The problem with SMB finance is…everything
SMBs are the lifeblood of most economies. In the UK alone they make up 99.9% of all private sector businesses and employ 60% of all private sector workers. Yet they are chronically underserved by incumbent financial institutions (FIs) across all segments.
Bank accounts are hard to come by, expensive, and no longer fit for purpose for the average SMB. Bank managers insist that small businesses value personal relationships more than efficiency or low prices, yet the anecdotal evidence from the SMBs we spoke to on our SMB Banking Insights podcast consistently suggested otherwise. The people who run SMBs, who in many cases ARE SMBs, have come to expect digitalised user journeys and competitive pricing in all areas of their lives. Just like everyone else. The opportunity to “pop in and chat” with their bank or relationship manager does not offset the outdated, expensive processes associated with getting and running a small business bank account. That’s especially true when that person can rarely offer any sort of personalised product or service,
The making and receiving of payments is the basis of almost every business, yet the firms that facilitate financial transactions in today’s world by and large ignore the specific requirements of SMBs. Incumbent providers of payment services, from acceptance to the paying of suppliers and employees, typically charge SMBs eye-wateringly high fees which take a huge chunk out of potential profits. They rarely offer services that cater to SMBs such as progressive fees based on number or volume of transactions that are processed or monthly rolling contracts. Yet those SMBs have little choice but to hand over hard earned revenue to such providers if they want their businesses to function.
Corporate treasury departments at banks provide large businesses with a huge range of services that help them manage and grow their assets. These include hedging, FX, investment, and savings among others. SMBs, however, have access to few such products. There are not many large providers willing to offer businesses with smaller volumes of assets these services. Those that do, rarely tailor them for the specific needs of SMBs. For example, small businesses could need to release funds at short notice if an invoice is unexpectedly delayed, something few FI savings products allow. But inability to access funds could lead to a small business ending up in debt, or in a worse case scenario, folding. As a result, they tend to hold what spare they have in current accounts where it may not be working for the SMB, but it is also instantly accessible.
One of the best known financial problems SMBs face is an inability to access credit, either at all, or at the point in time it is actually required. In order to access loans SMBs have to fill in mountains of paperwork, often in branch, providing lenders with information that could easily have been submitted online. They then have to wait weeks to find out if they’ve been approved, leaving them unable to plan effectively. When it comes to emergency credit, which SMBs are often in need of if, for example, a large customer is late with a payment or a vital piece of machinery breaks, FIs are rarely able to help at all. Instead, SMBs have to turn to instant lenders who charge exorbitant interest rates.
As with all other financial products, there is little in the way of SMB-tailored insurance on offer by incumbents right now. Products are expensive and inadequate — they are either “light” versions of commercial insurance or price-inflated versions of consumer insurance. That means many SMBs are forking out for insurance that doesn’t actually meet their needs, leaving them underinsured and out of pocket. The issue is only exacerbated for freelancers and those working in the gig economy, many of whom simply run the risk of going without insurance rather than try to navigate such a hostile industry.
Same old, same old
You may have heard all of the above before. If you have even half an ear to the ground in the world of financial services you almost certainly have. But it bears repeating, because it’s a problem that hasn’t yet been solved.
Hang on in there, there’s hope
The failure of FIs to serve SMBs across all these product segments has resulted in startups springing up to fill the gap. Many such firms are founded by SMB owners frustrated at their own experience and determined to improve the situation for their peers. In turn, that’s driving banks, insurers, lenders, and others to rethink their own strategies. All of which is good for the SMB industry. We will be revisiting this topic frequently in the near future, exploring which startups are really helping SMBs, how they are doing it, and what incumbents can do to ensure they don’t get left behind in the race to capture SMB business. Stay tuned. To find more of Sarah’s insights into fintech, you can find her research reports on Pulse and hear her regularly on the Fintech Insiders podcast.