providers are starting to take advantage of data aggregation services to extract data from banks and use it to offer these services themselves. This trend is destroying the FI’s relationship with the customer.
Many small community banks and credit unions do not have the resources to manufacture these products on their own. The good news is that advancement with APIs and the embedded finance movement means there are more options than ever for FI to offer its customers modern products. Banks can use companies like BankiFi to provide cash flow management and AR/AP services, modern Treasuries to extend payment convenience services, or nCino for a modern lending experience. These are just a few examples of fintechs targeting banks with products that enable banks to provide a comprehensive set of services to their small business customers and maintain customer relationships.
change is necessary
We won’t know for the time being whether Neobanks will ultimately prove successful; However, we have seen their impact on the industry. Consumers continue to expect lower cost banking products, lower fees and more services from their banks. It would be easy to argue that it would become more and more challenging for financial institutions to earn money from the retail bank consumer. It stresses the need for financial institutions to promote their small business customers and use them to generate more substantial revenue in lending and other products.
To do this, financial institutions must identify their small business customers, provide them with the digital experience they expect, and use their insight into the customer to offer additional products and services. This means that financial institutions will need to stop evaluating small business product business cases on the basis of net new revenue and start looking at them to avoid asset erosion from lost lending opportunities. Banks that are not able to make these adjustments will not survive.
