The $150B Question: Can Community FIs Capture the SMB Digital Banking Opportunity?

Small to mid-sized businesses (SMBs) are the beating heart of the economy, but four years into the pandemic’s digital transformation, many are still fighting to gain a clean bill of financial health. Outdated manual accounting processes and paper payments continue to waste precious time as cash flow falters and inflation erodes margins. Smaller banks and credit unions have their finger on the pulse of their communities’ needs and can set SMB clients on a path to success with modern digital banking and financial management tools. However, amid continued struggles, many small businesses are seeking alternatives to their existing banking relationships. Can community financial institutions (FIs) rise to the challenge of keeping their SMB customers loyal? Helping them get on their financial feet is the first step.

Financial Shortfalls Continue to Plague SMBs

SMBs Seek Digital Remedies for Cash Flow Pain

From Traditional Banks to Trusted Advisers

Writing the Digital Prescription for SMB Client Success

Financial Shortfalls Continue to Plague SMBs

Late payments, inflation and outdated payment processes create a triple threat of blocked cash flow, inefficiency and impaired decision-making for small businesses.

Late payments remain a stubborn impediment to SMBs’ cash flow.

Delayed payments continue to hamper small businesses’ operations. In the final quarter of the 2023 calendar year, SMBs waited 29.1 days on average to receive payment, a nerve-racking average of 9.6 days late — both up from the previous quarter. For small businesses, timely payments are not just nice-to-haves but essentials for survival and growth.

71%

of SMBs are experiencing cash shortfalls.

Inflation is stretching small businesses to their limits.

Seventy-six percent of SMBs with revenues under $10 million say they are suffering under the economy’s prolonged inflationary conditions, with a staggering 71% still experiencing cash shortfalls. Conditions have reached desperate levels for many, with 35% of SMB owners dipping into personal savings, 31% forgoing their own paychecks and 19% filling cash gaps with personal loans to keep their businesses afloat. This unrelenting pressure calls for smarter money-management tools tailored to SMBs’ needs.

Manual accounting processes exacerbate macroeconomic distress.

In an era of advanced technology, legacy accounting processes nevertheless maintain their choke hold over many business operations. An astonishing 36% of mid-sized firms are still using costly paper payments in accounts payable (AP), while 35% are wrangling accounts receivable (AR) manually. Smaller SMBs, particularly those generating less than $100,000 annually, are bearing the brunt of this inefficiency, with these work tools contributing to already highly unpredictable payment cycles.

SMBs Seek Digital Remedies for Cash Flow Pain

SMBs are aware of the need to digitalize and are actively seeking banking partnerships that can help them do so. They are also frustrated with — and ready to jettison — those that do not.

SMBs are frustrated with their current financial management and banking processes.

70%

of SMBs express interest in comprehensive cash management services from their primary FIs.

For SMBs, particularly those without dedicated accounting teams, financial management can be a daunting and time-consuming task. More than two-thirds (68%) of small business owners in a recent American Express survey expressed a longing for more time to focus on their core products and services instead of managing their businesses’ finances. In the United Kingdom, 74% of SMBs lament the marathon treks to deposit cash at rapidly vanishing local bank branches. In the United States, 34% of SMBs are burning a full workweek every year on in-branch banking activities, a situation so frustrating that 32% have already adopted new primary banks with a more digital focus. Clearly, the time for a digital switch is long past due.

SMBs have a fast-growing appetite for digital banking solutions.

Going digital is more efficient, and 78% of SMBs prefer to pay employees with a click, not a check. An even greater share, at 90%, are demanding the same push-button ease for vendor payments. Nearly seven in 10 SMBs want comprehensive cash flow management tools from their primary banks. With $150 billion in annual SMB banking revenue at stake, FIs that cannot deliver on these digital demands risk both client churn and a potential share of the valuable SMB market.

SMBs are actively pursuing new banking relationships to upgrade their digital capabilities.

Small business clients discontented with current banking partners are voting with their feet. In the U.K., 25% of SMBs plan to sever ties with their primary banks within the year, while 41% of U.S. SMBs are threatening to do the same, similarly motivated by lower barriers to credit (39%), better support (33%) and more impressive digital banking experiences (32%) elsewhere. These findings suggest that banks and CUs not offering robust digital solutions could face an exodus of their SMB clients to competitors.

From Traditional Banks to Trusted Advisers

By offering digital solutions that include predictive tools, seamless integrations and tailored guidance, community banks and CUs can position themselves as strong financial management partners in their SMB clients’ success.

SMBs want bankers to speak fluent ‘digital’ — and be financial gurus as well.

With nearly half of SMBs less than confident that their banks comprehend their cash flow struggles, many are moving away from traditional banking. Already, 42% of SMBs select their primary banks based on the latter’s sophisticated online and mobile offerings, while 35% prioritize digital banking experiences and seamless integration with their business software. Although 62% of SMBs still seek exceptional customer service, there is also a strong demand for technologies that turn financial management challenges into victories.

42%

of SMBs now choose their primary FIs based on the availability of online and mobile banking offerings.

To become better partners to their clients, banks can partner in turn — with technology providers.

Community banks and CUs might find themselves coveting the digital arsenals of bigger banks — such as Citizens, which can now offer SMBs a 12-month glimpse into their fiscal futures with its new cash flow forecasting tool. However, FIs do not need to be megabanks to check all the boxes on SMBs’ digital wish lists. Partnerships with the right FinTechs and other payments providers can turn community banks and CUs into digital dynamos that are second to none. Golden 1 Credit Union has taken note of this, partnering with NCR Voyix to develop an adaptable digital banking platform that caters to SMBs’ evolving needs.

Writing the Digital Prescription for SMB Client Success

The traditional banking model is simply no longer enough. SMBs are demanding comprehensive digital banking solutions, but these pleas are rooted in genuine needs that reflect a rapidly digitalizing economy. As SMBs increasingly search for intuitive, integrated and insightful banking solutions, FIs — especially community banks and CUs — face an extraordinary market opportunity to redefine their roles from mere banking service providers to strategic growth partners.

PYMNTS Intelligence recommends that community banks and credit unions consider partnering with FinTechs to offer digital services to small businesses, especially if they lack these offerings in-house. This approach can be mutually beneficial to FIs and their SMB clients by doing the following:

Expanding product offerings: Partnerships with FinTech firms enable community banks to integrate third-party solutions, offering a more comprehensive range of financial products to small businesses. This allows banks to provide innovative digital services without having to develop them from scratch.

Accelerating innovation: The ease of integrating FinTech solutions allows community banks to implement them quickly, reducing the time to market. This is particularly valuable for small banks that may not have large research and development budgets.

Enhancing customer experience: Collaborating with FinTechs can give banks access to cutting-edge technology, enabling seamless digital experiences and personalized services for small business customers. For example, SF Fire Credit Union partnered with a FinTech to create personalized digital experiences, resulting in significantly improved application completion rates.

Addressing specific needs: Partnering with FinTechs can allow FIs to tailor solutions to the unique needs of their small business clients for greater satisfaction and loyalty. For instance, The Cooperative Bank partnered with a FinTech to provide advanced artificial intelligence (AI) technology for protecting elderly customers from scams.

By offering both seamless digital technology and personalized financial expertise, community FIs can forge lasting relationships with their SMB clients — and make a serious play for the gold ring of SMB digital-first banking business.