B2B Payments

Micro-Businesses’ Major Role In SMB Banking Disruption

Solopreneur, independent contractor, freelancer, gig worker – regardless of the name, micro-business owners can largely agree that, when it comes to traditional banking, they’re often left out in the cold.

Small businesses are widely dissatisfied with their experience at large financial institutions, according to a 2017 Performance Against Customer Expectations (PACE) report released by FIS: 14 percent of small business owners say they have switched banking providers in the last year, and even more say they are considering doing the same. Dissatisfaction is especially high for SMBs working with large institutions.

A lack of adequate products and services is a top concern for small businesses that are unhappy with their banks, FIS noted, particularly as entrepreneurs increasingly turn toward online and mobile platforms to manage finances.

It’s in this industry climate that smaller, community banks see an opportunity, and competition is quickly heating up to fill the gaps in micro-business banking.

“I think we can all agree that small businesses are at the epicenter of our economy. They make the engine run,” said Mike Butler, CEO of community FI Radius Bank. “Over the last 10 or 15 years, we’ve seen a lot of micro-businesses emerge that do a lot with fewer people. Micro-businesses are a bigger part of the small business scene, but the banking products and services provided have not kept pace with the technological advancements occurring in other parts of the industry. They’re falling short of what micro-businesses are doing.”

The term micro-business is far from being set in stone. A gig worker may consider herself a micro-business, as might a contractor or freelancer.

According to Butler, the label doesn’t matter so much as what they need from their financial service providers.

“These definitions that have popped up, and the segmentation that goes on, sometimes complicates it for banks,” he said. “We tend to overthink it.”

His criteria for identifying a micro-business is any small business without a chief financial, marketing or innovation officer.

“There is one entrepreneur that does all of that work,” he said, “and they need help and support and a financial services partner to fill those gaps.”

FIS’ earlier report on small business banking found that community banks have higher satisfaction ratings among SMB customers than large, multinational FIs. Still, there is an opportunity for community banks to fill: Less than a fifth of SMBs surveyed by FIS said they are using the mobile products offered by their community banks – for instance, signaling room for these smaller FIs to improve penetration of digital products with their entrepreneurial clients.

“These companies absolutely need to use technology more because of their lack of size, scale and availability for human capital,” said Butler. “To be successful as a micro-business, you have to be more inclined to use technology. There is a large demand for advanced tools that allow them to save time and money – to peel back the onion a bit, it’s not just about more advanced tools; it’s about efficiency and cost savings for them.”

As part of Radius Bank’s initiative to heighten its technological offerings to the micro-business crowd, the FI is collaborating with Treasury Prime to create the Tailored Checking Account for these business customers.

The collaboration reflects a broader trend in the small business banking industry: 71 percent of 440 community bankers surveyed by the American Bankers Association earlier this year said they plan to launch new digital SMB solutions in the next year. FinTech players, the survey concluded, are increasingly seen by community bankers as an opportunity to help develop and roll out those products and services.

“We believe the relationship with FinTech is a big move forward for this sector,” said Butler, adding that such tie-ups benefit both the bank and FinTech. They’re also instrumental in encouraging technology adoption among micro-businesses.

“Micro-business owners are consumers, too,” said Chris Dean, CEO of Treasury Prime, who also spoke with PYMNTS. “They’re using technology in their consumer banking life that hasn’t kept pace on the business side.

“We believe the bank does play a role in educating and facilitating and providing those tools to the micro-business owner,” he added. “But they have to want it.”

According to Butler, collaborating with a FinTech like Treasury Prime presents the FI with a strategic opportunity to grow their connection and introduce additional features for micro-business customers. The industry is at a new point, added Dean, in which banks have to turn their attention to something other than small business lending.

“We’ve seen alternative lenders that have popped up to make lending available to small businesses, but what’s gone largely unaddressed is how these small businesses are managing their cash, their day-to-day operations,” said Dean. “This is the next entry point of disruption – how you help small businesses not just find credit, but also manage their cash, reduce expenses, make it easier to run their business.”

The community bank-FinTech collaborative strategy will be instrumental in that journey, noted Butler.

“FinTechs will play a role more and more in this industry as a whole,” he said. “And they’ve started to really focus on this small business sector. It’s an underserved component of the market, and we think there is a lot of room for significant improvement.”


Latest Insights:

Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. In the December 2019 Mobile Card App Adoption Study, PYMNTS surveyed 2,000 U.S. consumers for a reveal of the four most compelling features apps must have to engage users and drive greater adoption.