Ending The ‘Square Peg, Round Hole’ Small Biz Banking Problem

Small business banking suffers from a “square peg, round hole” problem.

Michael Rangel, CEO of challenger bank Novo, told PYMNTS’ Karen Webster that small- to medium-sized businesses (SMBs) — notably, the smallest among them — are an afterthought for the marquee names in banking, the incumbents looking simply for top-line torque.

After all, why would these banking behemoths service a small firm for a few thousands of dollars’ worth of revenue, when larger corporate clients can offer up multiples of that revenue stream?

The result is that banks offer a patchwork of cobbled-together apps and products for SMBs — and the businesses themselves end up having to jump from portal to portal and app to app as a result. The pain points have become stark over the last several years, Rangel said, even as consumer banking has taken off with embedded payments and intuitive front-end user experiences.

As he told Webster: “There’s really not much banking functionality being offered to what is effectively the economic engine behind this country.”

Either the banking solutions are consumer-like and simplistic, or the SMBs are being shoehorned into larger corporate banking products that simply don’t meet their needs.

“There is a massive void in between,” he said.

Novo, he said, has created an application that helps these companies address their business banking activities on a bespoke basis, using the checking account as starting place and focal point for a range of disparate back-end activities.

The company traces its genesis to 2016 when, as Rangel noted, challenger banking did not really exist.

“There was bit going on in the consumer side of the market, but definitely not on the SMB side,” he said. “There was nothing really related to the Banking-as-a-Service movement.”

There are, of course, several companies ramping up their offerings to plug the gap, leading FinTechs such as PayPal and Stripe to bring their own SMB solutions to market.

Rangel said that Novo’s approach is that banking will become invisible, but it needs an open-loop system to make sure that everything connects. Through open application programming interfaces (APIs), Novo can connect a range of business workflows to their checking accounts.

As he remarked, “All the money needs to go through the checking account anyway. That’s where the business revenue comes through and where you pay out expenses and disbursements.”

Rangel said that the checking account represents a hub of sorts — a central point of data that can, in turn, streamline and speed up other business functions and applications. Centralizing that data reduces the need for the SMB owner to navigate through the seven different online banking portals with which they currently grapple. (Yes, you read that number right.)

Through a platform approach to SMB banking, the small business does not have to be a systems integrator, but instead taps into a plug-and-play ecosystem that uses data in real time and gains time-sensitive insights into working capital and cash flow.

Novo’s Niche

Novo recently announced that it had raised $90 million in a Series B funding round that valued the firm at $700 million, and said it will use the funding to grow its customer base and invest in its own products and staff.

The funding round was led by Stripes and saw participation from past investors Valar Ventures, Crosslink Capital, Rainfall Ventures and BoxGroup.

Read more: SMB Bank Platform Novo Raises $90M

The company noted that it has 150,000 SMB customers and has enabled a cumulative $5 billion in transactions worldwide.

Rangel noted that Novo focuses on firms with $25,000 to $500,000 in annualized top lines and as many as 10 employees. That results in Novo casting a wide net, where its current North American customer base includes everything from nonprofits and travel companies to videographers and social media influencers.

“The way we think about the market is: ‘Tell me about your SMB stack. How do you run your business — and what are the tools you use in order to process payments?’” he told Webster.

In terms of mechanics, the company launched new features last year, including Novo Invoicing (for invoice creation) and Novo Reserves (which helps firms set aside money for future use).

Novo’s new functionality also includes Square, Shopify and Stripe integrations for monitoring monthly sales statistics and the status of payouts from Square or Shopify to Novo accounts.

See more: Novo Rolls Out Invoicing, Budgeting With SMB Banking Offering

Asked about the competitive environment — after all, the big banks have the commodity itself, the checking account and can conceivably connect the FinTechs to integrate applications into their ecosystem — Rangel countered that inefficiencies still lurk.

If SMBs throw in their lot with traditional financial institutions (FIs), they will still have to click on links within that bank’s ecosystem and journey outside of that ecosystem to each FinTech’s platform. Those degrees of separation are a real problem for SMBs, who want everything in one location, which in turn helps them save time.

Three Years From Now

Looking three years out to 2025, Rangel said that challenger banks and FinTechs will marginalize big banks’ hold on SMB banking offerings — where, right now, they’re just taking the proverbial crumbs off of incumbents’ plates.

That erosion of big bank market share will come as hyper-personalization increases and more digital-only challengers enter the fray, he said. Companies will need to focus on brand building instead of solely training their sights on customer acquisition.

Rangel predicted that in order to remain relevant to SMBs, the banks themselves will pivot, moving slowly but surely toward the challenger model. By way of example, big banks have been lowering or eliminating their overdraft fees, sacrificing billions of dollars on an annualized basis and following digital banks’ leads.

In 2022, Novo is earmarking capital for new financial products and building out the foundation of lending operations geared for a late-year launch. The company will also look to focus on marketing in order to expand its customer base.

“We’ve barely even scratched the surface,” Rangel told Webster.