The Future of SMB Banking Part I: Where We Are

Blog Posts
May 13, 2021

Part I: Where We Are

Does anyone else feel like the number of new consumer fintech offerings is getting a bit overwhelming? Every day it seems like there’s an announcement for a new debit card, a product that improves your credit score, a lightning-fast mortgage platform, an app that tracks your finances; the list goes on…

Facing this onslaught of consumer fintech offerings, banks have rapidly developed new features to keep their customers happy, and we – said customers – have been direct beneficiaries. Our bank partners are rolling out snazzy new interfaces, offering savings and investing tools, building credit score monitoring features, and much more. Keep ‘em coming, we say!

But while banks have risen to the challenge posed by fintech competitors in the consumer segment, we haven’t seen the same level of investment in their SMB customers.

In this three-part series, we’ll take a close look at the SMB fintech segment, focusing on the role that banks play in the ecosystem. In “Part I: Where We Are,” we’ll set the stage with a frank assessment of the challenges SMBs face and the solutions currently available to them. In “Part II: Where We’re Going,” we’ll discuss the future of SMB banking and consider how banks may (or may not!) fit into it. Finally, in “Part III: How We Get There,” we’ll look at the strategies banks will likely need to employ to remain relevant in the space.

SMBs are more pervasive than you may think. In the United States alone there are more than 30 million businesses that fall into this category, ranging from delis to dentist practices to Silicon Valley start-ups. From a market perspective, SMBs generate more than $1.4T in revenue annually, employ ~60M people in the US, and create a whopping 64% of new jobs every year.

Yet, as discussed, banks have largely declined to innovate for the evolving needs of this large, diverse customer base. We can postulate why bank SMB innovation has been lackluster (SMBs may have limited/imperfect financial reporting, a broad range of needs, varying levels of financial savvy, etc.). Still, the main thing to note is that more than 50% of SMBs feel that their primary banking partner simply does not understand their needs.

A fair question to ask: “What are those needs, and wouldn’t they vary widely?” Although on the face of it a deli may not have the same business needs as a dentist’s office or start-up, several features would benefit virtually all SMBs. Chief among these are access to “just-in-time” capital, improved forecasting and business analytics tools, AR/AP solutions, vendor identity/”KYB” features, and cash management products.

These features aren’t just a wish list of “nice-to-haves” – many of these offerings are mission-critical for SMBs. The lack of standardized, credible financials makes SMBs difficult for banks to underwrite. In fact, 60% of SMB loan applicants report receiving less financing than they applied for, which is troubling because a full third of failed SMBs cite lack of access to capital as the leading cause of failure. 50% of SMBs have no accountant or bookkeeper, further complicating the problem and making taxes, loan applications and forecasting a major strain on the business. A stunning 40% of SMBs incur penalties every year for incorrectly filing taxes!

Because banks have largely not delivered products tailored to their SMB customers, most SMBs find themselves using what are effectively scaled-up consumer banking products or watered-down commercial features. For some micro-SMBs (<$500K annual revenue), consumer banking features can be a decent – albeit imperfect – solution. Similarly, for the largest SMBs (>$30M annual revenue), enterprise-class solutions can be refitted to suit their purposes. But for the vast majority of SMBs, off-the-shelf banking products simply do not fit the bill.

You can start to see the picture here. SMBs, underserved by their bank partners, are eager to find solutions that can help them solve these crucial business issues. Although banks have historically been the go-to provider of financial services for SMBs, there’s a strong indication that this may be changing…

In the absence of bank-offered SMB solutions, new fintechs and large tech incumbents have entered the space and begun to offer their products directly to SMBs.

The market map above gives some idea of the breadth of solutions currently being built but is by no means comprehensive. Recent reporting suggests there are now more than 140 fintech start-ups focused on creating solutions expressly for the SMB segment.

Solutions range broadly in focus and complexity. Neobanks like Rho and Wise have focused on offering full-stack banking solutions to their SMB banking customers. Large tech providers like Shopify and Square have begun to leverage their deep data assets to offer differentiated advice and marketing tools to growing businesses. Data aggregation and analysis platforms like upSWOT and Codat are building the infrastructure that enables SMBs to forecast and analyze their businesses with precision.

As these providers penetrate the SMB space more deeply, many have started to expand their offerings. For some this has meant building the lending, checking and payment features that have historically been the exclusive territory of banks. As these products mature, we may see an increasing number of SMBs ditching their banks in favor of newer, better, more tailored solutions.

And yet, here at Canapi, we believe that incumbent banks remain in the pole position when it comes to the future of banking. It’s why we raised a fund backed by more than 40 regional and community banks and constantly look to introduce them to the fintechs building on the cutting edge of innovation. With their deep network of customer relationships, large balance sheets and versatile business models, banks are, in our opinion, best suited to serve this massive and important segment of the US market.

But it will take some major changes. In the next two installments of this series, we’ll dive into what the future of SMB banking may look like and how we get there.

If you’re an entrepreneur building in the fintech sector generally or are interested in discussing the SMB segment specifically, don’t hesitate to reach out to our team.

Sources: CB Insights, Cornerstone Advisors, Guidant Financial, US Small Business Administration