The U.S. banking industry is an ever-evolving machine, shaped and disrupted by FinTech, regulation and shifting customer expectations. Until recently, these changes rarely impacted the small business (SMB) financial services (FinServ) sphere: Among the biggest challenges for entrepreneurs is accessing bank services that are smaller than enterprise-level offerings, yet more tailored to their needs than consumer-sized options.
Today, perhaps the biggest shift in banking that has directly impacted the small business consumer base is the rise of alternative lending FinTech firms, which have challenged banks to modernize their own ways of providing SMBs with credit. That disruption isn’t over, either, according to Axos Bank CEO Gregory Garrabrants, who spoke with PYMNTS about how a fluctuating industry will continue to affect SMBs in the area of lending, payments and beyond.
“Small businesses pay higher fees, and there is less competition in small business banking — and more profitability, right now, than there is in consumer banking,” he said in a recent interview. “Consumer banking has become very commoditized, but small businesses are still very underserved.”
Garrabrants said that remains true in the area of small business lending and credit, despite the surge in alternative lending FinTech players targeting SMBs, largely as a result of the high fees many alternative players charge. Banks need to step up their technological approaches to this space, he noted, adding that enhanced algorithms and more strategic use of data available to banks can propel financial institutions’ (FIs’) position in the small business credit realm.
Speaking of data, Open Banking is another industry shift that Garrabrants expects to affect the SMB customer base. As a digital-first bank, Axos Bank is investing in its own application programming interface (API) strategy to promote the ability for FIs to connect with third-party service providers, and enhance access to data for improved (and less risky) lending — a tall hurdle, considering small business default and failure rates.
Besides credit, there are other areas of small business banking that stand to benefit from Open Banking initiatives. Payments is a particularly large opportunity, and, as Garrabrants explained, offers a chance for banks to improve legacy payment practices, like paper checks and wire, with technology.
In the case of Axos Bank, for instance, the FI addresses small business banking pain points by lowering the cost of using these traditional payment tools. The bank also operates an API platform that includes the ability to integrate wire payment functionality. While Axos supports ACH payments, and while Garrabrants said the bank is embracing faster payment functionality, in small business banking, these advancements in payments technology must be carefully applied to the SMB community.
“Some digital banks would say, ‘You can have a small business account, but you’re not going to get any checks,'” he said, adding that FIs should promote the use of digital tools without cutting out entirely the option of using traditional tools.
In the case of faster payments, for instance, demand among small businesses “is not going to be 100 percent,” said Garrabrants. So, while digital banks can help propel small business financial services forward into more advanced digital solutions, “we really have to bridge the gap on both sides,” and support the tools that are already in use by small businesses today.
(More) Disruption Ahead
Open Banking will be a force in U.S. banking that disrupts many, if not all, facets of the industry. That includes SMB FinServ in areas like small business loan underwriting, and the diversification of offered products and services.
Other disruptions are ahead in the area of bank-FinTech collaboration, but this trend is evolving, too, as more FinTech firms express interest in applying for bank charters. Garrabrants said this is indicative of the FinTech community understanding the benefits of participating in a highly regulated sector.
“It’s an interesting development, and an admission that some of the benefits of a federal charter — primarily deposit insurance, and access to payment networks that don’t require you to go to a sponsoring bank — are important enough to trade some of that regulatory compliance obligation for those benefits,” he said.
Garrabrants added that, while there are broad-reaching, regulatory initiatives like know your customer (KYC) that continue to disrupt the industry, there aren’t many with an acute, significant impact on the small business banking field. However, that could change as regulators consider expanding borrower protections to SMBs, impacting the FinTech firms that collaborate with banks.
Overall, he noted, regulators appear keen to continue promoting bank innovation. This stance will undoubtedly keep the doors open for further shifts in small business banking, as the industry considers how to balance SMBs’ legacy habits with contemporary needs.
“I do think the regulatory agencies are aware that innovation is required in banking,” he said. “The [Office of the Comptroller of the Currency (OCC)] has an Office of Innovation, for example, that follows financial tech companies in an attempt to assess their impact on banks. It actually spends time talking to banks about how to better be thinking about these things — not sleeping through these things.”