Posted on

“Take a hard look at your current ecosystem. If you were to double the assets under your management today, would your current ecosystem sustain that growth?” Finastra’s Kristen Lista, on what FIs need to do to compete in SME lending

Non-bank financial institutions (NBFIs) are capturing more and more market share in SME lending by leveraging technology to offer quicker lending solutions. This puts pressure on FIs to evolve their approaches while managing costs and improving service quality.

Finastra’s Principal Product Manager Kristen Lista joins the Tearsheet podcast today to discuss the most critical areas where FIs need to focus: consolidating technology to improve efficiency, decreasing the time between application and access to funding, enhancing back-office operations, and creating more client-centric experiences. 

Lista offers a valuable look inside the complex web of challenges that FIs are facing when trying to improve the SME lending products. From technology integration strategies to practical advice on process improvement, Lista offers an actionable blueprint that can help FIs better compete in the SME lending space, driving growth and customer loyalty.

Watch the full episode

 

Listen to the full episode

Barriers SMEs face in accessing funding

Limited credit history, lack of collateral, and sitting outside FI’s credit box prevent SMEs from tapping much-needed financial resources.

Addressing these barriers requires financial institutions to embrace digital transformation: “To overcome these barriers, FIs have to innovate and embrace digital transformation, and that helps to provide faster, more efficient lending decisions, ultimately getting to that time to say yes much quicker to provide for the SMEs funding needs.”

The threat of new entrants

Traditional financial institutions face significant challenges competing with more agile non-bank lenders in the SME space. Lista points out that NBFIs have gained market share by utilizing technology to streamline the lending process.

“Traditional FIs really are struggling to compete with non-bank financial institutions in the SME lending space, because NBFIs leverage technology to offer faster, more flexible lending solutions,” Lista noted. She added that financial institutions also face a tighter cost basis in the SME lending space, which means they need to find ways to reduce costs without compromising service quality, which is very tough to do.

But beyond technology and cost challenges, FIs may be overlooking a chance to diversify their offerings: “There’s really an opportunity and a need for FIs to grow into different asset classes as well, such as moving from SME lending into commercial and syndicated lending, which can help FIs diversify their risk and open new revenue streams.”

How technology can help FIs build better CX

CX and bank office efficiency play a critical role in the relationship SMEs have with their FIs –  technology in validating financial statements, automating underwriting, and enhancing loan servicing capabilities all contribute to the quality of service SMEs receive from their FIs. 

Lista also highlighted a frequently overlooked area, loan servicing. It’s here that FIs have a particularly important investment to make: “Loan servicing is kind of an afterthought in digital transformation, but it really can’t be an afterthought anymore. Loan servicing capabilities have to have that digital transformation, as well, and provide for better communication and transparency for bank clients.”

The importance of modernizing back-office operations

One reason why FIs have struggled to keep up with the pace of their competitors is their historical underinvestment in back-office operations.

“FIs really haven’t focused on the back-office servicing operations of the SME lending process,” Lista said. “There’s a lot of reasons for that. Primarily, they’ve been underfunded because banks thought that the back-office was not revenue generating, and so they would really focus their resources and their budget going towards client-facing systems.”

Blueprint for customer retention and growth

At a time when FIs have to play catch up with their NBFI counterparts, the key to their success may lie in focusing on customer needs, expectations, and experience. 

On the revenue front, Lista noted that while SME loans are typically lower in value, they’re higher in volume, creating a unique opportunity: “In order to grow their revenue, they have to prioritize the customer experience to get that retention and loyalty, and if they do that, they may see an approximate two and a half times increase in their revenue growth compared to those who do not prioritize customer centricity.”

To-do list: What FIs can do to better serve their SME customers

FIs that want to improve their SME customer experience can take the following steps:

– Gain a full system view: Undertake a detailed overview of the systems involved from loan initiation through servicing and termination. “Key systems that you should look at are customer portals, your borrower portals. You should be looking across the ecosystem at KYC, AML systems, loan origination systems, loan documentation systems, and, of course, your loan servicing system.”

– Evaluate potential for automation: Integration between these systems that contribute to the loan servicing process is crucial: “It’s important to look at what they’re doing, what the purpose is, but also, how do you automate and integrate these systems together and piece them together in an automated way throughout the ecosystem?”

– Don’t overlook KYC and AML – they impact CX: KYC and AML processes have a significant impact on turnaround time and customer experience. When considering modernization strategies, this is a critical area of evaluation with a CX lens. Complex KYC and AML processes can impact onboarding success and impact client retention. “If they don’t have smooth transitions from a portal to a KYC system, for example, the borrower is going to feel the delay and the impact,” said Lista. 

– Find technology partners that can technological lift in automation: Tools like Finastra’s offerings can help FIs create a consolidated and streamlined lending ecosystem.

“Finastra offers a lot of solutions to enable this consolidated and streamlined end-to-end ecosystem,” Lista said. “Our products help FIs to digitally transform their ecosystems to provide those right SME offerings and mirror up with their demands and expectations.”

– Integrate teams into SME strategy: “FIs must not only look at the technology, but they must also integrate their people and processes within the technology as well,” Lista advised. “Enhancing collaboration across business segments—the front office, the back office, the middle office—and also working with their IT departments and their technology departments internally. That collaboration is key.”

To read more about what FIs can do to build competitive lending experiences and products for SMEs and find partners that can accelerate modernization efforts and positively impact bottom lines, please visit Finastra’s website.

Posted on

How embedded payroll can help banks build stronger SMB relationships

Businesses are flooded with new choices of financial providers that could challenge traditional banks’ customer loyalty.

To maintain their position, banks should reevaluate their strategies and look for opportunities to integrate value-added services into their core offerings. Banks can collaborate with vendors and partners to broaden their product range and stay competitive.

Banks can take the first step by leveraging the trust they’ve built with customers to gain a competitive edge.

In the world of money, trust is the golden rule

Banks hold a strong position in the trust game with SMB customers thanks to their legacy, regulatory reliability, and long-standing reputations. 

Source: Gusto Embedded x American Banker

This sentiment is echoed by 97% of bankers who regard trust as a critical or very important factor for customer retention in their industry, according to research by Gusto Embedded and American Banker.

But relying on that legacy and reliability as the sole foundation for trust is insufficient to hold ground against emerging challengers.

“In addition to trust, banks need to offer additional value-added services like payroll to stay ahead of challenger banks,” said Yi Liu, General Manager of Gusto Embedded. “These businesses already trust their banks, so offering complementary services that allow them to manage all their financial needs in one place can deepen those relationships.”

SMBs expect an all-in-one solution to simplify their operations and reduce costs, so they can focus on growing their business.

According to a U.S. Bank survey, 56% of SMBs prefer a consolidated financial management platform with a comprehensive suite of banking, payments, and software solutions, and they expect their banks to provide them.

Source: Gusto Embedded x American Banker

Meanwhile, banks are struggling to meet rising customer expectations and growing competition from non-bank financial institutions, with only 11% of bankers rating their banks as excellent in this regard.

This gap has prompted SMBs to explore alternatives to traditional banking. According to Gusto Embedded’s research, 70% of SMBs depend on multiple providers to fulfill their financial service needs, despite maintaining a primary bank for core functions.

Enhancing technology and unifying data can help banks break this cycle.

Banks’ rebound strategy

There is ample room for financial institutions to ramp up investment in technology, particularly in providing advanced tools for SMB owners.

Here’s how:

i) Put embedded finance at the forefront

With embedded finance solutions, banks can open doors to better serve small businesses by incorporating services like payroll processing, lending, and payment systems.

Small businesses almost universally use business checking (91%) and credit/debit cards (88%), typically through their main bank, according to Gusto Embedded’s research. Payroll services come next, with 66% of businesses using them. However, 37% of SMBs utilize external providers for payroll, while only 29% rely on their primary bank.

Source: Gusto Embedded x American Banker

Banks have long held preferred provider status with SMBs. By offering embedded value-added services banks can weather industry change, gain a competitive edge, and improve customer retention, cementing their role in the evolving financial ecosystem.

“By embedding services like payroll alongside bank balance information, banks can predict a cashflow shortage and offer a loan to cover an upcoming payroll,” noted Liu. “This is a win for business owners as well, in addition to the overall time savings of having everything in one place, in one account.”

ii) Integrate superior services with minimal effort

Source: Gusto Embedded x American Banker

76% of SMBs emphasize ease of use as a key factor in getting products and value-added services from their banks, according to Gusto Embedded’s research.

This is a major consideration for SMBs because these businesses have limited resources and smaller teams. They need tools that are simple to integrate and compatible with their existing systems so they can avoid the complexities of managing multiple systems. 

“Our customers are telling us that they’re short on time and long on problems. We do not want them to have to log into 22 different applications to run their business,” said Mark Valentino, Head of Business Banking at Citizens, during  Tearsheet’s The Big Bank Theory Conference in 2024.

Additionally, SMBs typically operate in fast-paced environments, so user-friendly solutions can help them focus on their core business activities without being bogged down by complex technology or the need for extensive technical expertise.

Capturing young SMB owners’ attention with embedded VAS

Investing in tech upgrades can also help banks attract the growing group of tech-savvy young entrepreneurs, who are very receptive to convenient, digital, and embedded solutions.

Research indicates that the majority of Gen Z are eager to start their businesses ‘to be their own boss’, rejecting the traditional 9-to-5 grind. This entrepreneurial mindset is reflected in the fact that 80% of Gen Z business owners launched businesses online or incorporated mobile components, while 46% opted to start with a physical storefront. 

As a new wave of young entrepreneurs enters the market, financial institutions have a chance to connect with this emerging SMB customer base by supporting their business goals through embedded VAS.

“In our experience selling payroll to small businesses, driving ease of use is critical for reaching new customers,” said Liu.

The impact of a sharp differentiation strategy

In addition to the key strategies for engaging with the SMB sector, banks can take a more proactive approach by zeroing in on solving specific SMB pain points.

Handling payroll, for instance, can be fraught with complex components. Some SMBs employ full-time workers while others rely on contractors. In fact, most small businesses have between one and five paid employees, with smaller firms typically relying more on contractors, according to Gusto Embedded’s research.

Given the various types of employees within SMBs, business owners face significant hurdles in managing payroll. Paying contractors requires different workflows and systems than paying full-time employees, adding extra complexity to payroll processes.

To create a holistic solution that tackles all aspects of a specific challenge, such as payroll, FIs can collaborate with embedded payroll providers like Gusto Embedded.

In 2023, Chase Payment Solutions tapped Gusto to offer payroll services to its business customers. By partnering with Gusto Embedded, Chase Payment Solutions customers can manage payments, banking, and payroll with a single Chase.com login. This integration streamlines payroll, tax calculations, filings, and employee paystub creation.

“When we talk to banks about embedding services like payroll, the conversation typically focuses on how banks are uniquely positioned to solve SMB pain points, such as cash flow management and real-time payroll,” said Liu. “Likewise, setting up a business bank account is often one of the first steps for new business owners, followed by accepting payments and then payroll.”

“So, it makes sense that all of these services are available in one place.”

Learn how to create customized products that meet the payroll needs of diverse SMBs to solidify your connections. Download the Gusto whitepaper here.