Banks’ $370 Billion Small Business Opportunity

OBSERVATIONS FROM THE FINTECH SNARK TANK

The Paycheck Protection Program was a godsend for small businesses, helping many stay afloat and keep their employees on the payroll.

But the process for applying for the loans—and applying for loan forgiveness—exposed the accounting and payments difficulties that many small businesses have.

Lack of technology support for accounting functions, poor integration between accounting and payroll functions, and insufficient reporting capabilities on the part of the tools and technologies in place all contribute to this problem.

This “problem” is actually an opportunity for banks, however—a $370 billion opportunity—to provide accounting and payments services to small- and medium-size enterprises (SMEs).

The $370 Billion Opportunity

According to a study from Cornerstone Advisors, commissioned by Autobooks, SMEs spend more than $500 billion on accounting/bookkeeping, invoicing, bill payment and payment acceptance services from third-party providers.

Many of these small businesses would consider obtaining accounting and payments services from a bank—as would many that don’t currently use third-party services and, instead, incur internal expenses for their accounting and payments functions.

In addition to the 6% of small businesses that already get accounting and payments services from a bank, roughly three in 10 would “definitely” consider a bank for accounting, invoicing, bill pay and payment acceptance services.

In addition, the larger the small business, the greater the likelihood it would consider a bank to provide these services: Roughly four in 10 small businesses with revenues greater than $5 million said they would definitely consider a bank.

The result is a $370 billion revenue opportunity for banks and credit unions.

Relative to the current third-party spend for these services, banks’ opportunities are high because many SMEs who currently perform these functions in-house expressed interest in turning these activities over to banks.

This Is Not a New Market For Banks

Banks already generate more than $11 billion from accounting and payments services provided to small businesses.

Three megabanks—Bank of America, JPMorgan Chase, and Wells Fargo—control 47% of that market, followed by PNC and Citizens Bank with 5% each. Combined, community banks and credit unions have just 18% of the current market.

There are strong retention benefits to this business.

Among all SMEs, nearly six in 10 said they’re “very” or “somewhat” likely to look for a new banking relationship in the next year. However, among those that use a bank for accounting and payments services, just 21% expressed an interest in switching.

Payment Opportunities With Small Businesses

Small businesses need help managing their payment acceptance activities. Of 12 different payment types, more than half of small businesses accept nine or more payment types.

And according to the study, days sales outstanding (DSO) average about 30 days for small businesses with less than $5 million in revenue, climb to the mid-30s for SMEs with $5 million to $20 million, and grow to more than 40 for businesses with $20 million to $50 million in revenue.

If this wasn’t a big enough problem in and of itself, the New York Times recently reported that Square, a payments processor for many small businesses, is holding on to 30% of the payment revenue due to many small businesses:

“The withholdings came with little warning, and Square asserted the right to hang on to the money for the next four months. Square [said] it was doing this to protect against risky transactions or customers who demanded their money back.”

This isn’t a new issue between Square and its small business customers.

But it is a new opportunity for banks to crack the market and provide a more small business-friendly payments acceptance service.

Small Business Lending Opportunities

Among small businesses that expressed a definite interest in obtaining accounting and payments services from a bank, 62% intend to borrow over the next two years, and expect to borrow an average of nearly $2 million.

In contrast, among those SMEs that “might” consider banks for accounting and payments services, only a third plan on borrowing over the next two years, and that percentage drops to just one in five of small business who won’t consider banks for accounting and payments services.

Capitalizing on the Revenue Opportunities

In 2018, Amazon jolted the banking industry by announcing that it had provided $1 billion in cash advances to merchants selling on the firm’s platform in 2017.

How was it able to do it? Data.

Amazon had data about merchants’ cash flow and perspective on how any individual merchant’s business performance compared to other merchants in that particular space.

Armed with that knowledge, Amazon could offer cash advances to merchants that were most worthy of the advances and do so before the merchants even requested them.

The imperative for banks is clear: Banks must become embedded into small businesses’ everyday operations in order to achieve the speed and agility needed to compete with new competitors.

Banks need to bundle small business back office and merchant services with the more traditional deposit management and lending services they already provide.

It’s a win/win for banks: More non-interest fees that helps produce more efficiently-gained interest income.

For a free copy of the report The $370 Billion Small Business Opportunity For Banks click here.