OBSERVATIONS FROM THE FINTECH SNARK TANK

It’s a tough time for small business owners: The economy is shaky, inflation is rampant, interest rates have skyrocketed, and it’s hard to find good people to fill job openings. Is there a role for banks to help out here?

The immediate reaction to that question is “yes, banks could help out by lending more to small businesses.” But let’s be real: That’s not always a good business decision from the banks’ perspective.

There is another way, however, that banks could help small businesses: Design a better business checking account.

The Paradoxes of Small Business Bank Relationships

A new study of small to medium-size businesses (SMBs) from Cornerstone Advisors and StrategyCorps reveals surprising findings about small business banking.

Small business owners are satisfied with their business checking account relationships—94% are satisfied with the quality of services provided by their primary bank, and 93% are satisfied with the range of features included in their business checking account.

Despite this high level of satisfaction, small businesses are:

• Looking for new banking relationships. Overall, two-thirds of SMBs are somewhat or very likely to look for new banking relationships in the next 12 months. Among SMBs with revenue between $10 million and $100 million, that percentage rises to 77%.
• Looking to borrow from sources other than their primary bank. Roughly eight in 10 SMBs will consider their primary business checking account provider for their borrowing needs over the next two years—no surprise there. But more than half will consider another bank or credit union for loans—up from 42% in a study Cornerstone Advisors conducted in 2020.
• Looking for better business checking accounts. When asked why they might consider a new banking relationship, nearly four in 10 small business owners said it was because they want better business checking account product features and capabilities.

Reinventing Business Checking Accounts

What do SMBs mean when they say they want “better business checking account product features and capabilities”?

It means they want value-added services bundled into their checking accounts.

Many small business owners want cybersecurity, business identity theft, and data breach protection bundled with their business checking account. They’re also interested in getting buyer’s protection, dark web monitoring, and even bill negotiation services from their bank.

This isn’t a random list of services: nearly two-thirds of SMBs have experienced cybersecurity threats over the past few years, with many saying it's had a significant negative impact on their business. Payments fraud has been an issue as well, cited by nearly seven in 10 small business owners.

An Opportunity for Community Banks and Credit Unions

Banks have long believed that their community presence—and knowledge of the community—give them a leg up in winning small businesses’ banking relationships.

That doesn’t square with Cornerstone Advisors’ findings that megabanks and regional banks hold nearly 90% market share of SMB checking accounts.

The good news for community-based financial institutions is that small businesses are looking for new relationships. To capitalize on the opportunity, however, they can’t just copy the penalty fee pricing approach of the larger banks—they need to redesign their business checking accounts to capture the SMBs’ deposit business.

By reinventing the business checking account, community banks and credit unions can generate revenue from:

• Fees from value-added services. SMBs already receive—and pay for—value-added services for cybersecurity, business identity theft, data breach protection and credit monitoring services. Bundling these services into business checking accounts provides SMBs with greater convenience to obtain and manage the services and drives deeper engagement with the bank.
• Debit card interchange. Community banks lag the larger institutions in driving debit card use and interchange revenue from their SMB customers. Bundling value-added services gives community banks an opportunity to create a pricing structure that incentivizes SMBs to make greater use of their debit cards in exchange for more favorable pricing on the bundled package.
• Loans. On average, SMBs that bank with a community bank get nearly 60% of their borrowed funds from that bank. Creating a lending relationship with a small business is a lot easier if it starts with a deposit relationship.

The deposit relationship is also a faster way to grow the lending relationship.

Banks have traditionally approached small business relationships from a financial angle—that is, they see their relationship being a financial relationship. In contrast, digital players like Square and PayPal start from an operational relationship with small businesses.

Square, for example, got its foot in small businesses’ doors by providing payment services, then expanded to help with marketing, sales, and human resources functions. Using the accounting, payments, and cash flow it has access to, Square has leveraged its operational relationships into banking and lending relationships.

It’s time for banks to catch up in this game.

For a complimentary copy of the Cornerstone Advisors report Reinventing Business Checking: The Key to Growing SMB Relationships, click here.

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