The following was produced by Tearsheet Studios. We worked with small business lender BlueVine to produce a four part series on creating financial solutions serving historically underserved small businesses.
In this episode, we spoke with the CEOs of both BlueVine and NEXT Insurance -- two companies founded on addressing the needs of small businesses, out of a recognition that small businesses make up a huge deal of the economy.
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The following excerpts were edited for clarity.
Eyal Lifshitz, BlueVine: Hi, I'm Eyal Lifshitz. I'm the founder and CEO of BlueVine. BlueVine provides small businesses with end to end banking designed for them. Small businesses have long been underserved by the traditional banking system, and we're looking to empower them with a solution that provides accessible financial products for them that works all under one roof.
Guy Goldstein, NEXT Insurance: H, my name is Guy Goldstein. I'm one of the co-founders and the CEO of NEXT Insurance. NEXT Insurance provides insurance for small businesses in the United States, and we give them a solution that is simple, affordable and tailored for their needs.
During the pandemic, many small businesses were out of business. The government’s Paycheck Protection Program offered small businesses forgivable loans to help them keep their employees and stay in business. With the massive demand for financial help, large banks didn’t have the bandwidth, or desire, to process all those small business loans. This left a multi billion dollar vacuum -- taken up by small business lenders, like BlueVine.
Eyal Lifshitz: We've had thousands of customers leave feedback that we really saved their business during the pandemic with the PPP. Businesses that were shut down, literally within their last week of funds available, needing to let employees go, were waiting on funds to come from their bank that they work with -- some of them for decades -- and they were feeling incredibly frustrated. This is really when they needed the help, and their bank wasn't there for them.
We stepped up, were there, and were able to provide them access to the funds very quickly and easily. And we felt like their savior -- they were so grateful. The responses and the feedback that small business owners left with us, I'm remembering verbatim things like, ‘You saved my business,’ ‘What would I do without you?’ Really, really powerful things that small business owners were saying and were very emotional. It was a very difficult time for the last year and a half for them, and being there in their time of need very much aligns to our purposes of the company. Every single person at BlueVine working during this period felt that.
Guy Goldstein: We had a customer where the police ran after someone, and this someone stopped in front of their store, just by coincidence. Because the police were running after this person, they broke the window of the store, and ran through the store to the other side. The police followed them, and there was a shooting in the store. So there are bullets all around the store and everything is broken -- and it happened to be that the store owner is our customer. He called us to say, ‘Listen, I had this crazy event. I'm still shaking from the shooting that happened in the store.’ It was a pet store, and he said, ‘Everything is broken here. Meaning without your money, I'm out of business. I need to shut down the store and that's it -- close shop.’ And it was a process to even figure out how much we needed to pay. We immediately sent $10,000 so he could run the business, and then continue to figure out what exactly is the damage. He literally cried on the phone and told us, ‘Thank you so much for saving my business and my livelihood.’
Small businesses have been historically underserved by large FIs. Between the individual consumer and big companies, small business owners often fall between the cracks and have to depend on products that weren’t designed for them. But what is it that makes their needs so unique?
Eyal Lifshitz: Small businesses matter. They make up about half of the GDP, and they're the nation's largest employer; about half of the employees in the country work for small businesses. But at the same time, for a long time, they have been severely underserved by traditional financial institutions.
It is really hard for small businesses today to get access to financing -- only about 20% of small businesses are able to get financing through their traditional bank. And more broadly speaking, the services that they get from their bank are just not designed for them. They're either not getting access to the products that larger corporations get, or they only get what you would call ‘consumer plus services’ -- which is what a consumer would get with a thin layer on top of it, but certainly not designed for their needs today, especially where we are post-pandemic.
Guy Goldstein: I would also add that unlike large corporations, small businesses are small. And as a result, as an institution, you don't get a lot of revenue when you work with them. If you're a bank or an insurance company who wants to serve small businesses, the revenue you're going to get is fairly low, and it's very complicated to serve them. As a result, the incumbents have neglected this type of segment because they don't make enough money.
As hard as this past year has been on small businesses, it has highlighted why small businesses absolutely rely on financial partners -- especially in banking and insurance -- that understand them and their specific needs.
Eyal Lifshitz: Small businesses took a very hard hit. Many of them needed to shut down periodically given government orders. It was a very difficult time for them. Many of them don't carry large amounts of cash on their balance sheet, and don't have many weeks of runway with the current financials that they have. As a company whose mission it is to empower small businesses, we realized that we need to step up and be there at a time where they're struggling.
The government put forward the PPP --- the Paycheck Protection Program -- that was there in place to support small businesses, and we knew that we needed to take part in that. We really put a lot of effort into supporting as many small businesses as we can, as part of this program. We’re really proud to have facilitated over 300,000 small paycheck protection loans as part of this program, providing access to almost $9 billion in capital. Certainly we’ve been very busy supporting small businesses during this period, and very proud of what we've achieved.
Guy Goldstein: This year showed why it's so important for our company to be dedicated to small businesses, and focused on small businesses and the entrepreneurs that run them. When the pandemic started, we noticed, like everyone else, that businesses are working less. For us, as an insurance company, because they work less, we’re getting less claims. So we decided to institute a 25% discount on the insurance business for all of our customers for several months. We were the first company in the United States to give a 25% discount on the monthly insurance payment in order to support and help them during this pandemic.
We called on other insurance companies in the country to do it as well. And following our discount, other insurance companies like Geico, Progressive, and all the rest of the insurance companies started to issue discounts to their customers. Our focus on small businesses gave us the insight and the initiative to go ahead and execute this kind of change.
The pandemic pushed small businesses to rely heavily on their financial partners. And as traditional institutions didn’t deliver, it emphasized just how important it is to have companies like BlueVine and NEXT, who are specifically dedicated to meeting those unique needs. It all starts from the checking account.
Eyal Lifshitz: When you look at the past year and a half, certainly there was an acceleration of adoption of digital services, as people didn't leave their homes and looked to consume more and more online. That dynamic trend certainly has not skipped over small businesses -- actually, I would say it is even more so in that segment.
When you look within banking, your typical consumer has long abandoned the branch. I don't remember when the last time was that I went to a branch as a consumer, but pre-pandemic, your typical small business would go to the branch at least once a week to conduct their business. This is just an indication that banking doesn't work for them, and is not set up to support their ability to digitally transact.
We have certainly continued our investment and focus in that area. We introduced our small business checking product in November of 2019. We've continued to double down on that, and have seen tremendous success with that product, as more and more small businesses are looking for digital-first products that make their life easier to transact online, and don't require them to go to a brick and mortar location to conduct their business.
A major driving force in the pandemic was the acceleration of digital transformation. It marked a higher-than-ever, global reliance on digital products. Small businesses, who have traditionally relied heavily on in-person services -- found themselves adapting to the new digital agenda, too.
Guy Goldstein: In the past, people and businesses said, ‘We want to speak with someone in order to do some transaction,' whether it's a loan, a banking application, or obviously insurance. They would often speak with agents. Today, they are willing to go a lot more digital, and willing to accept digital solutions.
We saw massive growth this year in our customer base of businesses who were willing to digitally buy a product like insurance, which is extremely complicated for small businesses, without speaking with anyone -- from a website. And that's what we do. We are a 100% digital solution for businesses. We also saw agencies are enjoying this solution, as an agent could also work with our system in a 100% digital way.
Providing an integrated solution for SMBs is hard because financial products are so different. The partnership between BlueVine and NEXT merges two instrumental solutions custom fit for small businesses, and packaged with the key element -- simplicity.
Guy Goldstein: Small businesses can be a one person business or 10 employees, and the owner needs banking, loans, and insurance, and they don't want to work with multiple companies. They are looking for one vendor to deliver all their needs in the simplest way to save their time, so they can go on with their own business and what they do day-to-day.
It’s very complicated to be one company doing insurance, banking, loans, and payments. That’s why it's important for financial technology companies to partner together to deliver the value for these businesses.
This is exactly what NEXT and BlueVine did. NEXT has a solution that can be embedded with any other financial services. We combined forces together, and combined the products so that BlueVine customers can seamlessly buy their insurance and get all their needs from one vendor instead of running around the block to find a second provider to work with.
Eyal Lifshitz: Our ethos is to make the financial lives of our small business customers easier. We know that purchasing insurance for small businesses is difficult, and as many as 40% of them go without business-specific insurance because the ability to acquire insurance has very high friction.
By joining forces, the two complement one another in a one-stop-shop that favors the financial success of small businesses.
Guy Goldstein: We recently did a survey with 500 small businesses in the United States, and found some very interesting findings. First of all, many new small businesses are starting up -- way more than in a typical year. This year alone, 4.35 million new businesses were created, which is 25% more than a typical year, like we had in 2019 or 2018. There’s been massive growth in the amount of small businesses that are opening and getting new licenses.
Even more interestingly, we noticed that women are actually opening more businesses than men -- the ratio between women-owned business versus men-owned business is almost 2x. And we see that women are opening businesses by themselves, where more often men are opening them with a partner. So this is a very exciting year for small businesses and the entrepreneurs opening those businesses. It’s great to see so many women open so many businesses.
Eyal Lifshitz: An area that we clients thinking about is access to capital. Once the availability of capital from government programs has dried up, certainly the demand is outstripping supply. The situation with availability of capital from the traditional banking system has not improved from pre-pandemic -- it is really hard for a small business to access financing from a bank. Only 20% or so get approved when they apply at a bank.
This is becoming increasingly important right now. As we're coming out from the pandemic and a down cycle in the economy, small businesses are starting and looking to grow, and capital is a very important part of that. And so for us, it is definitely a priority to make sure that we're streamlining more and more of our processes to make sure that we're putting and making capital available to small businesses that need it, and making that experience digital and easy by removing a lot of the friction and pain points that small businesses run with a traditional system.
Both companies play a major role in their customer base’s success. The takeaway from that is that the key is responding to their needs. As the pandemic wanes and business shifts from defense to offense, SMBs require different things. To do that, financial services firms must understand, and stay up to date, with their customers’ pain points and struggles.
Eyal Lifshitz: With the economy reopening, growth is top of mind -- whether it is to hire employees, invest in marketing, or to buy equipment -- and financing is very much connected to that. A year and a half ago it was about capital preservation, and just making sure that you're surviving. Now, the mindset has changed to, ‘How do I access the funds that I need to grow, to make sure that I'm benefiting from the opportunities that I see?’ And so we're hearing that a lot from businesses.
The traditional banking system is slow to react. We're not seeing that approval rates, even as low as they were pre-pandemic, have reached the rate of where they were then. So it's on companies like us to step up and make sure that we are helping small businesses, powering them, and providing them with capital.
Guy Goldstein: I would add to this that cash flow is a major challenge for small businesses. Always has been, and this year as well. Based on how they use NEXT, the importance of it is in two areas: first, we allow them to pay monthly instead of annually for their insurance. We give them both options, but we see most businesses choose to pay monthly -- because of their cash flow needs. And the second thing is about claims. If a customer is hit by a robbery, this business can literally go out of business because they don't have enough cash to buy new equipment, or to fix the problem they have. So, the speed at which we need to pay the claim (sometimes we pay the claims within several minutes) can give them the livelihood so that they continue to run as a business -- otherwise, they have to shut down shop.
The easiest way to stay tuned to the customers’ needs is to stay connected with them. But not all customers are created equal. In order to best serve small businesses, it’s important to recognize their differences.
Guy Goldstein: We call it small business, but it's not one category -- it's a restaurant, a lawyer, a personal trainer, a painter, a general contractor -- these are the people behind those businesses. It's a completely different thing to be a lawyer, than a gardener, than a schoolteacher. And all of these are basically considered small businesses. There are thousands of different professions, and the challenge in working with them is that you need to deliver specific tailored solutions for each one of those professions, and that’s complicated.
For us at NEXT there are two things that we need to do. One, obviously, you need to speak with your customers, and you need to understand all of this. And two, you need to measure a lot of data; a lot of those professionals come to our website and we start to learn from each one of the professionals what's worked for them and what's not worked for them. You need to optimize the system constantly in order to serve each one of them in a very tailored and specific way.
Above their differences, however, the common denominator of many small businesses has been relying on the bank branch to manage their financial lives.
Eyal Lifshitz: In terms of size of small business, we focus on the ones that are not commercially banked. With large banks, you need a higher range of revenue, and then you get assigned to a commercial banker who is able to attend to your every need. But if you are a smaller business -- let's say you're generating a million dollars in revenue -- you're served largely at the bank branch by a teller or by calling a support center.
What we're trying to do as a digital first banking platform, although we don't have the branches, is make our platform and online experience so easy and intuitive to use, such that ideally you can do everything that you need online without needing human support. But at the same time, there is always that human support to guide you and help you if there's anything that you need.
As a digital first service provider for small businesses, the key is creating an easy to use digital solution -- but one that is still complemented by human touch points for quick and easy troubleshooting.
Eyal Lifshitz: For small businesses, one of the major considerations is time -- they really don't want to have a time suck while waiting on their bank to solve their issues or areas of friction that they're not able to solve by themselves. So we make sure that we have a support center that is very versed in terms of how we run our operations and in terms of our products. About a year ago we set up a support center in Salt Lake that is now almost 100 people.
We are continuing to invest in multiple channels and tools: whether it's integrated chat, a contact page, or a beginner center. We are providing all these tools to make sure that if you are not able to get what you need and address your needs online, there's always a human there to help you. So we're complementing our digital first platform that is meant to be very easy to use with the support that small businesses need to make sure that they're treated in an appropriate manner, are able to conduct their business, and not get bogged down with managing areas of pain point within their financial services.
As expert service providers for small businesses and after years of experience, I asked both Lifshitz and Goldstein what is their best advice for fellow incumbents on building financial products and their strategy for developing new offerings for this large segment.
Eyal Lifshitz: Being very clear who your customer is. Small business is a wide category. Being very clear about the segment you’re serving, and building the products designed for them. Once you go too broad, then you start becoming like traditional banks that carry hundreds of SKUs, but not really the best products or features for any of the segments, and namely, the ones that have historically been less profitable for them, which in our case is small businesses.
We're laser focused on the segment that we're serving, and we're building products and services really designed for them. A lot of the product development is through iteration: we hear from our customers what they need, whether they tell us, through surveys, or through monitoring our support calls, so that we get an understanding from the market and our customers of what they're missing; then we put something in the market; and through continuous feedback, looking at the data, we continue to iterate and refine to make sure that we're really honing in and solving for the customer's needs -- we're really building for our customers. We're not building for us.
Guy Goldstein: Before you even go to the product, one of the most challenging things about small business is: how do you get customers? How do they learn about you?
For every entrepreneur, before you even start asking what you do with your product (which is where most people usually put their effort), you have to figure out: how do you get the customers? What are your acquisition channels? Do you get them with direct mail? Do you get them via Google or Facebook? Do you get them via partnerships? Whatever the way is, you first need to figure out how you get those customers because it's really, really important. There are thousands of different professions, different sizes and beasts, so you need to be very specific about how you acquire your customers.
The second thing about the product: it's so important to define the segment and the profession you want to go after. We at NEXT started only with personal trainers, and for a year that's all we did. We learned how to do insurance for and how to acquire personal trainers. And until we figured it all out, we didn't move to the next thing. Then after personal trainers, we did photographers, and then after photographers, we said, ‘Okay, let's expand it a bit to do construction.’
You need to be very focused on who you're going after and what you sell them, because there's no way to solve the problem generically for all sized businesses in all types of professions.
Now that the initial veil of the pandemic has lifted and businesses are opening up and looking to grow, I asked Lifshitz and Goldstein how they see the near future and what they predict for the small business banking industry.
Eyal Lifshitz: A priority for us is to make sure that we're creating a platform that encompasses more and more of the financial services that small businesses need. The fragmentation of financial services that has happened over more than a decade is not an ideal world for small businesses. They're not looking to pick multiple providers. They much rather prefer to have one destination for their financial services, and that would make their life so much easier. That used to be their bank. Unfortunately, that's not their bank anymore. So it's up to more forward thinking online fintech companies like us to fulfill that vision, and that's certainly the path that we're on.
Some of these things we're going to build ourselves, as we're hearing what our customers need. We have a lot of priorities on our roadmap in terms of adding more features and more products. But some of these things are going to be things that we partner on. We want to make sure that we're delivering to our customers not just things that are within our capabilities and the things that we're good at. Insurance feels like a really strong complement to banking products. I'm really glad that we're able to partner with NEXT and we're looking to continue and further that partnership and integration and then expand out of that and look for similar minded partnerships, as well in the future. Very exciting times for us.
Guy Goldstein: We have an ambition to become the biggest insurance for small business in the United States. And there are two main areas that we are expanding. One is the need to support thousands of professions, and we are still not there. So we need to continue to expand our availability for every type of small business over time. And the second thing, we want to deliver phenomenal service for them and make it seamless for them to get insurance from us, or whether they get it via a partner like BlueVine that we're working with.
Business is a moving target: they are hiring new employees, getting new cars, getting a new property. We don't want to deal with insurance all the time because of all the changes, and we all have ambitions to adapt to their business automatically as they grow.