When you picture a small business owner, who comes to mind?
The stereotype may be a young professional beaming at a storefront, or happily servicing a customer at a register. But the fact is, today, there is no single image of a small business owner.
There are an estimated 57.3 million freelancers in the U.S., accounting for more than a third of the nation’s workforce, according to stats from Upwork and Freelancers Union. In the fourth quarter of 2016, the number of entrepreneurs who started their own businesses hit a four-year high, data from Challenger, Gray and Christmas showed. And economists Alan Krueger and Lawrence Katz calculated that 94 percent of all jobs created between 2005 and 2015 were some form of “alternative,” impermanent opportunities, including freelance, contract and temp agency work.
For banks ramping up their focus on small businesses, it can be difficult to assess exactly who the small business customer is.
“If you go into a traditional bank in the U.S. and ask for the small business banking brochure, who is on the front of that brochure – and does that truly represent the next generation of entrepreneur?” asked Jeremy Black, CEO and co-founder of small business bank account provider Every.
Black, whose firm’s small business account service is currently in limited release, spoke with PYMNTS about how to address the needs of some of these micro-business owners in a landscape that is drastically changing for the small business population as a whole.
“There is a fundamental market shift happening, both in terms of the way the labor market is changing and, in correlation, the way the nature of entrepreneurship is changing,” he said.
He added that the issue of addressing small businesses’ financial services needs “is more broad than just fixing the ways in which traditional FIs interact with traditional SMBs.”
It’s easier than ever to become an entrepreneur, he said, and the research confirms it. But the underlying behavior of these new businesses is also changing shape. Many of these startups are built on digital solutions like Shopify, Stripe and other SMB-targeting SaaS products. This digital-first mindset means traditional banks cannot always find common ground (or profits) with their entrepreneur clients.
“We think banks don’t have a great understanding of what this next-generation entrepreneur looks like,” said Black. “And, quite frankly, they have a hard time acquiring them and making them profitable, so they just don’t pay much attention.”
As Every continues to gear up for its full launch, Black said the company is geared toward a particular segment of the small business market: solopreneurs and micro-business owners who may not have even intentionally become business owners.
“They start a small business, and they’re ‘accidental entrepreneurs,'” he said. “They make something, someone says they should sell it, so they set up an Etsy shop, and all of a sudden, a year down the road, they’ve done $60,000 a year in revenues.”
One of the largest hurdles for this kind of business owner is the fact that, quite often, because they did not necessarily set out to launch their own business, personal and professional finances are often intertwined.
“The first thing an accountant says is, ‘Why aren’t you separating business and personal finances?'” Black said of these entrepreneurs who are just beginning to find success. “There is a ‘getting-serious’ moment, whether it comes around tax time, or the moment they realize they could actually run this business full time. We’re trying to capture these people in that getting-serious moment.”
The first step, he said, is to separate personal and business finances. Research suggests this issue is quite common: Citizens Bank published research in 2015 that found 31 percent of small businesses feel they do not make enough transactions to warrant the establishment of a separate account for their company. More than a quarter admitted their accounts serve both their personal and professional needs.
Black said the continued reliance on personal financial products for business needs can often be traced back to these entrepreneurs’ frustration with banks.
“We’re finding through research that most of these people run their businesses out of personal bank accounts much longer than they would like to, and it’s because they don’t feel comfortable dealing with a bank,” he said. Offering something as straightforward as online account setup can address much of the friction these entrepreneurs face when in that “getting serious” moment.
From there, Black said, Every wants to be a partner to these entrepreneurs as they navigate their way through small business ownership. That includes conversations about what products and services would be best for them, such as bookkeeping software and loans, even if those tools are offered by third parties.
This type of relationship means new market entrants in small business FinServ should consider following the example of open banking initiatives like PSD2 in Europe. According to Black, these efforts are “hugely positive” for end customers, so long as data security remains a priority.
“I have no doubt that, as an industry, we’re going to figure out how to ensure that this is all positive for the customer,” he said. “And the small business market is more connected than other markets.”
By that, Black said, he means the landscape of operating systems – accounting, bookkeeping, inventory management, POS and a flurry of other Software-as-a-System offerings – require interconnectivity not only between each other, but with a business’ bank. Such an ecosystem requires open data agreements.
“We need to push banking into the edges of those systems,” he said. “That’s our long-term strategy. We think financial services are being unbundled from banks, and we think they’ll be re-bundled in those platforms and in that context. And for us, that necessarily means openness.”