Small business needs taxis not tankers

Large incumbent banks don’t serve small and medium-sized businesses well. Dress it up in euphemisms like ‘It’s an underserved market’ all you want; the reality is they get the short straw when it comes to banking.

This fact will come as no surprise to anyone watching the US cope with Covid in the past year. Getting emergency loan funds out to SMBs quickly was vital: JP Morgan estimated that half of them had less than two weeks’ cash buffer.

But the $660bn federal loan programme, meant to be delivered through the big banks, hit problem after problem. Banks didn’t want to take part. Paperwork went missing. Technology failed.

The rescue mission to get things working was led by the US community banks and digital challengers, after the Fed let them start getting funds out in late April 2020. It was this group of unexpected heroes and heroines who got the lifeblood cash out to SMBs.

Now they have a huge opportunity to revolutionise how those SMBs are served for decades to come - and to do it profitably.

Large, incumbent banks have traditionally been wary of SMBs because the risk in this fragmented sector seems too high for comfort. They don’t make much money on lending, especially because of what's currently happening with the interest rates. So what is the non-interest-bearing product that you're selling them to make a profit?

Add to this the fact that most of the time there is a limited secondary market on SMB. So ‘banking supertankers’ are not making money on it anywhere along the chain.

But one bank’s problem is another’s opportunity. There is now a great chance for challengers - especially digitally enabled community banks in the US and mutuals/building societies in the UK - to give SMBs what they want and need.

Whether spinouts from major players, the mobile brand of a community bank, or a newly created fintech offering, this ‘neobank’ model is an alchemy of the customer understanding that comes with community, and the flexibility and efficiency that comes with digital solutions.

A digitally adept community bank today has a unique opportunity – and a need - to keep hold of those SMBs customers they got the loans out to.

To capitalise on this unexpected opportunity, they need to think differently to the big players. Just selling a checking account isn’t going to work; no SMB owner I’ve ever met wakes up saying, ‘I need another checking account’.

They do need things that are appropriate to them. And community banks can provide services tailored to the customer; services that meet a need and genuinely add value.

They can do that because of the fusion of community and digital.

Community banks know their community base, what they want and need. An agricultural bank knows what keeps farmers or agroponics startups awake at night and what would make their lives easier. They know the local retailer who has gone digital this past year, and they can be a force for good in helping SMBs take advantage of this digital acceleration. However they do need to fit their own ‘digital mask’ before being able to help others.

Let’s look at how this might work, with an example of a digitally enabled community bank for gig workers.

In our example, I’m a gig worker, a sole trader, a last-mile delivery driver. I don’t need another checking account, but I do want a debit card that gives me cashback, because I tend to live from hand to mouth. I want to be rewarded when I do spend my hard-earned cash, so loyalty points linked to valet services, filling up the tank, or picking up a sandwich at a gas station speak to me.

I don’t drive 24/7, 365 days a year, so I want a bank that offers me the right insurance - say car insurance that turns on while I'm driving and then turns off when I’m spending time at home with family.

My bank could also do a deal with an electric-car manufacturer and provide a pre-approved, in-app, loan facility to enable my purchase. Better yet, they can also give me the option to auto-save each day or week by moving a percentage of my takings into a savings or investment account. There are lots of ways that my bank can speak directly to me in my financial life.

The digital community bank would offer these highly tailored services and I choose the ones that work for me.

The potential market is huge. How many gig workers do we have now, between all the delivery companies that went through the roof because everyone's getting everything delivered, and the new ones spawned in the last year? The US Bureau of Labor Statistics estimated that in 2020 43% of the labor force engaged in gig work in some capacity and that is set to continue.

And that’s just one community - what about geographic communities or communities of affinity, like teachers, doctors, nurses or personal trainers?

How could it happen? There are two obvious ways community banks could go digital in this full sense.

They could go it alone, spinning out new services.

Or, with much less investment and time, they could partner with fintechs who offer a platform built on cloud-native architecture, providing access to bespoke products and services via APIs, taking a sliver of the profit pie when customers sign up to highly bespoke services.

A community bank could curate a menu of products particularly suited to its community and offer them to all customers or to segments of that customer base.

This partnership model works well, and plays to individual strengths. If you're not an insurance business, then you shouldn’t do insurance. You’ve got the banking licence; you go to fintechs for the desired channels and services.

Because you know your community and you’ve done the research beforehand, you should be in a better position to know what your customer needs and wants, when they want it, and how they want to consume it. And customers trust you because your interests and expertise are aligned with giving them genuine value add.

It goes without saying, that it has to be accessible in a way that is quick and easy. I think most SMB owners would be okay with a digital-only bank. But, depending on your audience or your customer base, some might actually want a hybrid option. For example, if they're going to make a large asset purchase and they want the option to speak to a human being. This human being can be guided by data and offer highly personalised solutions. The technology and data inform the relationship manager.

So, what do we know? The old banking business model in the current climate, just doesn't work any more.

Megabanks move like tankers. They have outdated legacy systems and convoluted infrastructure and decision-making processes to negotiate when trying to get anything done. None of this helps their customers or their bottom line.

SMBs don’t need tankers. They need taxis - helping to take them, in all their individuality, from where they are now to the place they want to go. The digitally savvy community bank is the way to achieve that.