B2B Payments

SMBs Hang In The Balance Of Bank-FinTech Collaboration

Small businesses have historically been deemed as unprofitable by major banks, with FIs’ innovation efforts often prioritizing consumer products, followed by commercial banking offerings. The twist is, that gap in small business banking innovation led external FinTechs to step in and today, small business banking is a highly competitive, and highly innovative, area of financial services.

With FinTechs rushing in to fill the gaps in small business lending, banking and other financial services left by traditional banks, those FIs saw an opportunity to collaborate with their FinTech peers and integrate their solutions, rather than spend the money on inventing new small business products internally.

In India, Visa recently announced a partnership with FinTech Open to introduce new small business banking services. French bank BNP Paribas revealed in July its collaboration with OneUp to help the financial institution migrate its small business banking offerings to the cloud. And in May, alternative lending platform Biz2Credit launched its Biz2X Software-as-a-Service platform, allowing banks to white label its SMB lending solution.

Collaboration Vs. Competition

Bank-FinTech collaboration has been on the rise in the U.S., whereas in the U.K., the regulatory and competitive climate has opened the doors for a flood of challenger banks, many of which target the small business customer segment in direct competition to traditional banks.

Now, the U.S. is beginning to show signs of a challenger banking boom, with regulators recently introducing a bank charter to fast-track FinTechs’ ability to obtain nationwide approval to operate.

The initiative has been met with resistance, however, and many FinTechs continue to rely on bank collaboration in order to launch their U.S. banking operations.

Earlier this week, Canada-based NorthOne announced a deal with another industry newcomer, Radius Bank, to launch its mobile-first small business banking offering. It’s an example of the delicate competition-versus-collaboration balance in small business banking, where many FinTechs rely on traditional banks’ compliance standing and core banking infrastructure to introduce their technologies to the market.

Striking A Balance For SMBs

At the same time, as PYMNTS’ latest Digital Banking Tracker uncovers, traditional banks cannot ignore the competitive pressure of these challenger banks. As the Tracker notes, researchers estimate that legacy financial institutions will lose out on about $159 billion in deposits to newcomer challengers in the next year alone, while the percentage of consumers that find a physical small business branch important declining in 2018, PwC data show.

“U.S. legacy banks are facing competition on all sides from fully digital institutions,” the Tracker states. “Established banks will need to reevaluate everything from their mobile banking solutions to their banking fees and branches if they want to keep hold of their customers.”

That goes for small business clients, too.

However, as KeyBank head of digital banking Jamie Warder explained in the Tracker, these competitive pressures will ultimately prove beneficial to the banking industry as traditional and FinTech banks alike drive innovation to new heights. Legacy banks need to embrace artificial intelligence, machine learning and other new technologies, he said, to boost their offerings beyond simple transactional banking — including the small business banking segment.

Both legacy and challenger banks are needed to push the small business banking innovation needle forward.

“Legacy banks have the scale and the roots necessary to handle several diverse needs at once,” he said, “while challengers tend to focus on innovating in one particular area of aspect or banking. … What these FinTechs can do is focus on one area. They can bring a different way of thinking; it’s about how modern technologies and data can make that better.”

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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. The September 2019 AML/KYC Tracker Report provides an in-depth examination of current efforts to stop money laundering, fight fraud and improve customer identity authentication in the financial services space.

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