Back in the 70s when I was a kid, I remember going to the bank with my mom a couple times a week. She was helping my dad out with his computer repair business, doing the books and collecting payments. I was only six years old, so I didn’t really understand what was going on, but I can recall these visits to the bank with vivid clarity: the smell of mothballs and cleaning products, the neutral fading colors, the itchy chairs, the queuing maze, the hushed sounds… and some genuinely wonderful people.
No matter which branch we went to, the bank’s staff always knew everyone in our family by name. They always greeted us with a warm smile. And of course they never forgot to give those lollipops with the crinkly-wrappers to me and my siblings. They knew us. We trekked to the bank so often that it almost felt like going to grandma’s house. The bank was our “money hub”, the reliable bedrock of our financial life — as it was for millions of small businesses in America.
Not so much anymore. With the rise in digital banking, there are more options than ever for critical financial tools like invoicing, payments, lending, and accounting. As a result, financial institutions risk losing — or, in some cases, have already lost — their position of dominance.
Payments and receivables growth has ballooned, and this trend promises to continue. According to research firm Juniper Research, global digital payments volume was nearly $3.9 trillion in 2017, up 14% over last year. And CapGemini forecasts a 10.9% annual increase through 2020. But banking providers’ share of that growth is actually shrinking. Few (if any) retail financial institutions are seeing payments growth anywhere near those levels; most are seeing neutral or declining volume.
In a survey by Citizens Bank, CFOs from 300 companies said they would like to see receivables paid electronically increase from 39% to 54%. Meanwhile, another study from the Aite Group found that small businesses still make 44% of their payments by check, but they are increasingly interested in electronic payments. 56% of the businesses surveyed use ACH payments, but only for ~20% of their payments or less. Another 36% said they would be interested in ACH if their bank offered it.
Evidence also supports that SMBs are willing to pay for these services. Today, they regularly pay fees for multiple disconnected third-party services, and they tolerate credit card fees from 2.5% to 4.0%. Consolidating their tools into one single source would almost certainly save them substantial amounts of money and gain them better rates as well.
So it’s no surprise that non-traditional, non-bank providers (NBPs) are all seeking a share of this booming market — QuickBooks, Freshbooks, PayPal, Stripe, Square, Zoho, Xero, Bill.com, etc. With open APIs and other back doors into business bank accounts, it’s easier than ever for NBPs to create convenient and delightful customer-facing products that easily funnel deposits, service fees, transactions, and loans away from traditional financial institutions. Moreover, NBPs that were once satisfied to provide narrow “service silos” for singular tasks like invoicing, e-commerce, P2P payments, accounting, or lending, now want to own the entire customer lifecycle and they are moving rapidly to solidify customer relationships.
Reality Check: If traditional financial institutions don’t counter this trend effectively, there will come a day when they are merely more than cash depositories with small margins, few direct customer relationships, and little- to no influence.
In much the same way that AAA failed to stop Google, Expedia, and insurance upstarts from their ultimate dominance in online mapping, travel and insurance, traditional banking providers have underestimated the rise and ambitions of NBPs. We still hear often from bankers that “QuickBooks or PayPal (or fill in the blank with another NBP) doesn’t have much influence with our business clients”. But evidence shows otherwise.
Autobooks regularly examines anonymized core transactional data from financial institutions which reveals telling trends on business payments and receivables. For example, in a sample of 4,500 small-medium size businesses:
- Nearly 40% had multiple monthly transactions with NBPs such as Square, QuickBooks, PayPal, or Xero.
- 25% maintain accounts with significant average balances, but don’t use the financial institution’s treasury services, and show no NBP transactions. These businesses must be using treasury services from another financial institution, perhaps a regional or megabank, or using NBP services in conjunction with a different bank account.
- More than 35% of businesses maintain a business bank account with very low average balance, perhaps a minimum requirement for a loan or line of credit. They are clearly using another financial institution and/or NBPs for their banking and financial services.
Need more evidence that non-bank providers are gaining market share and influence? Look at the growth of PayPal and Quickbooks, two of the most common services used by SMBs for invoicing, payments, and accounting.
PayPal added 8.2 million active customer accounts in 3Q17 (up 80% from a year prior, and the highest quarterly growth in over three years). 3Q17 transaction volume increased 26% in the same period. And average volume per active account grew 9% year-over-year. PayPal’s revenue has more than doubled in four years, and they project revenue to grow at least 17% CAGR from 2017 to 2020. What FI do you know that is growing like this?
Of course, these increases are partially due to growing e-commerce sales, but PayPal is also prevalent in retail and B2B. Retailers such as BestBuy and Home Depot use PayPal as an in-store payment, and as of December 2016, 34% of North American retailers already accepted PayPal as a payment method and 21% planned to accept it within the next 12 months. Core transactional data also shows that SMBs increased their use of PayPal in each of the last three years.
In 3Q17, QuickBooks Self-Employed added 425,000 subscribers, up from 360,000 in the prior quarter. Intuit’s small business and self-employed group (which includes QuickBooks SE) reported 3Q17 revenue growth of 17%.
PayPal, Quickbooks and others are clearly growing their market share at the expense of traditional financial institutions. Moreover, they are not simply growing their traditional “siloed” offerings. Like many other NBPs that started humbly with a single service offering, these companies now use customer data to aggressively promote payment services, credit cards, and loans to the most desirable businesses, encroaching on traditional banking services.
Quickbooks may be the shrewdest at this game. They worked with willing financial institutions to make it easy for businesses to sync their Quickbooks ledger with their bank account (called BankFeeds), further minimizing the need to visit the bank. And now, with all that data on customers’ businesses, Quickbooks has launched QuickBooks Capital, a small-business lending service. Now, when a user logs into their QuickBooks account, they see loan offers from competing financial institutions, QuickBooks Capital and other NBPs (e.g., OnDeck Capital, and Fundbox). In the well-meaning drive to become customer-centric, traditional business banking providers may have let the proverbial fox into the henhouse.
Even Amazon is getting into the game. Amazon seems to have no limits to its ambitions and they already work with over 500,000 SMBs via the Amazon Marketplace. Amazon Lending surpassed $3 billion lent to small businesses since the program started in 2011. Sure, this is a paltry sum compared to the amount lent by financial institutions. But Amazon typically starts small, gains intelligence, and then scales up… big time.
From June 2016 to June 2017, Amazon lent just over $1B, a significant increase year over year since the program began. Contrary to some financial institutions which often grant or reject loans based on scant financial information, Amazon has unique knowledge of businesses’ finances, inventory turnover, cash flow, creditworthiness, customer reviews, and more. Moreover, Amazon can use an SMB’s inventory as collateral since that inventory is often already sitting in an Amazon warehouse.
What happens when businesses can satisfy all their needs through NBPs? And what happens when NBPs are able to create two-way data exchange with financial institutions and easily create customer experiences that rival or beat the experience incumbent banking providers offer? What will the role of traditional institutions be in an ecosystem where customers can mash together their own combination of preferences — invoicing, payments, accounting, lending and insurance tools — into a single interface. Who will own those customer relationships, and who will profit?
These anxiety-inducing questions are not just rhetorical, they are existential. In the same way that consumers want to get all their answers from a single source (e.g. Google), businesses are gravitating towards the most convenient, least expensive, all-in-one financial services, and their direction is mostly towards NBPs.
But all is not lost. Community financial institutions may be in the best position to cultivate personal relationships with business owners and then serve them in a way that no NBP can, with better, more reliable end-to-end services. Most businesses are seeking to automate repetitive financial tasks like invoicing, payments collection and processing, and account reconciliation, and to consolidate those tasks into a single online solution that minimizes their time and money spent.
Traditional financial institutions can take a page from the NBP playbook and leverage cloud-based third-party solutions, APIs, and mash-ups to provide an all-in-one solution that integrates seamlessly with the banking provider’s existing systems, and once again turns the local institution into the reliable hub for business banking relationships.