B2B Payments

A New Divide In Business Banking?


The 2008 global financial crisis forced traditional banks to pull back from small businesses (SMBs) considered too risky and unprofitable to finance, leaving a gap in the market for alternative lenders and FinTech firms to fill.

In the years since, alternative lenders, FinTech firms and digital-first challenger banks have been working to capture the small business demographic. More recently, banks’ reactions have been to collaborate with these players: Small businesses may not be profitable enough for traditional financial institutions (FIs) to funnel their research and development (R&D) resources into, but collaborating with FinTech firms or alternative lenders that have already developed solutions for small business banking and lending can be a cost-effective way for banks to capture the market.

The bank-FinTech collaboration trend has hit the small business customer segment particularly strong. However, there is evidence that there may be another growing divide in the financial services sector as FinTech firms and alt lenders target small businesses, while traditional banks invest their technology resources into larger corporate clients.

Alt Lenders And Challenger Banks Target SMBs

The most recent evidence of this comes from Balboa Capital, which published a research report last week finding that nearly two-thirds of SMBs obtained a small business line of credit from a nonbank lender within the last year. Small firms pointed to a more seamless application process and faster access to capital as their top motivators for turning away from traditional FIs, and toward alternative lenders.

“Small business owners who need quick access to short-term capital to improve cash flow — or to cover the costs of inventory, payroll and unexpected expenses — are looking to nonbank lenders for business lines of credit,” said Balboa Capital Manager of Ancillary Products Matthew Lent in a statement.

It’s the latest statistic from the alternative finance world that shows alternative and marketplace lenders are no longer SMBs’ last resort — and could signal that banks aren’t necessarily every small business’ first resort, either. Amid this trend, the population of challenger, digital-first banks targeting small businesses directly continues to climb, particularly in the U.K., with firms like Amaiz, AlbaCo and Tide vying for the SMB base (to name a few).

“The reality is that the majority of small businesses are underserved by traditional banks and service providers,” said Eduard Panteleev, co-founder and CEO of SMB-focused challenger bank ANNA, in an interview with PYMNTS last year. “The status quo of traditional banks offers huge scale, but lacks a personal touch.”

That’s a challenge that cannot necessarily be bridged, even by large, traditional FIs that connect their SMB clients to FinTech solutions.

Banks’ Corporate R&D Ramps Up

As FinTech firms identify shortcomings in traditional FIs’ services for SMBs, those FIs continue to invest in new technologies and services for their large institutional and corporate clients. According to new research from the Association for Financial Professionals (AFP), private companies are more reliant on banks than other types of businesses, and the bank-corporate relationship is essential for corporate treasurers when deciding where to place company cash.

“Banks are financial professionals’ key partners,” said AFP President and CEO Jim Kaitz in a statement, “and that relationship is a major determinant in deciding where to place operating cash.”

Some of the world’s largest banks, like JPMorgan Chase and Citi, are among the most recent to introduce new technologies for their large corporate customers.

Chase is gearing up to test its JPM Coin, a digital token for use in cross-border corporate transactions, with the bank’s Head of Treasury Services and Blockchain Initiatives Umar Farooq recently pointing to accelerated bond and securities transactions as a particularly interesting use case.

Just last week, Citi announced its Payment Outlier Detection solution for corporate treasurers to automate anomalous and potentially fraudulent transactions, as the FI explores innovative ways to address the risks of fraud and cyberattacks for corporate clients.

With traditional banks focusing their resources on developing new technology for corporates and treasurers, they may once again be leaving a gap in the market for FinTech firms, alternative lenders and digital-first challenger banks to vie for dominance in the small business market.



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