Small-Business Banking: Going Beyond the Lines of Credit

September 20, 2018

MONTHLY ANALYSIS

Business banking is more than financing

There are 30.2 million small businesses operating in the US, constituting 99.9% of businesses in the country. A total of 58.9 million small-business employees represent almost half (47.5%) of the US private workforce. According to the latest data from the International Trade Administration (ITA), a total of 294,834 companies exported goods from the US in 2015. Out of these, 97.6% were small firms; they generated 32.9% of the United States’ $1.3 trillion in total exports.

Small businesses are the backbone of modern economies, in which the democratization of financing opens new frontiers for an increasing number of entrepreneurs. Technology made it possible to painlessly set up and run a business – all software necessary to set up essential functions is on the market today (Stripe Atlas, Holvi, QuickBooks, and a number of function-specific solutions).

Small-business banking services offered by the institutional sector, however, are still inadequately limited in their comprehensiveness to a mere line of credit, leading to an increased interest in exploring alternative options. The Bank Administration Institute (BAI) shares that between 2016 and 2017, small-business deposit growth dropped 40% (from 5% to 3%). The FIS™ Performance Against Customer Expectations (PACE) 2018 survey found that out of those SMBs that have switched banks or plan to in 2018, most are customers of top 50 global banks. In fact, the data suggests that big banks could see as many as one in five SMB customers depart in the future.

One of the important findings of the annual survey by FIS suggests that for SMBs that switched banks or plan to switch in the next 12 months, digital self-service is the most important attribute. The ecosystem of over 12,000 financial technology startups operating around the world made a difference in redefining what it means to bank a small business. Companies similar to Holvi are not limited to providing a bank account – they are building services that make entrepreneurs’ everyday life easier. Holvi operates a financial hub with a range of services targeted at making small-business operations efficient and painless. The company allows entrepreneurs to set up and run an online store in a few clicks, and it’s fully integrated with business accounting and bookkeeping. Sales are tracked and recorded automatically so business owners can focus on getting more, rather than copying the details of previous sales into accounting software.

While some technology companies take care of everyday background operations, others take on solving an even more complex issue – tax reporting and compliance. There are over 660 RegTech startups operating globally, simplifying one of the most complex and important functions for any business today. Within itself, the RegTech ecosystem is rather diverse and includes solutions specifically for performing KYC/CDD, AML, risk management, market surveillance, fraud detection, etc.

Re-bundling and integrations

Today, it is not even the variety of functions covered by efficient and easy-to-use solutions that are the most important; it’s the move towards re-bundling – extensive cross-vertical integrations. Most often, with accounting software; but that is not where small-business banking should stop. Let’s take Satago for example – it offers invoice finance system via its platform and integrates with hundreds of desktop accounts packages and cloud accounts packages like FreeAgent, KashFlow, SageOne, Xero, Quickbooks Online, Freshbooks, etc. Satago’s solutions include invoice finance, free reports showing the risk profile of the businesses’ customers, and cash flow management solution for businesses of various sizes.

Xero is a stunning example of a success story in accounting that goes beyond accounting. Over 700 third-party cross-functional apps integrate with Xero. Xero can be integrated into apps that solve a variety of business needs:

  • Inventory

  • Payments (Stripe, PayPal, Square, Bill.com, InvoiceSherpa, Chargebee, and more)

  • CRM (G Suite, Accelo, and more)

  • Time tracking

  • Invoicing + jobs

  • POS (Square, Shopify, Vend, and more)

  • Payroll + HR (Gusto, Tanda, Paychex, Deputy, and more)

  • E-commerce

  • Reporting

  • Bills + expenses

  • Conversions

  • Debtor tracking

  • Documents

  • Financial services (Kabbage, Fundbox, BlueVine, Bizfi, and more)

  • Practice manager

  • Custom-made integration

  • Other (Office365, Zapier, A2X for Amazon, and more)

Moreover, at the beginning of September 2018, Xero announced its first full-featured API for bank feeds, enabling banks, FinTech companies, and financial institutions of all sizes to give their small-business customers faster access to financial data directly from the platform.

Xero already has partnerships with more than 180 financial institutions globally – including Wells Fargo in the US, NAB in Australia, Barclays in the UK, DBS in Singapore, and ASB in New Zealand. These direct integrations have required specialized development and customization from both Xero and the financial institution, the accounting software company emphasized. With the Xero Bank Feeds API, financial institutions can dramatically improve time-to-market for direct integrations as they gain access to a consistent development platform to serve their customers.

The ability of technology companies to easily arrange useful integrations is an important ace up their sleeve today. Going far beyond the lines of credit or a loan, technology companies allow business owners to focus on customer acquisition and retainment, investments in innovation, and physical expansion – instead of getting stuck in operational weeds.

With 63% of SMBs engaging with their banking services providers through digital channels (44% through online banking, 13% – smartphone, 6% – tablet), the ability to deliver a full set of services necessary to run a small business is the competitive advantage that the journey towards open banking in the traditional sector provides. The importance of comprehensives in small-business banking can be demonstrated by findings on SMB financial mobile app usage, showing that small businesses actively use a variety of functions other than applying for loans.

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Source: FIS™ Performance Against Customer Expectations (PACE) 2018

Banks that make their data accessible to verified third parties via a set of secure APIs ensure stronger ties with their businesses customers, enabling them to add a variety of financial services from other providers – insurance, benefits administration, investments, etc. – to their existing bank accounts, FIS emphasizes.

Re-bundling in either a form of a single platform or in form of extensive integrations is critical because of the complexity of business needs. By offering services that address broader needs of small businesses, financial institutions can position themselves at the center of a valuable ecosystem: as business account holders, banks have the opportunity to become the indispensable binding tissue for specialized service providers that address only a fraction of a wide range of business needs.

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Source: Small Business Ecosystems: Banks’ Next Challenge, Bain & Company

Research shows that small businesses have long been interested in services that go beyond core banking services. Procurement discounts, payroll and employee retirement plans, and other non-core services have been increasingly important.

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Source: Digital Models for a Digital Age: Transition and Opportunity in Small-Business Banking, McKinsey

We mentioned earlier that DBS takes the move beyond banking quite literally: in August 2018, DBS and Singtel teamed up for the nationwide 99%SME campaign that helps SMEs expand their business by digitizing their operations. DBS and Singtel will be enhancing the e-marketplace on the 99%SME portals throughout September. The enhanced e-marketplace will instantly connect SMEs, especially those without an online presence, to an e-commerce platform hosted on the 99%SME websites. The e-marketplace will give SMEs who are unsure of how to tap into online sales channels instant access to an online shopfront where consumers can browse and buy services & goods across different categories from fashion to beauty products to electronic goods and even stationary instantly – all at the click of a button. This will also help SMEs to raise their profile and grow beyond Singapore’s shores to expand their customer base regionally and globally.

With DBS and Singtel as founding members, there is also an interesting pack of partners, sponsors, and participating institutions involved in this project: Xero (which integrates with DBS), Lazada (Singapore), Mastercard, Singapore Chinese Chamber of Commerce & Industry (SCCCI), Temasek Polytechnic, Singapore Indian Chamber of Commerce & Industry (SICCI), the Singapore Centre for Social Enterprise (raiSE), Enterprise Singapore, and more.

DBS will be developing a B2B platform where SMEs can gain access to an e-marketplace to sell their goods and services to large corporate and multinational corporations (MNCs). This will be the first of its kind portal in Singapore. It will also grant SMEs access to supply chain connections, financing, and payment solutions that are usually only open to large corporates or MNCs. It is expected to be launched by the end of 2018 and details will be announced in due course.

With Asia being the fastest-growing region globally, SMEs in Singapore need the right programs and resources to give them a chance to realize their regional growth ambitions. SMEs are operating in a sweet spot, at a time where their business can grow at an unprecedented rate. This is due to rapid regional economic growth boosting domestic consumption and digitization opening doors to new markets and customers. To give SMEs a leg-up and encourage innovation, public sector partners, and MNCs must collaborate and close the gap with SMEs to address technological shifts as well as harness the power of technology to expand into Asian markets, grow revenue, and drive economic and social development. – Joyce Tee, Group Head of SME Banking, DBS Bank

Australia’s ANZ takes a different path – it is more focused on providing educational resources on the essentials of starting and running a business: the bank offers a small-business startup package, which along with the business current account and a business card, offers 12 months of MYOB Essentials (Payroll for One), as the bank calls it, for free. ANZ throws in free ANZ Biz Hub resources such as our Business Startup Guide and the Business Boot Up Program.

There is a financial value in going beyond lending in small-business banking

Nothing makes a more convincing case for going beyond lending in small-business banking than the evaluation of financial results of refocusing.

Banks have traditionally overlooked opportunities in areas such as payments, cash flow management, and e-invoicing, prioritizing lending when it comes to small-business banking. But the results of a study by BCG published Summer 2017 suggest that one-half to two-thirds of small businesses have required little or no lending. The unwillingness of some banks to change their business model to meet small-business needs has hindered their performance. In fact, the most profitable banks have focused less on lending, the study found.

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Source: Getting Big in Small-Business Banking, BCG

The study found that from 2015 through 2016, for example, Western European and APAC banks that favored deposits and payments posted pretax returns on regulatory capital that were nine percentage points higher than the pretax returns of banks that prioritized loans. Banks that are looking to improve their performance should likewise focus on deposits and payments.

These findings should not only be interpreted as an evaluation of financial results from focusing either on lending or payments; they can be seen as an indicator that a line of credit or a loan is no longer a sufficient primary focus for banks to both remain competitive and to grow & retain their small-business customer base.

Banks that go even further and serve their small-business clients in areas beyond core banking services through comprehensive platforms, or hubs, gain another important opportunity — they can access a diversified stream of data on small-business operations for enhanced risk management. A bank-built platform for its small-business clients that integrates a range of function-specific third-party solutions would allow the bank to access rich data not only about transactions but operational indicators that have to do with the overall health of the business. More accurate risk assessment can be achieved by understanding businesses’ supply chain, HR function, affiliations, revenue stream, and much more. After all, there is a startup for every bank service. With a comprehensive small-business banking hub where small-business banking services are re-bundled in a new way (API integrations), banks can regain the competitive advantage that was taken away by better FinTech solutions. It’s a place right at the center of the FinTech ecosystem and an indispensable position for small-business customers.

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