Banking, SMB Finance
Business model reengineering is critical to serving the $300 billion SMB market
Banks and fintechs will have to partner up, trade knowledge and expertise, to effectively and profitably serve SMBs.
Let me play the same horn for a bajilionth time: there is no SMB banking without embedded finance solutions.
Subboh Jaffery | January 25, 2023
Throughout 2022, SMB servicing was one of the biggest trends in fintech, and the same is expected in 2023. It also naturally emerged as a key theme in Tearsheet's recent The Big Bank Theory Conference.
Today, America's 29 million SMBs demand financial products and services worth more than $300 billion annually. As these businesses fall somewhere between corporate and retail banking, traditional banking models have been unable to profitably serve their demand.
Individual SMBs do not generate enough revenue to warrant specialized programs, as with corporate clients, and are too unique in themselves for the one-size-fits-all approach of retail banking to work. The result is highly dissatisfied SMBs, with 89% reportedly reconsidering relationships with their primary banks.
The SMB opportunity
SMBs are understood to be fast followers of consumers, and very agile in adopting new practices. As consumers moved towards digital, demanding better experiences from their financial services providers, we saw SMBs follow suit not long after.
The transfer of wealth and business to younger, more tech-savvy generations also played a role in SMBs looking favorably upon digital financial service platforms. that are easier and cheaper to customize for individual businesses and industries.
It's almost like this space was made for fintechs to fill up.
In serving SMBs, user experience is one of the most important factors. There's a growing demand for frictionless, integrated, and fast solutions, with assistance always available.
Digital bank Grasshopper, a preferred choice for many SMBs, understands this very well. The firm's strategy has consistently been to offer few products and services, but do them really well, rather than to keep adding more offerings.
"For SMBs, the experience has to be frictionless. It has to be kind of 24/7, and provide an Amazon-like feel to it," Mike Butler, the CEO of Grasshopper, said in his TBBT session. "We focus a little less on the number of products that we offer in the marketplace versus the quality of the experience."
The firm's current set of offerings to SMBs are focused on treasury management, with the belief that there is serious scope for such management-dashboard products. Grasshopper sees value in creating tools that can help SMBs in their day-to-day tasks.
The majority of SMBs have less than 20 employees, and there's no real CFO or CMO among their ranks. While these SMBs are often deeply attached to the products they're selling, the management bit gets tough for them. If providers can successfully help them with that, they can unlock great potential.
In light of the current macroeconomic climate and impending recession, Butler feels SMBs will be fairly resilient against the odds. This is because they tend to be more agile and are able to adapt more quickly. The same, however, will also create greater demand for digital management tools.
The question is this: If you can't hire as many people, can you use technology more?
"[In today's economy], you want to be able to manage your cash flows effectively through a timely transfer of money. On the payments side, getting money from one place to the other in tighter timeframes becomes really important. The third element is access to capital, and that is the tricky part during these periods of time. That's what I think the market needs to evolve for," Butler said.
Banks and fintechs, unite!
Fintechs have displayed a strong ability to serve the SMB market. Banks are becoming cognizant of that, and increasingly viewing the fintech landscape as an opportunity to collaborate, as opposed to direct competition.
And there's great value in that for the entire financial industry. If both types of players double down on their own expertise, they can collaborate to create value that they individually simply cannot.
"Our strategy and our culture is to kind of embrace the fintech evolution – recognize the fact that our banking industry does not create industry-leading technology. It's happening outside of our organizations. We need to embrace it and accept it and partner with it," Butler said.
Bank-fintech partnership have evolved into a banking-as-a-service relationship, in which banks are behind fintechs, powering the products that are impacting the small business world. For any bank with a future-proof strategy, this is pretty much the game these days.
It makes sense that when a fintech company can create an industry-leading product, but can't offer a depository product, for example, or needs a payment process behind it, it partners with a bank.
There are definitely some risks associated with such a partnership, and it is important that brands and banks both do the necessary due diligence before entering into such a partnership. This includes making sure they have similar work cultures and objectives, and that their technologies can effectively work together.
Danielle Cohen-Shohet, founder and CEO of GlossGenius – a business management app for SMB owners in the beauty and wellness industry – echoes the importance of due diligence in forming fintech-bank partnerships.
According to her, the most important factor is scalability. There are a lot of different opportunities and partnerships in the market right now, and it is important to be able to pick one that can enable your own business to grow.
"We really focused on scalability, because that was important for us. And scalability is important for us because we're only as good as our partners are, and when it comes to establishing trust with business owners and making sure that we can provide a trusted, secure experience, it's really important that we have a lot of scalability with partners," she said at TBBT.
The second most important thing to consider, in her experience, was customization. For her, that comes down to how nuanced workflows can be and should be for business owners in their space. This was important for GlossGenius because they had a very specific idea and a set of opinions about how they wanted to provide certain workflows to business owners.
Vertical-focused vs industry-focused approach
Broadly speaking, there are two approaches to serving SMBs. One is to create a solution for the entire industry, and the second is to focus on a vertical and become really good at it. Both of these approaches come with their own set of advantages and disadvantages.
An industry-wide approach creates a larger funnel with the ability to cater to a variety of businesses with a single offering. On the flip side, however, it leaves a business vulnerable to losing customers to a more specialized service provider.
Serving a vertical directly decreases the number of potential customers. GlossGenius is an SMB fintech provider with a vertical focus. The firm creates specialized products for the beauty and spa industry.
According to Cohen-Shohet, a vertical-focused approach to SMB servicing could potentially be more fruitful than trying to serve the entire industry. It grants the users of a service a certain level of depth that is very valuable to them, and enables them to scale. The logic is simple: it is harder to be something for everyone than to be very valuable to someone.
With such a focus on the vertical, the GlossGenius team was able to create solutions that translated directly into high customer satisfaction. For example, they learned that payment integration was extremely important for their clients, and a space where they in particular felt underserved.
The result? GlossGenius launched integrated iPhone tap payments – which essentially turn any phone into a POS terminal.
They also realized that more payment-focused data enabled their customers to make better decisions, and really doubled down on enabling that.
"We found threading payments into the client experiences makes it delightful for clients to reserve in advance. But more so helpful for business owners to protect their time," Cohen-Shohet said.
With businesses being able to tell which clients have a high average ticket value, or which clients are the ones that leave higher gratuity amounts, they were able to prioritize and save time. Businesses found themselves better able to understand not just their P&L, but also how their time was being utilized.
The future of embedded SMB servicing
Both GlossGenius and Grasshopper agreed that going forward, embedded finance is going to have a greater role in SMB servicing than ever before.
"I think we've just yet scratched the surface of what it is we could be doing with some of the financial applications and integrations," Cohen-Shohet said.
There is evidence now that embedded finance has not only helped businesses make processes simpler and faster, but has also directly resulted in higher revenues. Additionally, stories of how it improves customer experience and results in them living better lives are widespread.
This positive impact comes from two areas in particular – distribution models and data. Consumers and businesses can today avail services in highly streamlined and integrated ways, and that is only expected to deepen. Similarly, using data, they're able to understand their financial lives better and consequently make smarter decisions.
For SMBs in particular, the future holds more sophisticated solutions to business processes like cash flow management and inventory management. They can expect to see a lot of automation in processes.
And above all, financing solutions. Many are available in the industry today, but none have quite hit the mark yet, according to Butler.
"There's a financing element there that has to get more sophisticated to be able to help the small businesses finance purchases or inventory. Frankly, we're trying to solve it with fintech partnerships. That's who we're looking to today to find some fintech partners that are engaged in embedded finance," he said.
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