In the rapidly evolving financial services landscape, the role of traditional banks in serving the needs of small and medium-sized businesses (SMBs) is being challenged by fintech companies and big tech players.
With Inflation and labour shortage rising, SMBs are increasingly adopting new-age fintech services to meet the need for faster access to funds and automated accounts receivables management.
In this blog, we will explore the future of SMB banking in the US and the potential for a radical transformation.
The Rise of Fintech and Big Tech in SMB Banking
A recent article published by McKinsey & Co a. on the “Future of Banking“.
highlights that…the greater threat [to banks] is a worldwide trend: new challenges, often emerging from varied industries and frequently utilising the cross-industry platforms that have recently contributed to the success of businesses like Amazon, Google, Microsoft, PayPal, and Spotify…
A poll conducted in October 2022 by the Harris Group along with the fintech, Unit called “The State of Business Finances” pointed out that 84% SMBs today are open to getting financial services from sources other than traditional banks (like big tech players). 68% SMBs said they need faster access to funds in their accounts (making collections and accounts receivables management a major pain point).
71% SMBs polled in this survey said they are more open to trying new banking solutions as a result of the current economic climate. A lot of these trends point to the fact that not only are SMBs increasingly adopting fintech services, but banks are also losing the relevance they currently enjoy (or enjoyed till very recently) in an SMB’s daily operations.
Technology providers ranging from payment companies, and commerce platforms, to ERP and accounting systems have ventured into the traditional banking fields of credit, lending, treasury management and deposits. Their playbook combines commerce, working capital management and banking services.
Research suggests that SMBs also find this playbook relevant, with multiple reports suggesting that SMBs are open to testing out banking services offered by fintech companies. Global tech giants like Google, Walmart, and Tencent have developed platforms to offer banking services to millions of customers in markets like Asia.
Although the US has not yet witnessed it, the required technology for a particular purpose is already in existence and ready for deployment. All that is needed is the implementation of this technology in the US market, which could potentially lead to significant advancements in various industries.
Banks have a few different options as they work out their future strategies – do they become a back-end sponsor and processor for fintech, a marketplace for fintech applications, or focus on directly solving some of the key problems that SMBs face?
A PYMNTS and American Express Survey conducted in 2021 said that 31% SMBs wanted to prioritize AR automation investments over the next 2-3 years while 46% of mid-sized businesses were looking to automate AR to accelerate payment receipt. Rising inflation and labor shortages have only made these challenges more real and urgent for business owners and banks should put themselves in a position to be able to help.
The McKinsey report also talks about banks becoming business gateway providers: “Serving as a gateway provider offers everyday banking for SMEs via an integrated online portal, aggregating services that facilitate,
payments, cash flow financing, accounting, and taxes. These are designed to simplify the daily operations of organizations by automating essential tasks, freeing up their time and resources to focus on core activities. The gateway providers are expected to compete with other established players in the small-business service ecosystem, including online accounting platforms, software companies, and even telecommunications providers to know more click here
Choosing the Right Path Forward
Ultimately the path that banks take will also be determined by the technology partner(s) they choose. There will always be a ‘Build versus Buy’ decision to be made. But that decision will need to go beyond choosing the most compliant and cost-effective provider. Banks must look for partners that can offer a vision to build for the ever-evolving needs of today’s businesses and market to that audience, all while providing the necessary support to their sales and technology teams.