‘We’re increasingly focused on connecting banks, businesses and innovative partners in a collaborative ecosystem’: Bottomline’s Norm DeLuca
- Historically, banks have not found a good model to service small businesses.
- Bottomline's GM of digital banking solution joins the podcast to talk about creating technology ecosystems around banks for SMBs.
As banks increasingly work with modern technology providers, ecosystems are forming around them and the businesses they serve.
Norm DeLuca is the general manager of digital banking solutions at Bottomline Technologies. He knows something about ecosystems and something about banking — spending 20 years in the industry. Bottomline works with nearly 1000 banks around the world to connect them with businesses and innovative partners using digital technologies to help them move the ball forward.
Norm DeLuca is my guest today on the Tearsheet Podcast.
My experience in banking is deeply informative for how we work with banks. I think a lot has changed in the last 20 years for the banking industry, but a lot has remained the same.
Finally, there’s a significant amount of acceleration. I say ‘finally’ because it just feels like over the last couple of years, we reached an inflection point that’s got banks really focused on embracing the challenge and the opportunity to really accelerate digital transformation.
I spent a lot of my career really focused on building businesses around small businesses and SMBs for banking companies. And that’s really been very informative, as I tried to really help translate. I see my role in a lot of respects as a translator between the world of technology and the world of banking.
I really try to connect with the underlying problems banks are trying to solve for their customers and how they’re trying to engage with customers in the way that they always have, but now brought forward into the digital domain. So a lot of issues are the same, and the needs are the same. But the ability today of digital technologies to connect banks and businesses is something that’s completely different. I think banks are really starting to get their head around it over the last couple of years. It’s an exciting time to be in the middle of it.
The challenge for small businesses
The events of the last 12 months with the pandemic and everything associated with it has obviously had a massive impact on the small business sector. And it’s really challenged them and stressed them in a lot of ways. I think what it’s done is really crystallize and accelerate some of the key underlying needs that have been there all along, but now have come to the forefront.
The first is the need for more accessibility to affordable digital solutions that are more purpose built and tailored to the needs of smaller businesses. There’s been kind of an explosion over the last year in the demand for access to these services, digitally, out of need. It’s really heightened that issue. And unfortunately, the history of the banking industry and the technology community that supports it has not been as focused on purpose-built and tailored solutions for the unique needs of this very complex, diverse, SMB segment.
The second big one is really cash. Cash is really the lifeblood of all businesses, but it’s really the lifeblood of smaller businesses. A huge amount of small businesses live sort of hand to mouth on cash flow, and they need access to capital but also access to better services to help them better manage their cash. And banks are a logical provider of those solutions. But they haven’t always provided the most comprehensive tailor made, cash management and cash forecasting solutions for smaller businesses. It’s a really compelling need, which has always been there, but has been amplified by the events of the last year.
SMBs are in no man’s land
I think that’s an incredibly important issue that’s at the heart of the matter of understanding the segment and why it’s traditionally not been well served by the banking industry. And why it’s been so heavily targeted by non banks who perceive the opportunity from under servicing the segment. And why we think it’s still a really big opportunity for banks, a big growth opportunity, because of a lot of natural advantages that they have.
So for any industry, small businesses are a tough nut to crack. The reason is that they generally have a need for more complicated services and advice than consumers do, and therefore can’t be reached effectively with the same mass market models as consumers, yet they don’t have the revenue size and wallet potential that justifies a business model for larger enterprises and for banks, that means intensive direct relationship manager coverage and things like that.
So they they fall in between, especially for banks, because the whole system of banking was really designed around retail and commercial, to be focused on consumers or larger commercial enterprises. And this really big segment, in the middle, which is neither consumer nor commercial, has always gotten a little bit lost in the shuffle — whether it’s solutions, organizational structures of banks, there’s not always clear ownership of the segment at a high level. And therefore, the ability to build great business cases for serving SMBs better tends to get subsumed under other parts of the organization. It lacks ownership and advocacy.
For banks politically, culturally, organizationally, historically, the nature of their information, technology stacks, and infrastructure — everything — the sort of the natural flow is against serving this segment well, and that’s why they need to make changes very affirmatively in the way they do business and the way they’re organized, to do a better job of meeting the needs of the segment.
Serving SMBs better
The starting point is effective segmentation and targeting because one-size-fits-all doesn’t work. And even when banks focus on the small business segment, they tend to think about it too monolithically. It’s an incredibly diverse segment that ranges from tens of millions of small offices and home offices, entrepreneurs whose needs are more consumer-like to larger small businesses that are doing business internationally, are digitally native, and have relatively complex needs that often mirror those of larger enterprises.
So a one-size-fits-all approach or an imprecisely segmented approach to working with SMBs is a root cause of the problem and a driver of the solution. Specifically, we see that lots of small businesses are trapped on consumer banking platforms. And there’s a lack of precision in separating the fairly large number of small businesses that probably are well served on that platform from the subset that is especially underserved and therefore really high potential in terms of their demand for financial management services. These SMBs are trapped in a consumer platform that doesn’t offer any of those kinds of services, like capital access, cash management, business payment services, and other things.
The trick is to be able to use technology, cost effectively, to use AI and machine learning, which we’re doing with lots of our bank clients now, to really precisely target not just generic small business, but which of those smaller businesses is truly underserved. So that’s a really big starting point: targeting the right SMB, identifying the high potential from the low potential, and directing marketing and services in that direction. That’s the key.
Big tech moving into banking SMBs
I think the threat is profoundly real. And banks are well served to be very paranoid and realistic about it. There’s been an increasing realization that the threats are real in a couple of categories. One is opportunity costs. One of the other things that’s held banks back in this space for a long time is a lack of confidence in the ability and willingness of smaller businesses to pay for services. That’s a result of the history of having everything lumped together under consumer. A lot of fintech innovators have done banks a big service because they’ve proved beyond a shadow of a doubt that that was a myth. Small businesses do have the ability and willingness to pay a fair price for a good service and a good value proposition.
I think that’s opened eyes — there was some skepticism about that for a long period of time. So there are opportunity costs there where banks are losing opportunities to extend their traditional payments and cash management services more deeply into serving the needs of small businesses, which are being attracted to other other providers like Square or QuickBooks. These new firms are taking a lot of potential business away from banks in a way that’s a very natural extension of their core business.
The other big threat is to the core business: taking deposits and making loans. I think there’s an increasing realization that that’s not as safe as it once was. And that the more this encroachment from fintechs and non banks, whether they’re really large technology platform providers, like Amazon, or niche fintech providers, like Bill.com, the closer they get to the core, the more ultimately that core is also at risk. The core deposit account, the core lending franchise, has been under attack for a while. The good news is these alternatives have awakened banks to the fact that it was a myth that small businesses wouldn’t pay for good value propositions and good services. They’ve awakened to the risk that a lot of these alternative providers are trying to unbundle the traditional banking relationship along product lines and take the more profitable parts of the relationship away. I think banks realize that even the core business is increasingly at risk.
The future is about collaboration. It’s not a zero sum game. It’s not mutually exclusive. A key strategy for banks, which we’re really putting a lot of attention and focus on, is identifying the right innovators who are bank centric in their approach — meaning, that they want to collaborate with banks because they recognize that banks do have really large customer bases. Banks really do have a lot of intrinsic advantages: the regulatory license, the higher level of relative trust as a steward of important financial information and financial matters. Lots of small to midsize banks still have great community and relationship profiles. Banks need to identify the bank centric innovators from the innovators that are more focused on disrupting them in the long run.
I think there is a clear distinction between bank centric innovators. We work with a partner, and I know he’s been on your podcast. Steve Robert, CEO of Autobooks, is a new partner of Bottomline. We’ve been working collaboratively in the small business segment to embed the Autobooks capabilities into our digital banking platform to make it more effective at reaching and servicing smaller businesses, and deepening relationships with small businesses as Autobooks does really well.
Autobooks is an example of a bank centric innovator that can enable banks to provide really cool innovative services without — and this is the key –compromising their vital interests, which are engagement with the customer, primary ownership of the customer relationship, and brand identity with the customer. That’s the key for the banking industry. When they get into collaboration with fintechs, it’s to recognize how to collaborate effectively to bring innovation without compromising primary ownership of the customer relationship and the customer engagement level, which in the long run, is going to determine who the winners and losers are.
In any disrupted or disrupting industry, the ones that come out the other side with ownership of customer engagement are usually the ones that win the lion’s share of the economics — if they emerge as the orchestrators of this new ecosystem.
Creating bank-centric ecosystems
I think it’s a great model. We’re looking to repeat it across a larger ecosystem of what we think of as the bank centric innovators. The main thing banks can do well is extend themselves more deeply into the everyday financial management operations of their business clients, especially small businesses who need more of these services. Smaller businesses need an intermediary who really understands their business to help integrate and coordinate all of these different services that they need in a more coherent way.
I always carry around a quote from an SMB owner in a focus group we did a little while ago that just really crystallized this. Her quote was — and she was an adopter of lots of great fintech services from separate providers, and she was a QuickBooks customer and a bank customer — our fantasy is that someone jams all of our favorite things together in a way that actually works for us. That just nailed it for me. That’s the opportunity for banks or other platform providers: to step into the midst of all this increasing choice and complexity. All of these things on a one off basis are great, but especially for small businesses who lack the depth of professional financial management staff, they don’t have lots of people coming to work all day to manage the complexity. So, they really need someone who can emerge in the digital domain as the one who pulls it together for them.
That’s the opportunity for banks, but what’s underneath that also is the system of record for businesses. The system of record for businesses financially is the GL, the general ledger, not the bank account. And this is where Autobooks is really smart in the way that they’re approaching this problem. If banks are really going to play that role, which at the end of the day means a unified view of data that can be translated into really meaningful engagement and advice, that wins customer loyalty and customer lifetime value, if they’re going to play that role, they have to be able to embrace the GL. They have to be able to integrate the general ledger, or the accounting software, or the business with the data in the banking systems and online banking, to get to that high ground and be the source of truth.
Behind the scenes, that’s a lot of the competitive focus. It’s between a big ecosystem that’s more around the general ledger, like the QuickBooks ecosystem that wants to put the accounting software at the center of the universe and take the engagement high ground away from banks, and banks, that want to create an ecosystem that keeps the bank at the center of the universe.