Business Banking Sucks – but a few FinTechs and Big Banks are trying to change this.

As a business owner, I rarely log into my business bank account. They make it too hard for me to log in, and when I do, the level of capability doesn’t reflect the jobs I have to do on a day-to day-basis. We are hugely busy building our company, 11:FS, and I can’t be bothered with something that doesn’t give me basic insight and isn’t at all connected to my personal banking.

Instead, I use Xero for accounting and invoicing; Receipt Bank for receipting; PipeDrive for managing our pipeline; and various other niche players that deliver me real benefit and help me run our business.

More than just using these services, I pay for them each month, and as a business owner I feel the value. They make my life easier, make us more efficient, and help us be a better business. I cannot say the same for our business banking account.

As this service gap increases and business banking continues to become quietly disintermediated, I wonder, will the Xeros and Quickens of the world eventually become the primary banking service of small- and medium-sized business owners? In a way, this is already happening with platformication and open APIs.

I recently co-hosted an event with LinkedIn where we discussed how SME banking is currently being disrupted, and what the future of SME banking could look like. Here are some highlights from that discussion.

Business banking sucks

Historically, the role of business banking has primarily been around cash management and transactions, and, over time, access to credit, although that’s not as easy as it needs to be for businesses. Right now, business banking pretty much sucks, says Luka Ivicevic, Co-Founder and Head of Growth at Penta, a digital bank for SMEs based in Berlin. Paperwork is painfully time consuming and takes away from the actual running of the business.

George Bevis, CEO of Tide, a digital SME bank based in London, believes the future of business banking will encompass a range of services, “which exist to exploit the fact that your business banking is the information hub in your business” that can “empower you to build a better and more successful business, and spend more of your time on whatever it is that your organization exists to do.”

PSD2 – will banks become obsolete?

PSD2 legislation will essentially give European consumers control of their financial data. This means banks, which traditionally hoard that information, will have to share it with third parties. This is great for new players who want to disrupt banking, but what does it mean for SME customers? Luka sees something similar to Apple’s App Store.

“When the Apple App Store came out, nobody knew what type of impact it would have on our lives. Developers got really, really creative, and they built amazing products that we all use today, and that are essentially improving our lives. Enabling developers to build apps for SMEs could optimize business processes. We want to give them the freedom to create apps that create value for businesses. So essentially, we want to make this open platform where developers are allowed to get creative.”

There is a scary side to this for traditional banks – Luka predicts they will become completely obsolete. “There’s going to be absolutely no point to even have a bank account, if Xero, or another accounting tool, can execute transactions and manage cash flow, and even apply for a loan, because the accounting tool has all that information. It’s up to the challenger banks, like Penta and Tide to open up their APIs so that we’re enabling the different accounting tools and different software.” And that is essentially what Penta is doing, integrating the best third-party apps in financial services so 100% of the banking is done in one place.

The next wave of innovation

George suspects accounting companies won’t become the primary environment where businesses do their financial services: “It almost doesn’t matter how good you are in accounting software, your number of customers only ever is going to be in the hundreds of thousands.”

However, companies like Xero do have two huge advantages, George says: they’re unregulated, and they have the culture of a software business. “They are willing and able to build experiences that are only driven by the needs and interests of customers, and they obviously don’t have to worry about appeasing regulators or credit committees. So that’s why that innovation all started in what I would call software-only businesses. I think the thing that’s interesting now is that the next wave of innovation in business banking seems to come from businesses like ourselves and others who are exploiting regulatory change and the emergence of white label banking services providers, so that we can still offer the full array of banking services, transactions, and money holding and so on, but still managing to avoid being regulated by sitting on top of other organizations.”

FinTechs and banks partnering.

With new regulation like PSD2, there is a lot of opportunity for disintermediation in the market, and the onus is on the banks to provide valuable services for the customer. Some will rise to the challenge; others will fall flat on their face.

Incumbents are very good at hard things that operate below the surface, like making transactions happen rapidly, and having large balance sheets available for lending. However, George says, “Banks haven’t historically found it easy to come up with great user experiences on top, in the digital age. I have no doubt there will be some banks who will be good at that, and obviously some banks that will totally fail at that. The interesting question for me is the extent to which those banks are willing to partner with newer organizations.”

Santander and Kabbage offer a great example of a traditional bank and FinTech coming together to offer a great customer experience. Small businesses need capital, and Kabbage offers U.S. SMEs a seven-minute complete process to get funding, rather than a three-day journey. They also license their platform to financial institutions, both domestically and abroad, through several partnerships, including with Santander, which is powering its working capital loans product in the U.K. through Kabbage.

“The working capital loans solution is a great example,” says Sigridur Sigurdardottir, Chief Customer and Innovation Officer, UK, at Santander. “If you think about it in the context of what was, it would have taken a small business anywhere from two to four weeks to get a decision on working capital. That’s a long time for a small business. And now, all of a sudden, you get a decision within minutes, and you have your funds into your account within 24 hours. That, really, is a transformational proposition for SMEs and attracts them to move their business, or move and take up a loan with us, and that allows us to then deepen that relationship with customers.”

So Santander benefits from Kabbage’s data and technology, and Kabbage benefits from Santander’s brand equity, which no banking service or accounting software can currently compete with, says Pete Steger, Head of Business Development at Kabbage. They’ve done market studies with small business owners to test brand awareness, which was around 12%. And when they asked respondents where they’d go for a small business loan, they all said the bank – not Kabbage.

“And it’s going to take an extremely long time – it’s taken us a really long time – to get to a cost of funds that’s even in the less than 7 or 8x ballpark of where a bank is at, and so that limits from the marketplace what you’re able to offer, and the flexibility of what you can actually do in this space for the most amount of customers.”

Face-to-face still matters.

With massive bank branch closures and more and more mobile-only banks coming onto the market, does face-to-face still matter in the customer journey? “The ability to talk to people continues to be important through the journey,” Sigridur says. “While digital forms a big part of our play, and we’re digitizing a lot of our experience, that ability to pick up the phone, or talk to a person, and providing a broad range of services to small businesses through their life cycle is really important. So it’s really providing that seamless, frictionless experience into the channel of choice for that small business.”

George agrees, saying that while Tide is known for mobile banking, the service exists on desktop, as well, and while most members communicate with Tide via in-app messaging, they can talk to someone on the phone if they want. “We have an online community, as well. We recently opened up a store for a few weeks in an underground station in London that allowed us to get closer to our members. So it’s definitely the case that business owners do value a variety of channels. I do think, if you look to the future, that the proportion of businesses that want face- to-face access will decline significantly, and the most favoured form of interaction with a banker is zero interaction.”

Though Luka says that face-to-face – at least virtual face-to-face – offers a differentiating wow factor. He likes how the onboarding for Number 26 involves a video Skype chat, which he believes provides a better experience than some other digital banks that don’t have video interaction. “So yeah, maybe we can onboard a business in five minutes, but if you do this one extra step, which may be a little longer, maybe two, three minutes longer… I think that A) creates a wow factor, and B), ensures there’s security, and I think that’s a double gain.”

Final thoughts

SMEs want more time to focus their efforts in their business than working on their business and if you enable businesses to spend less time banking, it makes life easier for them. “Business banking really sucks,” as Luka says, “and we believe that there are better options. You shouldn’t be doing your banking for hours and hours a week. It should be similar to booking an Airbnb, or ordering an Uber. So it really comes down to targeting people who believe in exactly that mentality, and it’s about those early adopters.

“I remember when Tide was in pre-beta, and they did a fantastic job of getting a lot of subscribers. So we’re taking the same approach, where we have a large subscriber list of people who we are constantly interacting with and interviewing, to try to understand what their needs are and what they believe beyond that. But essentially, it comes down to the mentality of the person and how they adopt, until it becomes more mainstream.”

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David Brear is CEO and Co-Founder of 11:FS, a digital transformation agency that helps banks become truly digital.