Small businesses (SMBs) have no problem airing their grievances against big banks. Researchers from CivilisedBank released data last month that found nearly a quarter of U.K. small businesses believe banks have not changed their ways since the financial crisis, often prioritizing quick profits instead of building long-term relationships.
The small business isn’t exactly a moneymaker for large financial institutions (FIs), and that’s led many banks to pull back from small business lending and investment in SMB-targeted technologies, creating a major gap in the market in which challenger banks have flooded in to fill.
But as more SMB-focused FinTechs emerge, another market remains untapped in the U.K.’s financial services space. Freelancers and the self-employed are far from big banks’ top priorities, and yet, according to Coconut Co-Founder and CEO Sam O’Connor, the population of self-employed professionals whose needs are unmet today is huge.
“The economics of banking don’t lend themselves well to the bottom 90 percent of the small business market,” he recently told PYMNTS. “The acquisition costs for banks are around 300 pounds [about $425], and their business models are based on transactional revenues, such as foreign exchange and loans. The small end of the small business market doesn’t use that, so traditional banks can’t really service them.”
Coconut announced its official launch on the market this week and published new research it conducted on the landscape of financial services for the self-employed. O’Connor said that research revealed just how financially insecure many of these professionals feel, with more than a quarter saying they don’t contribute to a pension fund. Those struggles compound the existing challenges of running one’s own business, like expense tracking and tax returns, each cited by more than a fifth of self-employed professionals surveyed by Coconut.
Despite those hurdles, the self-employed population continues to rise. Data from the Association of Independent Professionals and the Self-Employed, or IPSE, published last October showed 32.1 million people are now employed in the U.K., with the self-employed making up more than 15 percent of that overall workforce.
“There is more of a demand for flexible workers, which enables people to make a lifestyle choice,” O’Connor said. “Technology platforms are also facilitating people to do that. What we find generally is that it’s a lifestyle choice they’re making; they want the freedom, flexibility and higher earnings. It’s also becoming a lot easier ... on the demand side, you have a lot of new startups coming in looking for flexible workers.”
In many ways, the self-employed have some of the same challenges as small businesses with multiple employees, from those struggling with expense management and tax filing, to issues like late payments, a hot topic in the U.K. market today as regulators continue to explore how to enforce shorter payment terms between small suppliers and large corporate buyers.
According to O’Connor, Coconut’s own research found more than a third of self-employed professionals said they have, indeed, had an invoice that never got paid.
The executive described that figure as “quite incredible.”
“The self-employed do have the same problem [as SMBs], and they don’t have the power to change that situation,” he said of the self-employed late payments issue, adding that technology can significantly enhance a freelancer’s ability to stay on top of which invoices have and have not been paid.
But with so many traditional banks unable to fill the needs of self-employed professionals, it’s clear this population cannot simply fall into the same category as SMBs in general.
“When I was self-employed, I tried to open a business bank account,” O’Connor recalled. “I had to book an appointment in the local branch and go sit for an hour and fill out a questionnaire. It just felt like the bank was putting up a hurdle for me to open the account.”
He said he ultimately decided to simply use a personal account service — the same path most of Coconut’s customers took too, he said.
“That can create up to 10 days of additional work to extract business expenses from personal ones every year,” he noted, “and that’s on top of all of the other things you have to do.”
Regulatory efforts to propel the financial services industry into more progressive, innovative territory via PSD2 and Open Banking have certainly opened doors for FinTechs and challenger banks to address the needs of the small business community. Dozens of challenger banks have stepped into the U.K. market and, according to Burnmark Co-Founder and CEO Devie Mohan in an article on the nation’s challenger banking space published last year, competition is boiling.
“It will be interesting to see how the challengers the report analyzes evolve over time and how consolidation, partnerships and [an] increase in the breadth of offerings affect the market as well as individual players,” wrote Mohan at the time. “What we need to remember is this is a constantly evolving space — new challenger banks are emerging every month (or week), and features are being added or eliminated to achieve the right balance of customer centricity and scalability. The success of this space will determine the future of banking and money, despite the unknowns.”
Coconut’s O’Connor says that, despite the influx of competitors, there is room for many.
“I think ... all this innovation in banking is enabling companies like Coconut to start to properly segment the market and service individual needs of specific groups,” he said. “Where banks have failed in the past is they just apply one brand, one type of communication, one product across the board — and it’s just not going to work anymore. We need to really focus on our group of customers — the forgotten 90 percent of small businesses — and deliver a product that really meets their needs.”
Challenger banks have their own hurdles to overcome, including securing trust from customers more accustomed to working with big names. Despite all of the attention paid to SMB banking innovation in the U.K. as of late, the industry has a long way to go, the CEO added.
“There are a lot of needs that must be met, and banking innovation in the U.K. is in its infancy,” O’Connor said. “There are a lot of consumer banks doing great things, and it’s creating this awareness of what a bank can and should do — and that is driving demand for much better business products.”