B2B Payments

Small Business Banking Braces For More Disruption

With regulations surrounding data ownership, privacy and open banking now in full swing in multiple markets around the globe, opening up account data is now a requirement for many financial institutions (FIs).

This past year, however, the open banking model flexed its muscles in markets like the U.S., where even without a regulatory mandate, it gained traction and intensified competition.

While initially focused on the consumer market, open banking this year also began to demonstrate its potential value for the small to medium-size business (SMB) banking market. The same demand for data integrations between back-office platforms spread into the need for those FinTech solutions to also integrate with SMBs’ bank account data for faster, more accurate data entry and analysis.

Arjun Thyagarajan, co-founder and CEO at SMB banking and payments technology firm Wise, told PYMNTS that in 2020, SMBs’ continued demand for better banking experiences will inevitably drive the ongoing proliferation of data sharing.

“SMBs have traditionally been underserved by Main Street banks and payment providers,” he said, adding that historically, the banking industry has positioned itself to service SMBs with physical bank branches. “Given the shift of today’s SMB ecosystem toward digital and mobile, open banking model-leveraged players will be in the driver’s seat to serve the burgeoning and differentiated SMB banking needs that have been underserved by legacy branch-centric, physical servicing.”

Connecting Through Data

The key to open banking’s rising adoption in the SMB financial services market, he said, is data integration.

As such, APIs will play an integral part of SMB banking’s evolution in the year, and years, ahead, with Thyagarajan pointing to the drive toward “ecosystem integration” as a major strategy to addressing SMB banking friction. Enabling banking and payment services to more easily integrate into SMBs’ existing workflows via APIs, he said, will emerge as a “priority focus” in 2020.

Thyagarajan added that not only will open banking and data integration drive banks and FinTechs to collaborate and integrate with each other, but this emphasis on ecosystem integration will also generate an environment of collaboration between SMB-serving FinTechs themselves to elevate and enhance combined offerings for joint customers.

It’s a trend that has already begun to manifest in 2019 as more B2B FinTech solutions not only announced integrations with banks, but with each other.

“Data integration is key because every time you set up a new tool within your back office, if it doesn’t speak to the other tools, then you have one more thing to manage,” explained Jennifer Brazer, founder and CEO of virtual SMB accounting solutions provider Complete Controller, in an interview with PYMNTS earlier this year.

An Evolving Landscape

Open banking wasn’t the only disruptive trend for SMB financial services this year.

In the U.S., the continued digitization efforts of smaller community banks and credit unions (CUs) also led financial service providers to explore new perspectives on SMB customers and how to address their need for digital, value-added services beyond the bare minimum of opening accounts.

For smaller FIs looking to embrace open banking and the digital revolution, however, barriers are plentiful.

“With bigger banks, some of them have more software engineers than Google,” explained Mark Rockefeller, StreetShares co-founder and CEO, in PYMNTS’ September Credit Union Tracker. “This is an extraordinary thing. They view themselves as technology companies … On the other side of the spectrum, you’ve got community banks and credit unions.”

Conversely, however, community banks and CUs may also be in a position to beat out the largest FIs in meeting SMBs’ needs, an opportunity that became especially clear amid the continued evolution of marijuana banking laws in the U.S. Analysts noted that even if, and when, the U.S. federal government passes the SAFE Act to allow financial service providers to service legal marijuana businesses, the largest banks are unlikely to step in.

That could be an opportunity for smaller banks and CUs, according to a September Politico report.

“The passage of SAFE is not likely to cause large financial institutions to open their doors suddenly to cannabis-related businesses,” the report stated.

“What is likely to happen from SAFE’s passage is more community banks and credit unions deciding to serve marijuana businesses,” the report added.

The Market Opportunity

With FIs large and small finding opportunity in embracing open banking for their SMB clients, and with new opportunities opening up for smaller financial service providers and FinTechs to address a customer base that has been historically underserved, Thyagarajan said the value in SMB banking is significant.

“Thirty million SMBs offer a multi-trillion-dollar TAM [total addressable market] on depository, receivable and payable management,” he said.

In the past, the gap in SMB banking services has led to what Thyagarajan described as a “DIY approach” to banking, leaving SMBs to search elsewhere for their financial solution needs. Looking ahead, he said, technology will remain center stage as more traditional FIs and FinTechs work together to fill in that gap.

“The macroeconomic trends of a robust economy have led to both new SMB formations and growth in existing SMBs at record level,” he said. “From an SMB banking perspective, demand for core banking and payments in 2020 will be at an all-time high for this cohort. With prolific adoption of technology, especially digital and mobile, SMBs will demand that all their providers, including banking partners, be digitally integrated into their business ecosystem.”


New PYMNTS Report: The CFO’s Guide To Digitizing B2B Payments – August 2020 

The CFO’s Guide To Digitizing B2B Payments, a PYMNTS and Comdata collaboration, examines how companies are updating their AP approaches to protect their cash flows, support their vendors and enable their financial departments to operate remotely.