SMBs Are Evolving Quickly — Can FinServ Keep Up?

Several waves in the evolution of banking and financial services appear to have roots, at least partially, in the small and medium-sized business (SMB) community. The rise of alternative lending, for instance, is often attributed to the pullback among traditional financial institutions (FIs) from lending to SMBs as a result of stricter capital and risk rules post-financial recession.

Hundreds of FinTechs have stepped onto the market in the last decade with products designed specifically for small business owners that aren’t having their needs met by banks, and this has also led to a new trend of FinTechs and banks working together to service joint SMB clients. The rise in on-demand services and gig workers has generated new conversations about the very definition of a small business, too, and how to meet the financial services needs of a new breed of entrepreneur.

The common denominator across these shifts is a gap in traditional bank services to small businesses, and research in the past year corroborates this sentiment among SMBs.

Last July, analysts at FIS found evidence that small businesses are feeling frustrated by big banks. Its Performance Against Customer Expectations (PACE) Report, which surveyed nearly 500 SMBs in the U.S., found 14 percent of small firms that use a large global bank have switched banks in the last year, and more said they’re considering doing so this year. Nearly half said they might switch banks because their current provider doesn’t have the products and services they need.

In another report published last October, small business banking technology firm Seed found a similar frustration among SMBs regarding a lack of services and products offered by their banks.

The company surveyed 423 SMBs in the U.S. and found most don’t have access to “an intuitive, simple mobile banking app,” and 65 percent said their banks don’t offer in-app messaging or phone support. Less than a third said their banks provide financial insights at a time when more small businesses are seeking strategic advisory services from their FIs.

In an interview with PYMNTS, Seed CEO Brian Merritt said there are changes ahead for the SMB financial services market.

For one, banks will “learn to listen to SMBs,” he said.

“Consumers want personalized, digital experiences with the companies they chose to patronize; SMBs are the same,” said Merritt. “Traditional banks are pretty bad at connecting with consumers, [and] at finding them where they live,” like on social media and messaging platforms.

Banks’ notoriety for poor customer service exacerbates the existing challenge of the small business — too big for consumer products, too small for enterprise-grade tools.

That’s been the case for years. More recently, the expansion of the gig economy and other technological trends have made it easier than ever for an individual to start their own business — and harder than ever to find the right financial services.

“A small business can be a freelancer or an artisan, and as it becomes less necessary to have an office space, and easier to conduct business remotely, I think businesses will start looking more and more like anybody with an idea,” predicted Merritt.

In the latest PYMNTS Gig Economy Index, released in collaboration with Hyperwallet, more than a third of gig workers said they spend their entire work time on one gig job, and 69 percent said they wouldn’t quit their gig work for a full-time job. Not all of them are entrepreneurs that operate their own businesses, but for those that are, the right tools — like accounting and cash management solutions — aren’t necessarily coming from their banks.

Luckily, Merritt said, technology has made it easier not only to start one’s own business, but also to keep it running.

“A lot of these [small businesses] will crash and burn, of course, but technology allows entrepreneurs to proceed without as much risk,” he explained. “You don’t need to spend a lot on a website, an accounting team, and so on. So much cool stuff can be automated now. An SMB can have an accounting department in their pocket, can send out invoices, run email campaigns [and] manage a social media presence.”

As these solutions evolve, and as more technologies breed new products for entrepreneurs, the financial services space — including banks and FinTechs — must be proactive to service these entrepreneurs, he added.

“The distance between idea and [a] working business is shorter, and smart Finserv companies will learn to intuit the needs of these businesses-of-one and really little SMBs,” Merritt said.

There may be loads of flashy tools that can fit in your pocket, but a few necessities stand out for small businesses today: “security, mobility, and transparency,” Merritt noted. “Products that protect your identity and finances, that let you run a business from anywhere, and that give you total visibility into all that information.”

If a traditional bank isn’t meeting these three demands, research suggests small businesses will turn elsewhere.

Merritt said he is excited to see how small businesses, freelancers and entrepreneurs react to a changing financial services landscape in 2018. But, for the banks themselves, and the broader financial services market, he’s not necessarily convinced they’ll be able to keep up with SMBs’ powerful market pressures.

“I think we’ll see financial services start reaching out to SMBs through third-party platforms and tailoring offerings to the particular needs of businesses,” he said. “Notice I said ‘start.’ Banks are slow to change, whereas SMBs, by necessity, evolve quickly. I think there will be a continued disconnect as the big guys chase the little guys, but everyone will continue settling into an alignment that favors digital and, hopefully, sees power in the hands of the consumer and SMB.”