Banks Must Tap Fintech Partnerships to Capture SMB Accounts

Digital banking isn’t optional — it’s a must-have for more and more small businesses seeking financial services. Fintechs have been the pacesetters in the race to deliver digital solutions, but banks can catch up if they’re willing to sprint. Effective partnerships with fintechs can help banks and credit unions innovate quickly and claim small business customers as their prize.

There’s a great scene in the Netflix series “Dead to Me” where Christina Applegate’s character is standing on a doorstep writing a check to a teenager and the young girl quizzically asks what she’s “drawing.” When told it’s a check, the girl then asks the middle-aged Applegate if she has Venmo, to which she replies, “Do I have what-what?”

The exchange perfectly illustrates a current disconnect between small businesses and financial institutions. Traditionally, small and midsize businesses (SMBs) have often been underserved by banks and credit unions, but in recent years, the gulf has widened because of a number of factors — not the least of which is that financial institutions don’t offer enough digital capabilities for this market.

Fintechs have stepped in to fill the gap and are expanding their small business offerings, but they’re coming up against their own limitations. We’re now at an inflection point, and banks and credit unions have an opportunity to recapture a growing SMB market by partnering with the same fintechs they once competed against.

Big Numbers in Small Business

There are 32.5 million small businesses (defined as having fewer than 500 employees) in the U.S., comprising 99.9% of all firms, and they’re responsible for 44% of economic activity. The small business market is key to a financial institution’s sustainable growth — and that market is burgeoning.

According to the Small Business Administration, small businesses with fewer than 50 employees created 1.9 million jobs, making it the fastest nine-month start in any year on record. Further, 43% of small businesses intend to increase their staff and 76% expect revenues to rise over the next year, according to the U.S. Chamber of Commerce’s Q2 2022 index.

A Jaw-Dropping Statistic:

Small businesses are responsible for 44% of the U.S. economy.

Not only is the small business market growing, it’s increasingly demanding more digital products and services and it’s continuing to evolve away from strictly brick-and-mortar establishments to digital businesses. Artists who sell on Etsy are a prime example. In addition, small business owners are also consumers who want to offer a seamless digital experience to their customers and have that same experience with their financial institution.

Financial Institution Evolution Lags

Unfortunately, many banks and credit unions haven’t evolved along with their small business customers. Many are still using the same old approaches and processes and offering the same old products and services. But small businesses want more. They have needs far beyond loans, and those needs are increasingly digital-centric. They want capabilities such as receivables automation, expense management, cash flow forecasting and seamless payment initiation processes.

A 2021 survey conducted by Aite-Novarica Group on behalf of Q2 tells the story. Nearly half of small businesses surveyed felt their financial institution doesn’t understand their needs. More than half said a seamless experience across the bank that includes a single login to access all accounts and products is required or very important to keep its business. At least 45% want to see their banks partnering with more fintech providers. And 60% to 70% already partner with a fintech for a financial capability that could be offered by a bank.

A Gap to Fill:

Almost half of small businesses say their banking provider doesn't fill their needs and 45% say they want their bank to partner with more fintechs.

It’s not that banks don’t recognize the need to offer more innovative products and services to their SMB customers, including a seamless digital experience. In a 2022 survey of bank leaders fielded by Arizent and American Banker for Q2, more than 80% said innovation is essential to their digital growth and transformation.

Yet, 60% of the respondents’ financial institutions continue to rely on paper-based processes for anything other than account openings or loan applications. The reason for the disconnect can be traced back to banks’ legacy core systems and siloed and fragmented technical infrastructures.

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Opportunity to Compete With the Big Four Banks

Financial institutions understand what they need to do. Six in ten respondents in the 2022 survey said fintech partnerships are key to their growth strategy, but only 10% have established such partnerships. Meanwhile, fintechs are expanding their small business capabilities and eating away at banks’ share of the market.

Undoubtedly, the “big four” banks (JPMorgan Chase, Bank of America, Wells Fargo and Citibank) are faring better in the battle to serve SMB clients than local community banks and credit unions, but technology can level the playing field.

And now is the time. The Aite-Novarica survey found that more than 60% of small businesses would be more likely to bank with a community or regional bank than a larger bank if they were offered comparable products, services, and online customer experiences. That’s not surprising. All customers, including small businesses, naturally prefer to work with a bank they know and with whom they have history. By partnering with fintechs, banks can position themselves as trusted advisers, while offering the digital capabilities their small business customers crave.

Mutually Beneficial Partnerships

So, what’s in it for the fintechs? They’re already offering SMB customers what they want and grabbing market share in the process. But they’re also realizing that there are limitations to what they can do, and they need help. For example, fintechs are data-driven but they don’t have the same history with their small business customers as a bank does, so their data is niche and finite. They lack the global view of customers that banks can provide.

Key to Success:

Small business owners are also consumers, and they want the same digital experience from their financial institution as they provide to their own customers.

Additionally, as they expand, they’re running into growth issues — such as needing to embed additional financial services into their ecosystems — as well as compliance issues. And lastly, the most obvious advantage for fintechs to partnering with a bank or credit union is that they’re able to tap into the financial institution’s captive audience, enabling even faster growth.

The solution is for financial institutions and fintechs to come together to provide SMB customers with the best of both worlds: The trust and confidence that comes from working with an established bank combined with the innovation and agility of a fintech. By teaming up with fintechs, banks can sprint ahead and stay competitive in a race they’re currently losing.

Open Platforms Facilitate Bank-Fintech Partnering

The two sides need a means to bring them together quickly. One solution is a platform that allows fintechs to create innovative services and offer them directly to the bank or credit union’s small business customers from their digital banking solution. An open infrastructure marketplace such as the Q2 Marketplace allows financial institutions to use plug-and-play capabilities from third-party fintechs to avoid time-consuming software evaluations. The result is that financial institutions can offer more innovative solutions at a faster, more scalable rate.

There is power in a fintech ecosystem that enables banks and credit unions to help SMBs simplify their business by moving them to a single smart hub on which to manage their day-to-day operations, including expense management, payments, payroll and more.

Ideally, such solutions would be embedded into the bank’s digital ecosystem for seamless integration. Small business customers, just like individual consumers, want the ability to self-serve — an expectation that’s increased as Millennial entrepreneurs have entered the fray. The best solutions will help financial institutions offer quick, automated, self-serve processes that don’t require small business customers to visit a branch unless they want to.

By partnering with fintechs and offering digital capabilities beyond transactional banking, banks and credit unions can not only win back or gain new small business customers; they can strengthen their relationships with their existing customers, and even expand noninterest income opportunities.

Regardless of whether a financial institution is operating in a community of a few thousand people or tens of millions, serving small business customers is crucial to its survival and growth. If they don’t want to be caught on the doorstep writing a figurative check, it’s time they consider partnering with a fintech.

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