5 Ways Banks Can Prevent Small Business Defections to Fintechs

When it comes to their banking needs, the critical small business market is vastly underserved. Facing numerous challenges, small businesses are demanding more from their primary banking provider, but are often coming up short, especially with digital payments and digital account opening. Here's what is needed.

Since the beginning of the pandemic, small businesses everywhere have had to make considerable changes to how they conduct business. From standing up order-ahead experiences and contactless payment options to creating a digital presence where there once was none, they’re leaning towards digital channels more than ever before. They’ve also had to adopt new staffing models, deal with ongoing labor shortages, and prioritize the safety of their customers and staff.

Early on, financial institutions were rushing to support them by offering relief loans through the Paycheck Protection Program. And while they had a bit of a rocky start, their steadfast support influenced record-high customer satisfaction among small businesses, according to J.D. Power.

But many banks and credit unions haven’t maintained that momentum. And while more businesses say they’re in better financial health than at the beginning of the pandemic, many are still struggling.

Supply chain issues and surging inflation continue to present challenges on everything from materials and labor to borrowing and overall financial well-being. Yet the stark reality is many banks and credit unions still aren’t providing small businesses with the same options, product offerings and level of service they offer larger enterprises. So, it’s not surprising that more and more small businesses are seeking alternative providers to get what they need.

Small Business Key Facts:

Small businesses make up 99.9% of all U.S. businesses and account for 66% of employment growth over the last 25 years.

As younger, digitally native generations continue to enter and make up more of the workforce — and increasingly start their own businesses — banks and credit unions must step up. More than half of Americans are Millennials or younger.

What can banks and credit unions do to better serve the needs of small businesses? Below are five practical but essential steps financial institutions must take.

1. Treat Them Like a Business

Financial institutions need to make small businesses — and their expectations of being treated as such — a priority. Repurposed consumer solutions lack the features these customers need, from invoicing and payments to entitlements and approvals. Commercial solutions, on the other hand, are often cost-prohibitive for small businesses; they offer robust cash management solutions geared toward much larger companies with much higher transaction volume.

But many small businesses are still being underserved by only being given access to one of these solutions. To tackle this ongoing challenge, banks and credit unions must first realize that not every business fits into the same box. They’ll need to work smarter to understand the individual needs of each of their customer’s businesses.

A marketing firm with 30 employees will have different requirements than an auto body shop with five. Both businesses will need an invoicing solution, digital payment acceptance capabilities and back-end integrations that make them more efficient. But the auto body shop will also require a method to accept point-of-sale payments, whereas the marketing firm may not.

Financial institutions must be able to segment small businesses and offer them products and services based on their distinct needs.

2. Make Onboarding Easy and Account Opening Fully Digital

Financial institutions everywhere tout digital account opening. However, it’s often not fully digital. Some solutions still require applicants to call or go to a branch to complete the process. But with the acceleration of digital everything, business owners and consumers alike expect to be able to open new accounts digitally in minutes — and not have to jump through hoops.

Digital account opening is critical to onboarding new customers and keeping their business. According to Aite-Novarica Group, 86% of Millennial-run small businesses say digital/online account opening is required, very important or important for their bank to keep their business as a customer.

But many financial institutions are still struggling to master digital account opening and make it easy to use. Only 17% of banks allow small businesses to apply for deposit accounts entirely digitally, and only a mere 5% enable small businesses to apply for loans fully digitally, according to Bank Director.

Financial institutions must continue to make improvements. And they need to do their due diligence when evaluating providers to ensure they can deliver a digital-first experience that is integrated across channels and touch points.

3. Deliver Deep Digital and Self-Service Capabilities

Small business owners need a full range of services and solutions to help them securely and efficiently manage their business. Whether it’s the ability to invoice and receive money, send payments, manage cash flow, create custom reports or interact with a banker, they need to know their financial institution can serve their needs adequately.

But again, the reality is that many don’t. And small businesses are open to leaving for alternative providers. An Aite-Novarica Group report indicates that 84% of small and midsize businesses (SMBs) run by Millennials are already using or have considered using alternatives to traditional banks to manage their finances.

While there are generational differences when it comes to the demands and interests of small business owners, the same study suggests that the needs of small businesses run by Millennials indicate a sizeable shift in how SMBs, in general, interact with their financial institutions.

As younger Millennials and Gen Zers increasingly start new businesses and make up a critical segment of the workforce, it’s imperative that banks and credit unions make their needs a top priority. And time is of the essence. With widespread staffing shortages, having access to self-service capabilities and integrations is crucial as these businesses work to keep their operations running smoothly.

4. Provide Payment Options and Demonstrate Their Value

When asked what banking functionality small businesses are most interested in, payment capabilities top the list for Penn Community Bank. “Ease and flexibility of sending payments” are what small business customers continually ask for, says Tracey Carroll, senior vice president and director of cash management at the bank.

Small Business Payment Preference:

Small businesses that say they are interested in changing the way they process payments:

That interest is not surprising because the payment needs of small businesses are shifting rapidly. Since the start of the pandemic, businesses have had to modify their payment operations to support a remote workforce, order-ahead experiences, digital payment acceptance and more. And with the ever-changing payment landscape, there is no absence of choice for digital payment solutions. But with so many options, it can be difficult for small businesses to navigate them and even harder to understand the benefits of each.

The factors most likely to impact the decision to consider new payment options include their ability to provide a more streamlined user experience, back-office automation and a higher level of security and accuracy. But there is a great deal to consider when evaluating modern payment methods, from cash flow management and operations to interchange fees and hardware costs. Financial institutions that provide diverse options and proactively communicate the value of each solution will come out ahead.

Additional Resource:

Case Study: “Penn Community Bank’s Migration to NCR Business Digital Banking Elevates Growth, Profitability and Competitive Edge”

5. Offer Proactive Financial Education and Guidance

Much like consumers, small business owners expect their banking partners to provide proactive and sound financial advice so they can make intelligent decisions to help manage and grow their business. While deepening and enhancing digital offerings is vital, being aware of the differences in digital and financial literacy among business customers is also essential for individually serving them.

Interestingly Enough:

Millennial-run small business owners have low confidence in their understanding of the benefits of new payment tools, despite using them more.

Banks and credit unions should also be focusing their efforts on proactively communicating the benefits that will resonate with small business owners and help them succeed. That means promoting different financial solutions to varying types of small businesses.

Financial institutions have a distinct advantage over alternative financial services providers when segmenting those messages: the wealth of data at their fingertips. They should be using that data to personalize their offerings and messaging. But also keeping top of mind that it’s about more than cross-selling products; it’s about education and trust, which leads to loyal customers with more products.

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