Can financial providers help SMBs run their businesses with the same digital convenience they enjoy in their personal lives?

Small businesses may be the backbone of the US economy but the jury is still out on whether financial providers can help resolve various challenges facing this sector.

Despite the availability of a wide range of payment solutions, many SMBs use personal banking products over business banking products and nearly half (45%) feel that their business banking online experience is worse than their personal banking experience, according to a new report by Mastercard.

“While historically the SMB experience has lagged behind that of consumers, we’re at a pivotal crossroads and can expect this gap to narrow as more financial providers look to customize their suite of offerings for this sector,” said Jane Prokop, executive VP and global head of small and medium enterprises at Mastercard.

What’s stopping SMBs from using payment cards?

58% of small businesses cite higher fees as one of the reasons to opt for a personal payment card to run their businesses, followed by 48% in favor because they find it easier to manage.

Because extending credit to SMBs is more complex than lending to consumers, it can take days or weeks to approve small business credit cards and the credit limits assigned are often lower than their request when opening a personal credit card or line of credit. In addition, onboarding SMB customers involves certain other intricacies. KYB (Know Your Business), AML (Anti-Money Laundering), and identity verifications are vital parts of the process, and many of those are currently done through manual processes within banks and lenders. This leads to delays as well as a high cost of onboarding.

Once a card is issued, challenges continue to exist. SMB owners need additional capabilities in order to fully utilize the card. For example, they frequently need controls on the spend of a card in order to allow employees to use it. 

Data and technology advances over recent years are providing answers to many of these problems. Banks and other lenders now have access to a far wider range of data that provides insight into the underlying risk of the business to tools that automate previously manual processes, and to partners who can provide capabilities that the lender itself prefers not to build internally. This means that as lenders redesign their process flows, they can create automated applications, KYB, onboarding, risk assessments, and credit offering processes. 

A corporate card can also offer financial protection from personal liability as well as minimized accounting and tax hassles, enabling small business owners to better streamline operations as they grow and scale. 

“Business accounts offer a range of rewards that can meet SMBs’ most relevant everyday business needs, giving them a suite of solutions to keep efficiency high and costs low,” added Prokop.

The access to credit: Featuring the role of SMBs, fintechs, and banks 

SMBs largely rely on banks as their primary financial institution, and those considering switching providers still choose banks first (39%), followed by neobanks (32%). Research shows that banks are the leading source of advice for small businesses.

That said, many small businesses are phased out every year in the US due to a lack of equal access to credit, among other reasons. While banks are important sources of credit for small businesses, the loan approval process at banks can be ungenerous even in normal times.

As a result, 42% of SMBs consider faster access to credit a reason big enough to switch their financial providers.

How SMBs can build on their creditworthiness

SMBs can improve their odds of getting the funding – capital, credit, grants – they need by making it easier for lenders to assess their creditworthiness, according to Prokop.

Lenders have traditionally relied on information such as GAAP financials, tax returns, and credit bureau reports to assess a business’s credit risk. However, they are increasingly beginning to tap into other sources of information, such as banking transaction history, trade payments history, and even social media activity to gain a more holistic view. 

Business owners can provide their consent for lenders to view their recent business banking transactions through open banking solutions, for instance. SMB owners can also smooth the path to obtaining credit by demonstrating the potential of their business – through future revenue growth from increased business, partnerships, contracts, expanding workforce and locations, and reducing costs – to prospective lenders.

“These forward-looking metrics are key: Don’t let the decision be 100% about the past,” said Prokop.

How fintechs stand at an advantage when it comes to serving the SMB market

Fintechs are gaining a foothold across the small business segment by delivering smoother user experiences coupled with digital-first solutions that are easier to integrate into SMBs’ existing workflows. This approach enables fintechs to keep pace with the changing needs of small businesses and quickly bring new products and solutions to market. 

Additionally, small and midsize businesses face significant challenges when it comes to making payments. To help them smooth out their payments processes, SMBs are increasingly looking to embedded finance solutions and service providers offering them.

65% of small businesses said they partner with fintechs outside their primary FI to meet at least one financial need. This statistic indicates that as much as banks are important to SMBs, fintechs can still step in to fill the gap.  

“It is an exciting time in the payments ecosystem for small businesses, as there is a significant SMB awakening occurring with a variety of new entrants – from neobanks to fintechs and telcos – launching value propositions to cater to this valuable segment,” added Prokop.

The window of opportunity for banks

Banks hold their ground as consumer trust continues to be the driving factor in financial services. Additionally, the discipline in operations stemming from strict regulation and licensing are some of the factors consumers value most often when listing the items important to their financial decisions. 

According to Prokop, banks have the opportunity to modernize their solutions and services to meet the growing demand of the SMB segment. The sector is currently serviced by a wide range of digital players, which has led to a complex and disjointed experience when selecting tools to run their business. This creates significant challenges for small businesses, including the time it takes to research, assess, and onboard solutions, as well as the management of multiple accounts and relationships. This also highlights the absence of a holistic and one-stop-shop solution for SMBs to build, run, and grow their businesses. 

“Banks are in a good position to remain SMBs’ trusted partners by enhancing their offerings, and embracing relevant partnerships,” said Prokop.

Banks and fintechs: Collaboration is the way forward

Fintechs’ technology solutions have raised expectations – SMB owners desire a more integrated set of tools that are easy to access.

In fact, two-thirds of SMBs say a frictionless digital experience is imperative to their business. While SMBs are open to new solutions from non-bank providers, fintechs may lack the reach, scale, and established reputation that larger financial institutions offer their customers.

Amid this landscape, there likely lies a ripe opportunity for financial institutions and fintechs to come together to deliver customized offerings at a greater scale and collectively deepen their relationships with small and medium-sized businesses, according to Prokop. 

“To continue digitizing payments for small business, we need these various ecosystem players – neobanks, traditional banks, marketplaces, and social commerce players – to be open to working with each other,” explained Prokop.

The big question: Are SMBs ready to ditch cash and checks altogether?

The SMB landscape is evolving. More small business owners are adopting new ways of working and embracing e-commerce to keep up with shifting consumer demands. 

On top of that, the volatile economy also continues to accelerate the shift to digitization, with more business owners turning to their banks or other financial providers for digital tools to help keep their businesses running. For example, there is a heightened focus on cash flow management, and as a result, SMBs are seeking tools that will enable them to better manage their payments and set themselves on the road to profitability. 

This confluence of economic and societal factors has made it increasingly important for SMBs to move toward digitally enabled payments. Up to 70% of SMBs globally have intensified their use of digital technologies. A Bank of America study also found that 85% of its small business customers are using digital channels to manage their companies’ finances.

“We expect to see the entire payments industry waking up to the opportunity by making digital tools, multi-rail payments, and access to capital more available to SMB owners. This will only further propel the movement away from risky cash and old-school paper processes for SMBs around the world,” noted Prokop.