The general consensus in the small business financial services ecosystem has emerged: Traditional financial institutions (FIs) have largely fallen short from providing small- to medium-sized businesses (SMBs) the digital-first, affordable tools they need to optimize their business operations.
FinTechs have stepped in to fill that service gap in droves, with some new consequences as a result. SMB owners in search of modern financial products and solutions are now struggling to connect them altogether, often while still working with a legacy bank partner.
Speaking with PYMNTS, Kirk Simpson, co-founder and CEO of Wave Financial, explored the impact that banks' shortcomings in the SMB banking sector have had on the evolution of FinTech, neo banking, and the growing need for the financial services community to rally around its SMB customers bracing for a rough road ahead.
Filling a Service Gap
"I think we all agree that traditional, large banks serve big business much more effectively than they serve small business owners," Simpson told PYMNTS. "It's a bit of a square peg, round hole. They want to talk a big game about supporting small businesses, but when the rubber hits the road, it's a very difficult market for them."
Put simply, it's often not profitable enough for a large FI to invest in the acquisition costs, product development and customer service that an SMB needs from its bank, especially when there are larger, more lucrative corporate customers to be acquired.
The resulting wave of FinTech solutions have made strides in addressing SMBs' finserv gap, but according to Simpson, it's created a new challenge of cross-platform integration. Not only is it a headache for an SMB owner to ensure that application programming interface (API) connectivity works from an accounting platform to a payroll portal, but also ensuring all of these third-party platforms can communicate with an SMB’s existing bank has emerged as a key source of friction.
A Connectivity Headache
That connectivity is essential, however, particularly when it comes to integrating bank account data with back-office systems and workflows.
Wave's solution to this challenge is to roll out its own banking solution, Wave Money, already integrated with back-office workflows like expense management. By combining banking with those adjacent processes, some of the friction points of manual integration or API connectivity can be mitigated, explained Simpson.
"For the average small business owner, when you talk to them about the idea of stitching together three or four pieces of software, remembering usernames and passwords, having to use APIs, it's ripe for error and sometimes breaks," he said. "A lot of small business owners are struggling with that functionality."
For Wave, that connectivity challenge is solved through working with Community Federal Savings Bank, which facilitates Wave Money's bank account offering. So, while FinTechs are stepping in to disrupt the status quo of traditional banks, there is a balance of collaboration, said Simpson, that will be key to helping SMBs move through the continued volatility in the market today.
Collaboration for SMB Recovery
Simpson said he is seeing a profound wave of change in the SMB banking space that mirrors the innovative disruption of the payments landscape that the finserv community saw beginning about a decade ago.
"The same thing is happening now with more and more financial products," he said, "and it's going all the way to the bank account."
As a result, "frenemy" relationships are emerging between banks and FinTechs that mesh competition with collaboration. Indeed, while a FinTech like Wave Financial needs a traditional bank to operate its banking services, the company will be competing directly against those traditional FIs for SMB customers.
But bank-switching is no easy achievement. Simpson said he sees several camps of SMBs as potential customer targets, including an expected onslaught of new SMBs likely to form as economic recovery emerges, as well as those SMBs that are continuing to operate with personal bank accounts.
Amid that cooperation-competition balance, what's important now more than ever is that the financial services arena come together to support SMBs.
"There are a lot of small business owners that are struggling," said Simpson. "We as a company, and many in this industry, are doing as much as possible to support them, not only because they are so vital to the economy, but to the communities we live in. This is time to support small businesses so they come back strong as ever."