Small Business Banking: What Fintechs Got Right and Community Institutions Need to Learn

Part 1: Small Business Banking: What Fintechs Got Right and Community Institutions Need to Learn

Recent months have forced us to find new ways to work, reevaluate our objectives, and creatively navigate unfamiliar obstacles hindering our daily progress. Many small businesses feel their community banks and credit unions should take the same approach to realize their diverse, unique needs rather than group them together. 

The push-pull between fintech and traditional financial institutions continues even within the small business market, with some contending the fintechs are doing it right. So, what can community institutions learn from these newer market entrants? 

The Traditional Small Business
Small businesses are the focus of recent articles and surveys due to the economic impact of COVID-19 shutdowns. They make up 99.7% of businesses in America, and at the start of 2020, totaled more than 30 million small businesses, who employed just about 60 million people - roughly 47% of the private sector workforce.  Since the closures started in March, it’s estimated that over 2% of those small business have closed their doors for good.

Chances are, you can name several small businesses struggling in your community, wondering how you can help - not to mention over 10,000 community financial institutions seeking to provide products and services to those in need. But, if you’ve ever been tasked with designing a product or service, you know the first step is to define your target audience - so, how exactly does one define a small business?  

Reading through the bevy of articles and surveys, two most common generalizations loosely define a small business as either a “privately owned business with less than 500 employees,” or a "business with an annual revenue less than a larger corporation,” not nearly specific enough to target appropriately with solutions and services.    

If you break down the small business market by number of employees, small businesses fall within three main groups. If you’ve ever talked to a business owner with 2-3 employees compared to a business with 19, you know more differences than similarities exist. 

  • 80% of today’s small businesses are categorized as “non-employers.” 
  • 17%, roughly 5.3 M businesses, employ less than 20 people.
  • The remaining 2-3% employ anywhere from 20-500 people.1

The Micro-Business
Another term often used is “micro-business,” defined as private businesses with less than 10 employees, generally earning less than $250,000 per year, and accounting for over 75% of all private-sector employers.  Still a wide gap, but maybe we’re getting warmer.   

Unfortunately, any compliance officer will advise that if you compare two micro-businesses, like a personal trainer and a family-owned restaurant, their business models will be quite different. Specifically, each business has different deposit levels, varying cash needs, and different ACH and wire transfer requirements. Yet, if you look at the advertisements for small business products and services from banks and credit unions, their descriptions are largely based on these transaction types and volumes.  

Is it any wonder that about half of all small business owners feel their primary financial institution doesn’t understand their unique business needs?  This shared lack of understanding is the reason why fintechs are successfully disrupting the small business banking market.   

What's Their Secret?
While community financial institutions concentrate on volumes and dollar amounts to define needs, fintechs look at the people behind the businesses and the business owners themselves, along with their habits and goals. So what does that look like? 

A little more than half of all small businesses are owned by those age 50-88, predominantly Baby Boomers. As a group, Boomers are most comfortable with traditional media like television, physical magazines, and newspapers. They slowly adapt to technology to keep in touch with children and grandchildren. 

The remaining businesses are owned by those under 50 years old, including Generations X and Y. Gen X grew up in the age of personal computers and use traditional media sources, but are more digitally aware, spending several hours a week online. Generation Y, better known as Millennials, grew up in the age of the internet. Of the three generations, they’re most likely to gravitate away from traditional methods in favor of online media sources.   

Studies show 67% of Gen Xers regularly use computers, and 60% have adapted to smartphones. Gen Xers are also most likely to do research before making purchases. Millennials live and breathe through their smart phones, making most purchases through their devices, and relying on reviews to inform their choices.3 Shouldn’t they be able to run their businesses the same way? 

Now, think of how these entrepreneurs fund their small business startups.  Traditional bank loans are likely to have high interest rates, translating into large monthly payments.  SBA loans may offer more opportunity, but larger loans require collateral, often in the form of a home or a large retirement fund. This opens the door for alternate funding sources, and the fintech companies listened.   

While community institutions define products by their usage, dollar thresholds and volumes, fintechs focus on the ‘jobs at hand,’ and solving, or at least lessening, the small business owners' biggest pain points.  As a result, the small business owner spends less time on finances, and more time doing what they love. 

The Way Forward
If 2020 has taught us anything, it’s that companies who find ways to work remotely - capable of promoting and generating business online, are more likely to survive in 2021. The old ways of doing business no longer work, and it’s time to change our thinking. Look at your product offerings from the outside in.  What are your members and customers trying to accomplish, and how can you best remove the speed bumps and pain points to get them back to their business? 

NXT, Alogent’s secure, flexible and customizable digital banking platform, enables community institutions to offer consumer and business banking under the same umbrella. Meet the diverse needs of your customer and member base, compete with the fintechs, and stand out from the crowd with customization, brandability and analytics to help target solutions more accurately.

>> Learn more about NXT and its business banking capabilities.