The role of financial software and systems integration in SMB growth

Small businesses account for 99.9% of all businesses operating in the United States, employing approximately 60 million people across the country, and are responsible for nearly two-thirds of overall job creation every year – contributing a significant portion to the overall GDP. Furthermore, their role is growing, with the number of new monthly registrations reaching 416,000 in March 2022, compared to 300,000 in March 2019.

In view of the growing needs of the SMB economy, a new report by Codat highlights the popularity of different financial softwares in the SMB market, how they are evolving, and what concerns need to be addressed in that area to better meet the needs of the SMB sector.

From saving time on basic invoicing and billing to simplifying tax calculations and project management, as well as providing a clearer understanding of profitability, financial software has become an essential tool for small businesses.

The infographic above shows that financial softwares secured the top 3 positions in the most widely used software types among small and medium-sized businesses:

• 75% deploy accounting/ERP software;
• 49% leverage incoming payments software;
• 38% make use of software facilitating outgoing payments.

It is often the case that small and midsize companies utilize software differently than enterprises do. Ideally, they want a solution that can handle multiple aspects of the business – with application integration and cost-cutting as top goals. However, the type of software considered most important weighs heavily on the business type.

On further branching out, the most basic categories for which SMBs widely deploy tech solutions to scale and grow are:

• Enterprise resource planning systems (ERP): 52%
• Payroll platforms: 51%
• Bookkeeping tools: 49%
• Expense management solutions: 45%
• CRM platforms: 40%
• ecommerce systems: 34%
• payments processors: 34%

A preferred specialized software solution for any of these specific tasks hinges on organizations' unique pain points and requirements – depending on the size of the business, demographics, and niche industry needs.

Once the organization grows beyond 10 employees, the need for specialized software for accounting, payments processing, and other related business tasks starts to grow. A company that plans to expand is likely to get hold of accounting software first, and softwares for incoming and outgoing payments that help in smooth day-to-day functioning follow down the line.

• Specialized accounting software: Out of the 500 surveyed SMBs, 75% make use of specialized accounting software to help them close their books. The product portfolio of Intuit QuickBooks, which ranges from QuickBooks Desktop and QuickBooks Online to QuickBooks SE, dominates this category – bagging a major chunk of 49% of the total market share. The remaining pool is split up among various providers, including GoDaddy, SAP Concur, Sage, and Xero – none of which exceeds a share of more than 4%.

• Incoming payments software: Nearly 49% of surveyed SMBs leverage specialized digital tools when it comes to the handling of incoming payments. This category covers ecommerce, POS, billing/invoices, and accounts receivable platforms. PayPal and Square take the lion’s share in this category by devising softwares with extensive applicability, and shoving a large number of smaller platforms out of the game, who are left hunting for 1% to 3% coverage.

• Outgoing payments software: Around 38% of SMBs reported using specialized software to manage tasks pertaining to outgoing payments — this includes expenses, payroll, and accounts payable. This category is the most fragmented area of the finance tech stack, with no provider pulling in a double-digit share among this section of consumers. This is evident from the fact that the most widely used software, payroll services platform Paychex, claims only 8% of the total market, with most providers having 1% coverage or less.

Considering the industry fragmentation, SMBs need to ask themselves whether the new software they are planning to implement will integrate with their other existing systems and deliver them a slice of the pie from the trillion dollars of value that they will create in the next decade.

On the other hand, market fragmentation means businesses servicing SMBs have to integrate and harmonize with multiple payroll providers to make room for a broad range of their customers. It’s an uphill battle to work coherently toward structuring and sustaining an integration with a single platform, let alone hundreds or thousands.

Integrating with the top one, three, or ten payroll providers might allow a company to cover half of their clientele. But to competently serve the other half or tap into new industries would require many incremental builds, draining time and resources.

To address the matter in question, B2B tech solution providers need to adopt digital solutions that take a more comprehensive approach to payroll data and roll hundreds of payroll integrations into a single platform.

In recent months, embedded finance has been surfacing as a hotbed for SMB needs, while expanding across vertical SaaS, the gig economy, HR tech, and fintech. With the use of an advanced cloud integration mechanism that addresses the growing challenges businesses encounter from trying to integrate with a diverse portfolio of customers and partners, embedded integration platforms are providing opportunities for broader access to more efficient and tailored financial services for SMBs, giving them an even playing field to compete with large corporations.

Knowledge gap

Besides the pressing concerns of fragmentation, the report focuses on another factor that hinders systems integration, which could conversely act as a revenue driver for the SMB industry – the awareness and education surrounding the prospects of integration.

The growing demand from SMB consumers to buy integrated systems is expected to become a much bigger driver of their purchase decisions in the coming years.

At present, 30% of SMBs include ‘how systems integrate’ as a top purchase driver. However, after learning about the benefits of integrations for their company’s financial well-being, 60% of SMBs say yes to them when finalizing a purchase.

While larger companies are far more familiar with the perks of integrations, there’s a lack of knowledge with regard to the value they may add among micro businesses, the data shows.

“There’s important learning for providers,” Codat head of communications Gabriel Macsweeney said. “Not only are integrations important – something that can be an important feature for them – but they need to explain how businesses can benefit from those to use to attract and retain customers.”

B2B tech providers could therefore benefit from taking an omnichannel approach to ensure that micro businesses in the US don’t lag in the adaptation to better-integrated systems, bearing in mind the current macroeconomic climate and the looming threat of a possible recession – which will pose a high risk to the SMB sector.