Small business is in a digital crisis and financial institutions could be their hero

It’s no secret that the pandemic has put an extraordinary strain on small businesses. Primarily, it’s growing pains. Small businesses were forced to grow into digital enterprises essentially overnight. Accepting online payments and facilitating sales digitally switched from niceties to necessities. According to McKinsey & Company, the global average share of digital customer interactions increased from 36% to 58% between December 2019 and July 2020. This signifies an incredible acceleration in digitalization. And many of these changes are probably here to stay. In the same report, “changing customer needs or expectations” was considered the most likely change that will stick around through the recovery. As a result, small businesses are looking to make lasting changes to their operating models.

For the most part, small businesses are facing a squeeze on margins and revenue as they scramble to implement the changes needed to continue operating in a new fully digital world. The problem is, they don’t have the right kind of help. They need somebody to guide them in adopting the digital solutions they need. Cisco’s 2020 study on Small Business Digital Transformation states, “The right technology vendor, with the right technologies and expertise, will help overcome tightening constraints.” Small businesses need somebody to take them by the hand.

Fintech may be the answer to the small-business squeeze, but not by itself.

There’s no shortage of fintech solutions for small businesses out there. The space is absolutely on fire. CB Insights says that as of Feb. 2021, global quarter-to-date funding for fintechs has surpassed $13.4 billion, the highest quarterly total since Q2’18. But how does a small business choose between all the options? And just like people, businesses don’t want a hot mess of apps and software to make up their business technology stack. They want everything centralized, not fragmented. Interconnected, not disparate. Who could provide such a service? Financial institutions (FIs). Although it may sound funny to think of banks or credit unions as a centralized technology provider for small businesses, emerging technology makes this possible and ideal.

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Until now, FIs have had limited viable options for offering competitive financial technology: build it, buy it, or partner for it. Building it is challenging because banks don’t have the product development resources to create solutions that meet customers’ sky-high expectations for software. The bar for user experience is just too high to compete with what the big banks and fintechs can offer. Buying fintech and implementing it isn’t much better. It’s expensive, resource-intensive, and risky. Finally, partnering for it carries similar cost challenges to buying it, and after a long, painful integration, there’s no guarantee that the FI’s account holders will adopt the product.

The situation for fintechs isn’t much better. They can appeal to consumers directly, but that’s tough because they’re in a constant battle to lower their customer acquisition costs and spending buckets of money marketing to an often-niche target audience. Distribution through FIs is an alternative for some fintechs, and while this path offers the benefits of a captive audience and existing trusted relationships, it also means long, difficult sales cycles. And then once the deal is done, the integration itself is no picnic. Fintechs are often working in developer frameworks that are difficult to use, offer poor documentation, and have limited flexibility.

Because of these challenges, integration between fintechs and financial institutions has been slow. But that could be changing thanks to new emerging models that finally allow partnership to become the true path to solving small businesses’ digital woes. 

A new model finally allows for productive partnerships between banks and fintechs.

With advances in open technology, entirely new go-to-market models are available to fintechs and FIs, which avoid typical partnership challenges. One such example is Q2, a financial experience and digital banking company based in Austin, TX, which offers a product called Q2 Marketplace. This product lets fintechs perform a single integration with the Q2 digital banking platform — running at over 450 banks and credit unions — instead of separate integrations with each bank the fintechs wants to partner with. And after the fintechs integrate with the platform, their products become available to every FI participating in the Marketplace program. Then, those FIs can select and install the fintech products they’d like to make available to account holders. Finally, account holders browse an app store-like environment containing these installed products and purchase what they need. It’s embedded banking in reverse: embedded fintech, where custom integrations and long, painful sales cycles aren’t necessary.

One early success with this Q2 product has been a fintech called Autobooks, which partners with financial institutions to help SMBs send digital invoices, accept online payments, and better manage their cash flow. Before Marketplace, Autobooks was forced to work against the laborious process described above. Using Marketplace, Autobooks has decreased their sales cycles by 57% and implementation time by 65%, meaning their time-to-value has dramatically improved, the needs of SMBs are being met sooner, and FIs are the hero that made it all possible. 

With a suite of fintech solutions available to them through their digital banking platform, small businesses finally get the right technology vendor to help them overcome the pressure of digitalization. And FIs get to return to what they do best: consultative banking. It takes a different form now. But offering suites of digital solutions to consumers and small businesses is a keen way to build engagement and trust, trust that was lost in the transformation to digital, as face-to-face communications diminished.