Neobanks Navigate SMB Market Potential and Regulatory Risks

Neobanks have gained momentum with the promise of helping consumers shift their financial lives fully online — with digital onboarding, speedier account openings and competitive rates on deposits and other offerings — in direct competition with traditional omnichannel financial institutions (FIs).

Those same attributes are being leveraged by the digital-only players to attract smaller businesses, particularly where there have been some gaps left by FIs. But challenges and risks remain.

The potential of the small- to medium-sized business (SMB) market is vast. In the U.S. alone, there are more than 33 million smaller businesses in operation, as estimated by the U.S. Chamber of Commerce, which employs about 46% of the overall workforce. In the U.K., 5.6 million smaller firms are in business, according to government data.

For many of these firms, cash flow remains a challenge. PYMNTS Intelligence has found that a majority of SMBs must grapple with delayed payments; about 60% struggle with cash flow. Loans and other credit products (such as virtual cards and expense management solutions) can prove useful when helping smaller firms survive, much less thrive.

But according to one recent survey from the U.S. Federal Reserve on small business lending, slightly more than half of large banks can approve “a small and simple loan in one business day or less, compared with only 29% of small banks.”

That leaves a significant population of FIs that take longer — in some cases, weeks — to approve loans. Other reports from the central bank have stated that small business lending has waned in recent years, both in terms of the number of loans extended and the dollar value of those loans.

Making Inroads

Neobanks have advertised business loans and jockeyed for business customer loyalty, particularly for primary accounts. In one example, as reported in October, British neo-bank Monzo said it had crossed the 500,000 business customers milestone. Announcing its Team offering geared toward smaller business clients, the company has offered up expense cards, the ability for businesses to have up to 15 staff members on their accounts and a bulk payments tool for approving multiple payments in a single step.

In June, Bluevine launched a Mastercard-powered small business credit card that provides 1.5% cash back on all business purchases, merchant discounts and a range of business tools. The Bluevine Business Cashback Mastercard integrates with other elements of Bluevine’s banking platform for startups and small businesses, allowing cardholders to access both their card and their Bluevine Business Checking account from a single dashboard, the company said upon launch.

Brex secured a $235 million credit facility to expand its ability to provide global corporate cards and solutions for expense management, travel, banking and bill pay.

The credit facility was provided by senior lender Citi and participating lender TPG Angelo Gordon, Brex said. The company said on its website that its business accounts allow users to send wires across 40 currencies, while deposits earn a roughly 4% yield. The competitiveness for accounts — on a yield basis — means that neobanks, already facing some uneven profitability, may find customer acquisition costs (as measured in interest paid on accounts) a key expense.

Fraud and anti-money laundering controls are squarely in the regulatory gaze. PYMNTS reported in October that Starling Bank was fined 29 million pounds ($38 million) by the U.K.’s Financial Conduct Authority (FCA) for failing to implement proper financial crime controls. According to the FCA’s announcement, the FCA noted “serious concerns” with Starling’s anti-money laundering and sanctions framework when it began examining the financial crime measures at challenger banks in 2021.

The bank issued its own statement accepting the FCA’s findings and that it “regrets and apologizes for the events and shortcomings” that led to the watchdog’s actions. “In response to the FCA’s investigation, and as a result of the bank’s continuous review of processes and controls, Starling has introduced extensive additional safeguards to ensure the bank complies with regulatory requirements,” the company said.