How Banks Can Bring Small Businesses Back to the Fold

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The relationship between financial institutions and small businesses has grown increasingly strained. Many small businesses are becoming dissatisfied with their payment and banking services. In fact, more than half obtain their merchant payment accounts from providers other than their primary bank.

In a PaymentsJournal podcast, Fiserv’s Tim Ruhe, Head of FI Payment Strategy, AJ Levin, Senior Director for Small Business Market Strategy, and Don Apgar, Director of the Merchant Payments Practice at Javelin Strategy & Research, discussed why small businesses are turning to fintechs for payment services and what banks need to do to remain competitive in this critical market.

Fragmented Relationships

Research shows that small businesses are turning to multiple providers—typically three to five fintechs—to meet at least one of their financial needs. This means they’re stepping outside their primary financial institution and relying on nonintegrated solutions—a complex and fragmented approach. To run their day-to-day business, they’re spending nearly 20 hours a week on cash flow and financial processes. Part of this burden stems from juggling so many different providers.

“They’re fragmenting their relationships, going to multiple places to serve their banking and payment needs,” said Ruhe. “They’re not getting everything in one place the way we would like them to. If you ask them how they pay and get paid, you generally hear a pretty incredible fragmented journey and to me that leads to: OK, there’s some work to be done. It’s not enough to just have a lending product and a bill pay product, we need solutions tailored to the needs of those small businesses.”

Take invoices, for instance. Many small businesses still send paper invoices but want to move to electronic invoicing and receive payments digitally. Ideally, they’d do that through their financial institution rather than a fintech, so the bank has visibility into where deposits are going.

That’s an area where banks haven’t competed as well as they could. Fintechs and banking-as-a-service providers are gaining ground by leading with specialized offerings in niche categories, then expanding into payments. Before long, they start pulling customers away. To prevent that, banks have to make sure they’re offering the right solutions to protect against that.

Small Business Is a Tweener

Historically, banks have served small businesses using a mix of consumer and commercial mid-market products. Small businesses have to choose between consumer services—which are intuitive and easy to use but lack advanced capabilities—and commercial banking services, which are typically geared toward businesses with hundreds of millions in revenue and dedicated staff to manage payables and receivables.

Small businesses are a tweener segment. They have merchant services, invoices, accounts payable, payroll cards, and loans, but they still need the simplicity of consumer banking. Often, the staff is just the owner and an accountant. They don’t have the time to learn new tools. If using their bank requires a learning curve, they’re likely to move on.

“That ultimately is the conundrum we’ve seen with financial institutions not having a dedicated small business solution,” said Ruhe. “We saw the seismic shift in real-time payments and mobile 10 or 15 years ago. Should banks offer P2P services? Now, it’s no longer a question. This is in the same category. Should we have a small business-focused integrated payment capability? Increasingly the answer is yes.”

These are revenue generating services. Small businesses expect to pay for quality solutions—whether it’s invoicing, expedited payments, real-time payments, or the ability to pay with a card to better manage cash flow. Fintechs are actively monetizing many of these revenue levers, while traditional financial institutions are not.

“For folks that have been in the merchant services space for a while, you remember the old race to zero,” said Apgar. “It was all about price, and it squeezed all the margin out. But in today’s market, it’s less about price for the small business and more about the interoperability, the convenience of being able to do everything in one spot. The verticals companies have made inroads into payments and grabbed basically half of the market share away from banks. Because of that, it’s extremely profitable for these software companies, because they’re not selling it on a low price.”

Making the Customers Aware

Banks now see the opportunity to step into that space with a completely interconnected product set that lets business owners run their operations more efficiently. But simply having the capability isn’t enough—it won’t be successful if customers aren’t aware of it. Small businesses are among the busiest customers a bank serves. They’re focused on running their business, which means they have limited time and capacity for new things.

Every bank and credit union needs to make sure their customers know what’s available to them. Banks still have staff in branches who engage with customers—and while many customers no longer visit branches, small business owners still do. That’s an opportunity to become the Genius Bar for small business at the branch.

“Today, we’re only seeing merchant services added to the bank account at opening 15% of the time,” said Levin. “To make sure that you’re beating the competitors to the punch, getting in front of the small business at the right time, that conversation has to be moved up further along in the process at account opening. Make sure that you’re able to capitalize on this buying moment with the small business.”

The Lure of the One-Stop Shop

The average small business owner wants the simplicity and digital capabilities of a consumer bank account, but also needs some of the features of a commercial demand deposit account. The opportunity for banks today lies in making it easy for small business owners to access all the functions and data they need to run their business in one place.

By bringing these products together and creating a one-stop shop—where merchants can not only access banking services but also payroll, insurance, and other essential business tools—banks can deliver a win for both the small business and the institution itself.

“Merchant services can help financial institutions deepen their small business relationships and improve their cross-selling abilities,” said Levin. “Merchant services can help financial institutions grow and protect their deposits—they result in twice the deposit growth versus accounts without merchant services. If you offer the one-stop shop, there’s less reason for the small business to go outside of those banking walls.”

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