For small businesses, getting paid is a pain, and its causing widespread problems. Most (60%) say they regularly struggle with cash flow, and many (40%) say it has limited their growth, according to a Bank of America survey. Now, through technology partnerships with fintechs, banks and credit unions are easing that pain and challenging competitors like Square and PayPal as a result.
In July, nbkc bank announced businesses could begin taking cashless and cardless payments directly through its mobile banking app using Apple’s Tap to Pay on iPhones.
With that expanded offering, the bank now provides small businesses with seamless and automated tools to manage their revenue: invoicing, payment, bookkeeping, and banking. And, through an integration created by Q2 and its Innovation Studio, it’s all done while avoiding challenges that often hinder institutions from launching new technology.
Small Businesses Investing in Payments
The most unwanted “hat” in business owners’ repertoire is the list of minutiae required to get paid. Almost every step is manual. Even where software takes on work, the systems don’t talk to one another. These idiosyncrasies result in cash flow struggles for small businesses.
“Many businesses have to bolt things together right now when it comes to payments and managing their money,” Derik Sutton, vice president of marketing at Autobooks, tells The Financial Brand. “They very much need to be able to do all of it in the same place. There’s just too much friction to cash flow.”
Surveys show business owners want to remove that friction. Some 80% have digitally optimized their business during the past year, according to Bank of America’s 2023 survey of small businesses. That’s up from 70% in the bank’s last report.
Owners say digital tools acquired last year helped them save time (65%), stay organized (60%), and manage cash flow (53%).
Banking services were the most favored type of digital upgrades with 60% accepting more cashless payments and 52% conducting banking online or via a mobile app. In a distant third place were upgrades bolstering the company’s social media presence (37%).
Striking at the Root: From Payment to Bank Account
Many businesses, not unlike consumers, live month to month. Payment timing often determines a businesses’ ability to pay bills. It “can even put owners into cycles of using credit to fill in gaps, which can then put them deeper underwater,” Sutton says. “Anything that drags down cash flow puts the small business at risk.”
In the case of nbkc bank, it has gone after payment timing by making it as simple as possible to take payment immediately.
“Not many businesses can wait 30 days to get paid on an invoice,” Melissa Eggleston, chief deposit officer at nbkc, tells The Financial Brand. “There are so many small businesses, solopreneurs or people who have side-gigs — our goal is to make it really easy for them to get paid and get access to their cash faster. This allows us to provide for the specific needs of a customer segment we want to serve really well.”
“Not many businesses can wait 30 days to get paid on an invoice. There are so many small businesses, solopreneurs or people who have side-gigs — our goal is to make it really easy for them to get paid.”
— Melissa Eggleston, nbkc
Through functionality developed by Autobooks, which integrates into nbkc’s digital banking via Q2, customers simply hold their iPhone or Apple Watch near the business’ iPhone to pay securely through near-field-communication, or NFC. They can do the same with credit or debit cards, or other digital wallets.
Functionality like nbkc’s helps stave off disruption from fintech competitors. “We all know players like Square, PayPal, Venmo and others are using technology to drive a wedge into the market to disintermediate relationships between banking and businesses,” Sutton says. “Every time you see a transaction come through [one of those fintech players] in a business account, you should consider that customer a flight risk.”
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More Than a Fintech Parity Play
Payments are important, but institutions are aiming higher: They want to serve small businesses better than competitors and in ways only banks and credit unions can.
Consider invoicing, for instance. There are so many opportunities for delays and manual steps. Waiting for checks often takes 30 days. An invoice as well as its corresponding check can be lost in the mail. Emailed invoice can go to spam folders. Even when invoices are paid, there’s still bookkeeping to be done, often in separate systems.
“Many businesses have to bolt things together right now when it comes to payments and managing their money,”
— Derik Sutton, Autobooks
The waiting game is effectively gone when customers pay with a debit or credit card via a merchant terminal. But then there’s opportunity aplenty for hassle from the hardware. Terminals must be shipped, securely installed, powered, and serviced, most of which affixes them to a geographic location. And, while merchant terminals serve retail locations, they’re not conducive for many businesses.
Businesses can turn to dongle-and-phone transactions with hardware offered by companies like Square. But a dongle is a device made by one manufacturer and it must connect to devices made by phone manufacturers, which again opens the business to a slew of IT issues.
Even after all that, the collected payment still needs to make it from the transaction platform to the business’ banking institution and then onto accounting records. “We’ve seen business owners hit a growth stride and send their largest invoice, maybe 30% higher than typical, and Square will just freeze their account,” Sutton says. “And then they’ll hold the funds for four to six weeks while they try to determine if it’s fraud. They also charge a premium to transfer that back to a financial institution in real time.”
The Payoff for Process Improvement:
Technology — while wonderful when used well — can complicate the invoice and payments process for business customers. Banks partnering with fintechs can speed up the process and strengthen the relationship with their business customers.
When invoicing, payment, and bookkeeping occur in the banking app, friction deteriorates. For tap to pay, there’s no mail, email, extra hardware or software, or moving money between platforms. In fact, the funds go straight from customer to the deposit account. About “95% of users are paid within five business days after sending an invoice,” Sutton says.
Businesses not using NFC payments by phone can invoice and receive payment by card via email. When it comes time for bookkeeping, owners or managers can download bookkeeping reports compiled automatically for them from within digital banking.
Better Tech for Payments and Invoice Processing: Build, Buy or Partner?
Solving for business cash flow pain also creates a new revenue source. nbkc receives income from card transactions. It also receives a portion of the subscription revenue when customers sign up for accounting and reporting features.
Replacing a month-long check-and-invoice process with one that takes minutes is a strategic differentiator for nbkc. If the opportunity offers fee income, and so many small businesses need it, why did it – a bank reported to have a 20-person engineering team – partner? Why didn’t it build the tech independently?
“If you build it, you’re setting out on a six- to eight-month journey that absorbs all your cross-team resources. By partnering, we could bring this to life in a timely way.”
— Melissa Eggleston, nbkc
“Even with the size of our development team, we don’t have unlimited resources,” Eggleston says. “If you build it, you’re setting out on a six-to-eight-month journey that absorbs all your cross-team resources. By partnering, we could bring this to life in a timely way. Ultimately, what’s smart about Q2’s Innovation Studio is how it removes barriers to saying yes. We can beta test something and decide to move forward; if not, we haven’t sunk significant cost into it.”
Leaders at Q2 call this “the new economics of banking innovation.” And it’s replacing the traditional build-and-test approach that has so often hindered digital transformation in banking, even when executives see a strong business case.