Banks and credit unions that diversify their offerings have achieved great success in serving their customers and members. Some of these products are created in-house and others are offered through partnerships with third parties. By offering a full range of banking products, these firms have forged strong relationships with the consumers they serve.
While banks have been successful in offering full-product menus to consumers, they have not performed as well when it comes to their small business customers. Instead, fintech firms have developed and marketed a range of tools that appeal to small business owners and have begun to disintermediate, at least in part, the bank’s relationships with these customers.
Leaving Money on the Table
Over the past few months, we’ve been visiting with a number of successful community-based financial institution executives who have been noticing that more of their small business customers are forging relationships with fintech firms.
Many banks are offering their business customers the same tools they’ve been offering for the past 10 to 15 years. This has created a serious problem for two reasons. First, traditional institutions are leaving fee income on the table. Secondly, fintech firms are now knowing more about their customers than they do.
Fintechs are considered “potential competitors” because at present most banks are partnering with them for their mutual benefit, and that’s expected to continue. However, there are certain products that banks should not let slip away.
Bill.com, a company that provides cloud-based software to help small and medium-sized businesses with payments and back-office operations, started out making it easier for small businesses to send invoices to their customers. Today, the company offers a range of services to small business, connecting seamlessly to their customers’ online accounting software and financial institutions. The company went public last year and in its first report as a public company, it showed a 50% increase in revenue – leading to an increase in its stock price by 15% in February. In its second fiscal quarter, the company posted revenue of $39.1 million, most of which was earned selling products that traditional banks could have offered if they had previously invested in the required technologies.
Every time a small business uses a cloud-based service provider to manage payroll, manage benefits to employees, manage invoicing or receivables, track their spending or forecast their cash needs, they are paying a fee to someone. It’s almost never their bank, yet these systems are quite often leveraging the bank’s capabilities to their own benefit.
But banks and credit unions are giving up something even more valuable than fee income. By sharing their information with these fintech firms, business customers are telling them everything they need to know to create, market and sell additional products to these customers. This is information the banks only have a partial, unenriched view of at best.
The Solution is a Solution
To regain control of these relationships, banks need to get out of the transactional mindset and pay close attention to the digital products their business customers are actually using to manage their cashflow.
In the process, they are likely to find that they need to make some investments to ensure they are not disintermediated in the future. This could involve supplementing the products they offer today or completely replacing them with modern tools that business customers need.
As they begin to navigate this space, bank executives will be making decisions about which fintech firms to partner with, which products to resell and which products they should develop on their own. Institutions interested in the latter case have already begun calling upon us for support.
With the right partner and a software solution that is directly integrated with their system and customer data, banks will be positioned to serve their customers and members rather than simply be a back office ledger and transaction processor for someone else.