In Banking, SMBs Need A Model T — Not A Faster Horse

Neobanks and FinTechs continue to charge ahead with a competitive edge against traditional banks, and small- to medium-sized businesses (SMBs) are increasingly at the center of the most innovative solutions.

The acceleration of SMB banking’s evolution is often traced back to the fact that more SMB owners are demanding better user experiences and enhanced functionality that consumers and larger corporates can enjoy. Historically, traditional banks have relied upon analog solutions to service their entrepreneurial clients.

“Small businesses typically have been pushed into branches because the banking mindset is to provide client services — you’re talking to a human,” explained Tyler McIntyre, founder of SMB banking FinTech Novo. “But in the same way investment advisers have moved to robo-advising, there is going to be a fundamental shift in business banking as well.”

Competing FinTechs are now acting in direct response to SMBs’ heightened expectations. Certainly, customer feedback played an important role in the slew of new features Novo rolled out this month. But as McIntyre told PYMNTS, true progress in SMB banking must also take roots in a bigger picture about what it means to be innovative.

A Faster Horse

The pandemic is intensifying SMBs’ banking expectations, said McIntyre. In part, it’s due to the need for enterprise digitization. But it can also be traced back to the fact that more Americans are starting small and micro-businesses at a record-setting pace as they seek supplemental income, make use of economic relief efforts and unemployment insurance, and find opportunity to fill in gaps left behind by SMBs forced to close amid economic shutdowns.

Traditional financial institutions (FIs) find these small operations too unprofitable to invest in digital-first products and services, leaving FinTechs with a greenfield opportunity to address these clients’ needs.

Doing so involves fostering a close connection with those business owners to understand what they want to see from a banking provider. Yet according to McIntyre, improving the SMB banking experience must also include a bit of creativity to introduce services an entrepreneur might not even know they wanted.

“Small businesses are all interested in suggesting products that are just faster horses,” he said. “But some of the integrations we want to build are the Model T.”

Solving SMB friction doesn’t always mean throwing a new product or service at the client. Instead, it involves understanding the point of friction at the root of whatever problem an SMB needs solving.

The Center Of Operations

According to McIntyre, the big picture of solving SMB pain points almost always involves cash flow. SMBs are in dire need of technologies and services that can support cash flow, whether it’s invoicing solutions to get paid more quickly, or platforms to obtain transparency into cash positions.

There are two layers to addressing this problem with better FinTech offerings.

The first is in data, with integrations and application programming interface (API) connectivity essential to providing visibility into finances on a real-time basis. SMBs need fewer interfaces to toggle between in order to assess their cash positions, and instead need streamlined platforms that can deliver insights instantly.

It’s a concept that gave rise to the enterprise resource planning (ERP) system, which has historically been the center of business operations for many larger corporates. But the ERP, said McIntyre, is missing the other key layer to addressing SMBs’ cash flow management challenges.

That second factor is rooted in finances, providing the kind of integrated functionality that can move funds faster and actually support the flow of cash.

“The ERP plays on the data layer side, ingesting information and generating files,” he noted. “But they miss that other, very important prong, which is the financial side.”

As such, it’s the bank account — not the ERP — that can be thought of as the operating system upon which functionality can be built. As the hub of both data and financial flows, it’s in a prime position to embrace embedded tools like invoicing and payments, McIntyre noted.

For the new SMBs emerging onto the market in droves, legacy banking portals and in-branch meetings must fall by the wayside. For the FinTechs stepping in to fill the service gap, keeping cash flow management at the heart of innovative efforts may help guide the business banking sector into a position to support those new companies and, as a result, the overall economy.