Extreme Makeover: Business Banking Edition

The original Extreme Makeover: Home Edition show that first aired on TV in 2003 featuring Ty Pennington, was one of the most uplifting shows. It was uplifting not because of the dream homes they built but because it showcased the feel-good magic created by designers, and rebuild homes for some of the most deserving families you could ever meet.

Such is the type of extreme makeover magic that we need for small business banking. Now allow me to build my case.

A report published by SBA (US Small Business Administration) in 2018 highlights the importance of small businesses:

1.     Generated 44% of U.S. economic activity.

2.     Employed 47.5% of workforce.

3.     Generated 32.9% of US total exports.

According to this FDIC report (as of 2020), there are more than 5000 commercial banks in US. And yet, a recent survey done by BlueVine captured the dire state of the overall banking experience of small businesses:

1.     Underserved – more than 91% feel banks are not doing enough.

2.     Overcharged – the average small business customer pays $451 in fees annually.

3.     Lack of access to capital - 39% of the respondents say getting lines of credit, loans and credit cards is difficult from their current bank. This is validated by the Biz2Credit Lending Index.

4.     Broken banking experience - more than 50% of small businesses have more than one bank account and use neobank financial apps to pay vendors and suppliers.

By now its amply clear that most of these 5000 banks do not feel compelled enough to offer better banking experience to one the most important groups contributing to the US economy – small businesses. Small businesses deserve better banking experience.

Hence there is a need for fresh look at some of the fundamentals that are directly affecting small businesses.

Global Banking Policy Makeover

1.    Deregulation

Policy makers across the world have realized that tighter regulation is stifling the growth and success of small businesses. One of the fundamental shifts that happened in the last two decades on the policy front was deregulation. According to this SBA research study, reduced regulation, especially those that target start-ups, cuts corruption, increases entrepreneurship, and raises productivity.

2.    Data Privacy

Another important policy initiative that is relevant for the discussion here is on the data privacy. The General Data Protection Regulation (GDPR), which took effect on May 25, 2018, enhances individuals’ rights when it comes to protecting their personal data. 

GDPR made an impact on the banking front as well. EU Payment Services Directive (PSD2), which took effect on January 13, 2018, puts an obligation on banks to give Third Party Providers (TPPs) access to a customer’s payment account data, provided the customer expressly consents to such disclosure. The new legislation is intended to improve competition and innovation in the EU market for payment services.

These positive developments empower small businesses to look beyond banking entities to solve their problems. It also forced banks to open their banking and customer data. Third Party Providers created innovative Open Banking  and Banking-as-a-Service platforms and democratized banking.

Use Cases for Extreme Makeover

We have seen several innovative banking apps and platforms in the recent times. The makeover has already begun. However, I would like to highlight some use cases to further help small businesses:

1.    Core Banking Experience

We discussed at length how the core banking experience for small business is broken. Following aspects would greatly improve the experience:

Instant Onboarding and Account Management – Even today entrepreneurs find it difficult to approach and open a deposit account for their business. Majority of self-employed, entrepreneurs and startups still use their personal bank accounts to manage their business.

Digital Banking and Mobile App Experience – small businesses have repeatedly looked to neobank apps as an alternative. and" target="_blank" rel="noreferrer noopener">This report by Gartner confirms that 69% of US banks rank below the neobank apps in digital performance.

2.    Treasury and Cash Management

Single Source of Truth for Cashflow – majority ofsmall businesses have multiple bank accounts. Having a single window view into their cashflow and AI based predictive cashflow forecasting system empowers them to make informed business decisions.

3.    Spend Management

Intelligent Spend Solution – I have covered this in depth in this article.

4.    Frictionless Credit

Just-in-Time (JIT) Credit Decision Making - Lenders must gather holistic pictures of their applicants - the ability to make credit decisions in real-time by just having access to bank and card transactions data.

Buy Now Pay Later (BNPL) – this innovation is already helping the retail users on several ecommerce websites. Small businesses could benefit as well.

Invoice Factoring – instant access to short term capital (Net 30/60/90) based on the Account Receivables.

Conclusion

There is no doubt that small businesses are the most hard-working group in the country and are the lifeblood of the US economy. Yet despite being key drivers of innovation, job creation, and competition, there is empirical evidence to show that banks have consistently underserved them. Encouraged by the policy changes, we are seeing an explosion of non-banking FinTech startups including Tera who are on a mission to build better banking experiences. This bodes well for small businesses.