Traditional banks and credit unions are finding their small business customers, an important component of their businesses, are targets of aggressive competitors. With 30.2 million small businesses in the U.S., these firms account for 99.9% of all American business and create nearly half of the nation’s Gross Domestic Product. They are a valuable source of business if they are properly served.
Whether it’s payment processing, small business lending or digital banking, there are now a host of competitors offering these services and are eager to take this business away from traditional institutions. The barrier to entry is low. It’s easier for competitors to find and market to these businesses, who often feel they have been ignored by traditional firms.
How traditional banks and credit unions can remain competitive
To attract and retain this business, traditional lenders must complete their digital transformation. Increasingly, small businesses are going to online lenders, who are making it easier for them to get the funding they need. Small business loan applicants going online rose from 14% in 2014 to nearly 25% in 2017, according to research from Raddon Research Insights.
Fortunately, because small businesses are built upon relationships, many of these firms will maintain their traditional banking relationships even as they contract with fintech firms to meet other needs.
In addition, this is an opportunity for financial services companies to see new market entrants as partners instead of competitors. At the same time, they must begin providing solutions to small business problems instead of just products, such as open banking. It is not uncommon for a small business to pay a couple of hundred dollars per month to a collection of third-party fintech providers who are disintermediating the financial institution.
Our own research revealed that small business owners are seeking solutions to four critical problems:
- Not enough time
- The need to grow
- The need to increase profitability
- The desire for the peace of mind that comes from being supported
Most small business owners expect digital banking to be part of the solution and are actively seeking out digital services that will help them make the most use of their time and save money. It needs to be more than simply transaction history, balances and payments. Comprehensive solutions with capabilities such as managing accounts payable and\or receivable, rather than simply an ACH and\or Wires module are getting their attention.
Innovations in fintech are continuing to increase and evolve, making this an ideal time for traditional financial institutions to implement the solutions needed to remain competitive in today’s financial services industry. In fact, according to CB Insights, in 2018, overall fintech funding hit $32.6 billion by the end of Q3, up 82% from 2017’s total figure of $17.9 billion.
Completing the digital transformation can be a challenge for traditional institutions. To streamline this process, banks and credit unions can turn to fintech partners that are experienced in helping banks and credit unions complete their digital transformation so they can provide the solutions small businesses are seeking now.