Where Credit’s Due Ep. 6: Digitizing commercial banking with Q2 and TD Bank

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In today’s podcast episode, we are talking about how banks are looking to serve the small and medium sized business sector in a digital economy. Today, fintechs like Square and PayPal really dominate this market because they have been better able to find solutions that worked for the middle market sector. 

The competition is incentivizing banks to digitize and upgrade their commercial and SMB infrastructure, and various companies are coming in with software products to help them bridge this gap. 

Listen in for a conversation on how banks can effectively compete in the SMB sector currently, and the role of digitization in this whole equation. Joining me today are Paul Margarites, Head of U.S. Commercial Digital Platforms at TD Bank and Kirk Coleman, Chief Banking Officer at Q2.

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The following excerpts were edited for clarity.

Traditionally, commercial banks offered a one size fits all solution to their business customers, but this has started to change. What is different this time, and what are the challenges that still remain?

Kirk Coleman: The SMB sector is a really wide and varied segment of the banking industry, and so there is no kind of just one approach, which actually makes it really interesting. And it's also a reason why you have banks of all sizes competing for that business. 

To be successful in the SMB segment, you've got to be able to be very close to the customer in terms of what it is that they need most. In some cases, you have really small businesses that are maybe great at what they do, but not super sophisticated in terms of their financial and operational needs. And then on the higher end, there’s mid sized businesses that maybe have someone more professionally running their financials and some of their operations. So it's this huge spectrum. But it's a great opportunity. And I think that's why we see a lot of investment in this area, both in banks and non banks. 

The pandemic has accelerated a lot of the digitization of what banks previously considered harder processes to truly digitize – we've seen an acceleration there. But the same is true for the small and medium sized businesses themselves – they're also going through this sort of digital transformation for themselves. And so we're all going through this together, I think it's a wonderful time to bring new services and solutions to that segment.

Paul Margarites: I think the small business sector is such a great space and interesting space. We've seen particularly in the last few years, that as a bank, you have to be able to go to where that business is. That means meeting all those specific needs and having the presence to really guide them, whether it's through digital channel interactions, or in person too. 

Those relationships and that advisory piece when it comes to your banking relationship is just so much more critical from a small business perspective, than some of the larger businesses that don't necessarily have the bigger teams and the expertise. So being able to meet those clients in the channel in which they want to meet you, is how financial institutions really can bring success to those clients. 

The pandemic turned up the dial on digitization, but I think there was also a lesson learned in the financial industry when it comes to adaptability. During the pandemic, we learned that we can adapt quickly. We tackled the PPP program in days, getting that financing out to those businesses in need. As an industry, we realized that we can change and we could change quickly for our clients. And we've taken those lessons to heart.

TD Bank is looking into bringing consumer style innovations to its commercial customers, and you're doing so by expanding into embedded finance. How do you see embedded banking benefiting small and medium sized businesses? And do you think this is a way banks can effectively compete in the SMB sector currently?

Paul Margarites: Not only do I think that they can use this to compete, I think banks such as ourselves need embedded banking to compete. Small businesses are trying to do everything themselves, so time is of the essence. Getting things done quickly is absolutely necessary for the survival of a small business, particularly from their banking relationship. And the way they do that is through integration and embedding the banking capabilities, when the context matters. 

What that means is that if I'm a small business, if I'm in my accounting system, and I'm trying to manage my bills, I'm trying to manage my receivables and my reporting, I don't have time to do one by one payments, or one by one pieces of information, and piecemeal together reports. I need my bank to come to me. I need the bank to come to my systems, bring all the data in the context I need so that I can quickly get the financing piece done from my business perspective, and can move on to what I really should be doing, which is scaling my business, working with my team's growing my business, working with suppliers, etc. to really grow.

Q2 also offers solutions for banks in this segment. How are you thinking about digitalization in this space?

Kirk Coleman: We try to look at it through the banker's eyes, which is what it is you're doing with these customers, to onboard, serve and grow. If you think about a bank and the investments that they've made across the technologies and capabilities across those four categories, it's this big menagerie of technologies that's been implemented into that space.

We have packaged our solution under the banner of Q2 Catalyst. That's our way of coming to the markets as a digital banking provider, able to meet you where you are in terms of what your highest priority is. We'll be investing alongside our financial institutions and fintechs that we serve. Everyone will have a slightly different journey, in terms of where their maturity of their capabilities is.

Every institution, as much as the general public might think of all banks as being the same, the truth is that each bank has its own strategy, its own personality, and its own way of serving the community that they're in, whether that's in a single geography across many geographies, and so we have to be able to bring solutions to those institutions so that they can deliver that sort of customized digital experience in a way that's very specific to how they see serving the needs of their community the best.

What are the financing solutions and digital experiences that businesses need but are currently unaddressed by their financial services providers?

Kirk Coleman: This is where we have to put the humans back in the middle. Because whether it's a commercial institution or midsize business, these are areas of massive growth for financial institutions. I believe banks ought to really be able to win in a very big way in this segment, but it's not a one size fits all. You have to have the technology that's flexible, but you also have to have humans available, involved at the right points in the relationship. You have to have these processes and technologies that are flexible to meet those customers wherever they are. 

What we don't want to see is sort of a very homogenous sort of underwriting and credit that scrapes out all of that variability. All these businesses that really need a more personalized touch, we want technology that flexes with them, and the same is true on the deposit side.

Paul Margarites: We have this conversation here at TD often and it's exactly what Kirk is saying in terms of the balance between digital and human, because there's different approaches across the industry. If you go straight through human, you get the personalization, but you don't necessarily get the scale, if you go straight digital, the opposite problem.

I really think that it's connected to the embedded finance piece, in the context of the customer being able to share their information at the flip of a switch to their banker and link into the automated tools. When you get that information from the client, it's generating solutions in hours or days and not weeks. And then using the human element from those results, and being able to deliver the right solutions to those clients to help them grow their business.

At TD Bank, does this happen in house? What are the tools and capabilities that a bank can have an in house, or find through external vendors? How do you think about this process?

Paul Margarites: We're actually looking at both, and there's different pieces of the end to end process where it makes sense to pull in vendors versus build in house. There's in house models that banks can use around getting client data and developing solutions for them. And then there's solutions like Q2, I'll give a shout out to Kirk over here on the on the precision lending side that you can integrate with, so that you can go on the pricing side and be able to deliver more attractive rates.

It's really about taking a look at the end-to-end process and deciding whether to go with vendor for the whole thing, or picking the spots where I want to play and could use a partner. From a banking perspective, it may not make sense for us to build everything. And quite honestly, a good innovation team and a good digital transformation team is going to break that up and help make those decisions.

Kirk Coleman: The very best instant financial institutions are going to provide solutions that are a combination of things - they're gonna put that puzzle together in a very specific way for themselves. We know that that's the environment into which we're going, so we need to be great at understanding that environment. We think our mission aligns very well with with our customers, which is super important, because if you don't have alignment on why you're doing what you're doing in the first place, then it's really hard to come up with the best solution, not just for the bank, but for that end customer, that business or that individual that needs that product or service.

The other part, of course, is that we have to be great at all the integrations. The most frustrating thing for customers that have to provide the same data for multiple processes, and be asked the same questions multiple times. There's lots of short cycle innovations that are going on, I think it's really super exciting.

There's a lot of new ideas coming into this space over what data we can consider for the small medium sized business sector to understand its financial behavior and help the sector through solutions. What are some of the new underwriting technologies or methodologies?

Paul Margarites: I wouldn't even say it's necessarily new technologies, but integrating into real time data sources is what's driving the innovation in that piece. There's nothing unique about the data sources that the industry is grabbing, at least from a core underwriting perspective - it's a company's financials , it could be tax statements, etc. But what's changed is the fact that those are available in real time because you can take a look at those financials, you can layer in some machine learning and you can have a sense of where your business is going.

So in theory, you could start the underwriting, or at least the pricing and packaging, before a client's even asked for it. And that's the difference - you're getting ahead of the business needs versus you're reacting to the business needs. And I think that's the big thing that is starting to change in the industry. You know, the other thing I will say, but that hasn't yet quite resonated across the industry, is layering in additional alternative data sources - things like geolocation or other kind of available public data that could layer in additional context and actually change what would be a traditional underwriting process.

Kirk Coleman: When a financial institution makes an underwriting decision, if they get to a quick yes, then everyone's kind of happy, right? The trickier part is when you have to say no, or maybe not. Banks have a responsibility to be able to explain why they turn people down. I think the best scenario here is this coaching relationship. Maybe in the future, that'll include even more non traditional data sources, but the core of it is going to be financials.

We can plot out a journey for your customers, in terms of the growth that you're gonna go through, being financially responsible and managing your own finances. And we're gonna give you the coaching tools, and products and services that meet you along that journey. This is what good banks have been trying to do since they were founded, having a customer for life, and taking them through all of these different phases of growth. We need to be doing that at scale we need to be doing for everybody. There's a lot of different things that you can bring into the picture, as opposed to a cookie cutter yes or no, I think that's really important. The end customer will benefit from that because they'll understand and have a better framework for how to think about the types of products or credit that they might need in the future, and a better idea of how others assess risk.