SMBs are an untapped opportunity for banks

In our latest BAI Executive Report, we explore how financial institutions can broaden and deepen their small business relationships.

Banks haven’t always been enthusiastic about working with small businesses. These enterprises are small in scale, loan values tend to be low and the failure rate is comparatively high, so for many bankers, they didn’t seem worth the trouble.

But like so many things in banking in recent years, that line of thinking has undergone a dramatic transformation. First, fintech competitors started courting small businesses with offers of loans and other services. Then came the pandemic and the hundreds of billions of dollars allocated as part of the Paycheck Protection Program. During the first two weeks of PPP alone, the Small Business Administration processed more than a decade’s worth of loans to SMBs.

Now that banking institutions see the value in small businesses as customers, the big question is how to broaden and deepen the relationships between banks and SMBs. We explore that question in this month’s Executive Report.

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Norm DeLuca from Bottomline Technologies lays out a key issue in our lead article: Nearly half of small businesses believe their bank does not understand their needs. He writes that fewer than one in five financial institutions offer a full slate of the services small businesses need to run their operations efficiently.

Not only does this understanding gap create profitable opportunities for fintechs and other disruptors, but banks and credit unions also “risk missing out on a once-in-a-decade chance to transform the financial lives of a perennially underserved customer segment and win relationship primacy for years to come,” DeLuca writes.

He says invoicing and receivables services are a particularly promising opening, pointing to a Mastercard survey finding that the vast majority of small businesses upgraded their digital capabilities during the pandemic. Digital account opening and cash flow management are other  areas to target.

My Q&A interview with Patrick Smith, head of small-business banking at Santander Bank, yields more insights into what the nation’s 32 million SMBs want from their banks. Along with the products and services they need, Smith says, these businesses want to be understood and cared for.

Advice from financial institutions too often has an institutional feel, he says. “It doesn’t feel like it’s born out of a real concern for the small business. It has to actually fit the empathy criteria in order to be received in the right way for the small-business owner.”

Bottomline also advises that banking institutions get more serious about catering to small businesses owned and/or operated by millennials, who start turning 40 this year. In his article, Curt Raffi ticks off a number of reasons why this demographic cohort represents such a significant opportunity, starting with a couple of key stats: Millennials are already the largest generation of adult Americans (72 million strong) and will soon be a majority of B2B decision makers.

Millennials are also widely considered to be the nation’s most tech-driven generation, and research by BAI and others clearly shows that they prefer interacting through digital channels.

Raffi writes that millennial small-business owners say they’ll pay for smart digital services that help them, but that upside is somewhat tempered by their tendency to swap out banking relationships when it’s expedient to do so.

A few more articles of interest in this Executive Report:

  • Seeking financial immunity from COVID-19: BAI contributing writer Lauri Giesen speaks to bankers and other industry watchers about the uncertainties facing small-business owners as we head into another pandemic winter. Many SMBs are already turning to their bankers for emergency credit lines, digital payment options and even coaching on how to best run their operations.
  • Where’s everyone going?: Erik Nilsen from Bottomline writes that banks can get ahead of small-business attrition by proactively reengaging with their SMB customers as a way to maintain ownership of the primary relationship. Getting better use out of readily available data is the key to placing the customer at the center of every interaction.
  • Will neobanks take over small-business banking?: Fintechs and other neobanks are taking some market share in lending, payments and other services, but contributing writer Marilyn Kennedy Melia reminds us that traditional banks have advantages that small businesses value, including the ability to create and deepen relationships.

We hope you enjoy this Executive Report on small-business banking.

Terry Badger, CFA, is the managing editor at BAI.