Embedded digital banking solutions bind the new banking small business relationship

Here are five words any small business would be thrilled to consider at this point: “Let’s move past the pandemic.”

Yes, it presented unprecedented existential business challenges. And yes, it forced ten years of digital banking innovation into about eight months. And although the virus itself is proving to be a stubborn global force from a business perspective, it’s time to move on. The next cycle of business dynamics for small businesses will be about the move from survive to thrive. It will be about evaluating the changes of the past year and building on them. And the best source of advice and solutions to move forward are banks – both corporate and community. As banks move from “digital-first” to “digital next,” small businesses present a unique and profitable opportunity.

New footing for the small business-banking relationship requires a wider lens than the pandemic.

• First, on the positive side, the 30 million US small businesses that have made it through the cauldron of 2020 represent a $370 billion opportunity for financial institutions.
• Second, small businesses now need banks to be a source of digital next banking technology as well as more basic blocking-and-tackling functions like back-office operations, accounting and invoicing.
• Third, the small business customer, like the consumer, is moving decidedly toward digital banking. According to an Accenture December 2020 report, only 32 percent of consumers interacted with their bank via website or mobile app in 2018. By the end of 2020, that was up to 50 percent.

On the more challenging side of the ledger, the cash flow and cash management issues that resulted from the pandemic could be more acute as small businesses mount a comeback. Government programs may have helped in 2020, but now small businesses need to generate cash, spend it efficiently and plan for the lifecycle of the business, not an interrupted set of unprecedented events. The small businesses-banking relationship in many cases may need to be reset.

As banks look toward that reset, there are a host of ways they can help small business clients recover, plan for the future and compete for the digital next consumer:

Embrace digital banking through embedded solutions: Any small business that signs up for upgraded or even basic digital banking suites will expect better customer relationships, data analytics, and less friction in the onboarding process. That’s not enough in the digital-next environment. Embedded solutions will incorporate payments, cash flow management, digital invoices, accounting and financial reporting and other features, inside of a bank’s online and mobile banking channel. The next generation of digital banking customers will see these features as table stakes and embedded solutions from banks will help small businesses compete for them.

Obsess over cash flow: small businesses are vulnerable to cash flow issues even in good economies. That has been magnified. According to a Mercator Advisory Group 2020 report, 39 percent are looking for a larger credit lineup from the 32 percent reported last year. Business debit card use has increased from 34 percent in 2019 to 42 percent in 2020, and charge card use grew from 23 to 31 percent. Cash flow is not just about sales revenue. It’s about controlling revenue. It’s about automating and optimizing technology that controls how a business gets paid, pays out, tracks revenue and accepts online payments. Banks need to extend these services to tap into the $370 billion small business opportunity.

Select and partner with relevant fintechs: Legacy banks and credit unions will need to elevate their conversations when it comes to small business – focusing on the reality of a small business ecosystem and addressing the issues that impact their daily lives. “So now for every bank that really cares about small business banking, that’s a vertical inside of banking,” says Autobooks marketing VP Derik Sutton. “Wouldn’t it be valuable to bring the tools to enable a business owner to get paid? Isn’t it valuable to integrate those directly back into the banking ecosystem relationship? So now a business owner doesn’t have to go to a third party, non-bank app provider to accept payment, and, more or less, transfer that money into the bank banking ecosystem.”

The Bottomline: No sector of the financial services business has it easy right now. As financial institutions cope with a level of competition from fintechs – whether they’re a huge corporate bank or a regional credit union - they must also do more to support the success of their small business customers, preserve customer loyalty and deepen relationships. Financial institutions and their small business customers will both need to find new ways to engage and create these new relationships, which can potentially be more valuable than one based strictly on transactions. With $370 billion on the line, the bank- small business reset is an urgent one.

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