Featured in Financial Brand, this blog post summarizes the challenges financial institutions face when it comes to competing against non-bank providers and defines a new path forward for upgrading small business banking.
Small business deposits, loans and payment processing are all at risk for financial institutions, but not from traditional competitors. Ecommerce firms like Kabbage and Shopify and online accounting providers like Quickbooks are directly competing for small business relationships. If financial institutions want to stand up against these new competitors, they need to upgrade their small business checking services.
Have you seen all the new small business banking announcements?
Over the past several months, non-bank providers have been flooding the market with new small business account offerings.
The central theme of each of these announcements can be best summarized in this statement from Shopify’s announcement:
“Existing banking products for small businesses just suck,” said Kaz Nejatian, Vice President and General Manager of Shopify Financial Solutions. “The legacy banking system does not serve [small businesses] well.”
That’s obviously a very bold statement, and probably elicits a visceral reaction from many bankers.
That aside, is there any truth to the statement?
Small Businesses Need Cash Flow Support
When talking to financial institutions, it is clear that most want small business relationships. The struggle is that they are not well positioned to effectively service or support the unique banking needs of a small business.
The primary need of a small business is to manage cash flow. According to a 2016 report from the JPMorgan Chase & Co. Institute, the median small business owner only had 27 days of cash in reserve. Detailed in the report is the tight correlation between daily inflows and outflows of cash for small businesses. This tight correlation highlights that any disruption in consistently bringing in cash can have a catastrophic impact on the health of a small business.
Fast forward to 2020 and the impact of COVID-19 has had on the ability for small businesses to consistently accept customer payments. Small businesses that once relied on in-person interactions to receive payment have been forced to find new ways to accept payments online. This impact was not only felt by retail-focused businesses, but also trade workers, medical professionals, lawyers, consultants and more.
The problem is that most financial institutions are not well prepared to help businesses owners make the transition. Most have good solutions for online bill pay (payables), but are not well positioned to offer online payment acceptance (receivables).
Small Businesses Are Stuck Between Too Little and Too Much
When it comes to managing cash flow, small business owners are stuck between two offerings within a bank: Consumer-level functionality that is too basic, and treasury functionality that is too complex.
This creates frustration for the business owner and the financial institution.
Consumer products leave business owners feeling underserved and searching for a solution to better manage their cash flow and, most urgently, how to accept online payments from customers. Commercial or treasury products, on the other hand, are underutilized because the products are not built for the small business. The owners become frustrated over time with the associated fees and the perceived waste of resources.
To illustrate this point: Let’s say a contractor called into your bank and asked, “I have several jobs that I’m about to complete and my customers want to pay me online with a card, can you help?”
What is your response? For most financial institutions, there is not a good solution to offer.
Traditional merchant services programs are better suited for businesses that conduct in-person transactions. Online treasury management tools are focused on larger businesses that handle transactions in batches, most of which are B2B.
Simply, neither solution was designed with the small business owner in mind.
The unfortunate response back to the contractor is then, “I’m sorry but we really don’t have a good solution.”
This is what underpins the Shopify statement: “The legacy banking system does not serve [small businesses] well.”
The Challenge Presented by Non-Bank Providers
As evidenced by the above product announcements, there is a growing number of non-bank providers that recognize there is opportunity in, and are aggressively targeting, the small business market. This is a problem for financial institutions and the banking industry.
Ecommerce providers such as PayPal and Square have been in this market for years. Now others are joining the fray: Quickbooks, Shopify, Wave and Kabbage to name just a few.
They each have a common aim: help a small business owner with their cash flow and use that as a wedge into a larger relationship. They do this with tools that simplify receiving online payments, offer better forecasting or online lending.
Let’s take the use case of receiving online payments through a non-bank provider, and the impact on the banking relationship. When a small business receives a customer payment, the funds are first deposited into the non-bank provider’s virtual wallet (account). The business owner can transact online directly from their account or can sign up for a business debit card provided by the ecommerce platform. The business debit card typically offers real-time access to any funds in the business owner’s account, eliminating the need for the business to transfer money back to the financial institution.
When a small business owner starts receiving payments through a non-bank provider, their deposit relationship at the financial institution begins to decline over time. In addition to deposit services, most ecommerce providers also offer online lending.
With a full suite of services designed specifically to serve a small business, you can see how the small business relationships are now at risk for attrition.
The Opportunity for Financial Institutions in Accounting Services
To preserve and grow small business relationships, financial institutions should take steps to upgrade small business banking. Building on the foundation of existing digital banking and payment channels, financial institutions can still win the day with small businesses.
It all starts with maintaining control of how a small business gets paid, or deposits money into their account. Similar to locking in a direct deposit with a consumer account, financial institutions need to lock in the direct deposit for small business accounts.
For many business owners, how they accept customer payment is shifting from in-person to online. Instead of accepting cash, checks or in-person card payments, they now need to accept payments via digital invoice or an online payment form. To support them, and to lock in the small business deposit, financial institutions need to offer the ability for businesses to request and receive online payments as part of their suite of business banking services.
Effectively, financial institutions need to transform their existing digital banking channels into an ecommerce platform for small business owners.
In doing so, financial institutions become a digital destination for business owners. Helping small businesses better accept digital payments, manage cash flow, pay bills and automate bookkeeping tasks embeds the financial institution into the day-to-day operations of a small business.
How Autobooks Can Help Banks Fight New Rivals Seeking Small Business Accounts
Autobooks partners with financial institutions to upgrade small business banking in many of these ways. Autobooks is an all-in-one product suite that enables a small business to accept online payments, send digital invoices, automate accounting tasks and access real-time financial reports.
As a payment facilitator (PayFac), Autobooks is able to enroll, risk score and underwrite a small business to receive online payments in minutes, not days. This rapid onboarding process enables financial institutions to lock in the small business direct deposit. Combined with easy-to-use accounting functionality, Autobooks eliminates the need for a small business to turn to a third party accounting or payment provider.
Best of all, Autobooks makes it simple for financial institutions to upgrade small business banking. Autobooks comes with pre-built core, digital banking and payment integrations that remove the technical burdens of a new project. When it comes to a successful product launch, Autobooks provides a comprehensive suite of go-to-market services that are proven to drive product awareness, adoption and utilization.
Most financial institutions can launch Autobooks in 90 days from contract signing.
Partner with Autobooks and transform your existing digital banking channels into an ecommerce platform for small businesses.