The Crossroads of Convenience: Should Banks Become SMB Financial Hubs?
Steve Dow
Founder and CEO, Monit
posted: March 5th, 2024
Given recent upheaval in the banking industry (PPP, bank failures in 2023, system-wide run off of deposits, etc.), banks are no longer viewing the Small and Medium Business (SMB) segment as the neglected business line it once was. With a growing recognition of its strategic importance and financial potential, banks are finally making a concerted effort in the SMB space. The buzzword on everyone's lips? Digital hubs and marketplaces – ambitious visions of positioning the bank as the central “sun” in the entrepreneurial galaxy.
But in this race to capture SMB hearts and wallets, a fork in the road emerges. Do banks build their own proprietary empires, brick-by-digital brick, offering everything from banking to bookkeeping under one roof? Or do they leverage the existing ecosystem of third-party providers, forming alliances to provide seamless, integrated financial solutions?
The allure of the fully bank-owned "hub" vision is undeniable. Bookkeeping? Check. Payments? Yes please. Payroll? Yep, that too. Access to a treasure trove of financial data? The jackpot! This prospect of becoming the undisputed champion of SMB finances is truly intoxicating.
Yet, before diving headfirst into this grand ambition, banks would be wise to take a deep breath and ask themselves two crucial questions:
- What is my SMB strategy, and what are my goals? Is it customer acquisition, revenue growth, deeper engagement, or a mix of all three? Clarity on these objectives will be the North Star guiding your journey. A related sub-question is to explore what your SMB customers want. A recent paper by Bain & Company articulated their findings quite plainly in the study’s title: “Small Businesses Don’t Want Banking Products; They Want Support Managing Their Finances.”
- What are we truly good at, especially when it comes to technology and data? Building and maintaining complex software like a proprietary General Ledger for SMBs, even with white-labeling, can be a technological quagmire. And convincing SMBs to abandon their existing accounting ecosystems? A Herculean task, indeed.
The answers to these questions will often lead to a more focused, and far more effective, path. Here's why banks might want to reconsider the "hub" model, especially when it comes to accounting software:
- Building or white-labeling a General Ledger is a massive undertaking. This tech monster requires constant feeding, updates, and security patches. Banks are typically focused on core banking systems and may find themselves out of their depth in the software development swamp.
- Convincing SMBs to switch accounting systems? Forget about it. These platforms become the repositories of a business's lifeblood – its financial history. While many SMBs don’t love their accounting platform, it represents an engrained business process that they are loathe to move away from. A recent study by Barlow Research finds more than 80% of SMBs ($100K-<$25MM) already use third-party accounting software, mostly QuickBooks. Asking an owner to migrate that data is like asking them to spend a ton of time (a commodity they are woefully short on!) learning a new system that may not match their current feature set.
- Focusing on low-hanging fruit can by incredibly productive. Industry studies and proprietary data confirmed by banktech partner Monit show that SMBs have an average of 4-5 different FI relationships. Further many of these relationships are with non-bank providers, like PayPal who is quietly hoarding SMB deposits in clearing accounts. Monit and Jack Henry have independently shown that some business are keeping >70% of deposits in these clearing accounts. Stating the obvious, there’s a massive opportunity for banks with targeted knowledge of these cases.
So, what's the alternative? Instead of chasing the "hub" mirage, banks can unlock the true potential of the SMB market by:
- Identifying where to compete. Can your bank offer superior loan products, faster transaction processing, or more competitive, tailored interest rates? Focus your energy on areas where you have a clear advantage and can demonstrate real value to your SMB customers.
- Partnering with third-party providers that have proven capabilities to address SMB pain points can further enhance your areas of strength. Companies like Monit have built user-friendly accounting-adjacent offerings with robust capabilities. Collaborate with them to offer integrated financial management services, leveraging their expertise and your digital infrastructure.
- Building bridges, not empires. Forget walled gardens to embrace open APIs and award-winning user experiences. Allow seamless data exchange between your banking platform and the tools SMBs rely on daily. This creates a frictionless experience, enhancing value for both the bank and its customers.
A relevant case study is of a regional bank, who partnered to bring Monit’s cashflow forecasting and financial guidance tools to its SMB customers. After a year of usage, the bank’s SMB customers increased deposits at the bank by over 50% and those same businesses 3X’d their digital session times with the bank. Why? The bank offered highly desirable tools that integrated with the business’ existing accounting software, which built tremendous goodwill with customers and unlocked incredibly valuable insights for the bank and its bankers.
Ultimately, the success of any SMB strategy hinges on two things: clarity of purpose and honest self-assessment. Banks need to be crystal clear about their goals and brutally honest about their strengths and weaknesses. The "hub" dream may be alluring, but in the dynamic world of SMB finance, collaboration and targeted competition are often the wiser bets. By forging partnerships, leveraging existing ecosystems, and focusing on areas of proven expertise, banks can become true partners in the success of their SMB customers, establishing themselves as more than just financial institutions, but as trusted allies to a critically important customer segment.