In recent years, the rise of neobanks has gained increasing attention and there is endless debate about their ultimate threat to traditional banks. These new digital banks are often the first to focus on retail banking products with cleaner design experience. At the same time, integrated banking services are experiencing explosive growth, with companies in all industries striving to integrate financial services products into their platforms. These trends have also increased the need for data “connectors” such as MX, Plaid, and Akoya, allowing consumers to share data across multiple platforms. Despite all this progress, banks see the key elements of banking as disappearing, with a disproportionate negative impact on smaller regional banks and credit unions. They are losing small business customers.
SMEs drive the economy
One of the main sources of income for small FIs is the interest rate margin, which is the difference between the interest rate that the bank charges the borrower and the interest rate that the bank pays to hold the money there. .. FI cannot simply collect deposits and earn money from debit exchanges and fees to prosper. They have to lend a lot of money to generate profitability and prosper. For most small businesses, this means lending money to small businesses, which are increasingly consuming non-bank financial services products.
The evolution of integrated finance has increased the availability of products offered by non-bank providers. When small businesses buy these products, they often find that the products they already use, such as accounting software and shopping cart providers, offer loans and other more personalized products. It’s not just a better experience. These products are offered by companies that have a more comprehensive understanding of their customers’ business needs, often offering more relevant features and custom pricing.
In addition, the prevalence of mobile devices means that many small business owners are increasingly hoping to be able to run their businesses through mobile phones. The landscape architect wants to submit an invoice while working on site, or the owner of a cleaning service wants to submit a brief quote for custom cleaning. These new forms of participation are shaping the behavior and expectations of small business owners, and banks are in short supply.
Digital takes over
Reaching small business customers can be difficult for many financial institutions. 98% of small businesses have less than 20 employees or are sole proprietors, so these companies often look like retail customers in the banking system. This lack of customer visibility means that SMEs may have limited ability to target financial products that they find useful. Fortunately, many small community banks and credit unions are leveraging their commitment to the local community to build strong relationships with their customers and meet their identity needs. Until recently, this usually meant providing a loan, a merchant acquisition, or an insurance service. Meanwhile, large-scale FI has developed a marketing program to target potential customers and bring them to banks.
The challenge is that these traditional methods are beginning to lose their business effectiveness. Increasingly, digital trends mean that SMEs spend less time talking to bankers and spending more time interacting digitally. This has increased their tendency to seek solutions from existing products or services they are using, maximizing the convenience and value-added capabilities of their relationships with bankers. FI loses control of its customers.
According to a survey by industry analyst Ron Shelvin of 2020 Cornerstone Advisors, SMB $ 500 billion For accounting / bookkeeping, billing, invoice payment, and payment acceptance services from third-party providers.The bank $ 11 billion Accounting and payment services provided to SMEs, but only 6% of SMEs get their accounting and payment services from banks. Ron beneficially pointed out the opportunity for banks to generate additional revenue. Still, I think industry changes have turned this from a revenue opportunity into a business imperative, especially for smaller FIs.
Perhaps the biggest opportunity is to use the data that FI already has about SME customers to generate value-added services more aggressively. Every FI has information about when to pay regular invoices, how to make regular income patterns, how to manage cash flow over time, how to grow your business, and more. However, we rarely use this information to offer products such as short-term loans, pre-billing payments, mortgage repayments, and additional cross-selling opportunities. Instead, non-traditional financial services providers are beginning to leverage data aggregation services to retrieve data from banks and use it to provide these services. This trend is eroding the relationship between FI and its customers.
Many small community banks and credit unions do not have the resources to create their own products. Fortunately, advances in APIs and integrated financial movements mean more options for FI to bring its customers to the latest products. Banks can hire companies such as BankiFi to provide cash flow management and AR / AP services, hire Modern Treasury to extend payment facilitation services, and hire nCino to experience the latest lending. .. These are just a few of FinTech’s offerings to banks that offer a wide range of services to small business customers and maintain relationships with them.
Need to change
It’s unclear for some time whether online banks will ultimately succeed. However, the impact on the industry has been confirmed. Consumers continue to expect cheaper banking products, lower fees and more services from banks. It would be easy to argue that it would be increasingly difficult for FI to make money from retail banking. This underscores the need for FIs to strengthen SME customers and use them to generate more substantial revenue through loans and other products.
To do this, FI needs to identify small business customers, provide the digital experience they expect, and use their knowledge to provide additional products and services. In short, FI should stop valuing business cases of SME products based on net new revenue and begin to consider them to avoid asset erosion due to lost lending opportunities. Banks that cannot make these adjustments are unlikely to survive.