Why Banks Should Want Their SME Customers

At first glance, the general consensus of the small business market today is that this customer base isn’t exactly lucrative for major financial institutions. It’s a sentiment that is often used to explain the retreat of large, traditional FIs from small business lending — they’re high-risk, with little cash to provide.

So, it may be a wonder that Digital Insight has just released its newest solution, Business Banking, as a way for these banks and credit unions to service their SME clients. PYMNTS spoke with Digital Insight Director of Business Banking Solutions David Potterton about the tool, whether banks actually want a small business as a customer and how the new offering is a reflection of the emerging trends of small business finances and shifts in how FIs will respond to those changes.

For some major banks, Potterton explained that the reluctance to serve an SME is due to the risk factor. Naturally, many of these FIs — especially smaller ones — don’t want to spend the resources to build and develop in-house solutions geared towards small businesses.

“There’s a lot that goes into building any kind of solution,” Potterton explained. “You have to find the developers, understand the technology, keep up with various releases, make enhancements your customers might request. It’s a lot of overhead for most institutions.”

Not to mention, he added, these banks are focused on providing financial solutions, not developing software.

[bctt tweet=”Banks are focused on providing financial solutions, not developing software.”]

Potterton noted that this has created a gap in small business-focused banking services.

“The gap is really around how the solutions present themselves to business users, especially small businesses,” he said. “FIs today typically have a large business orientation. They use a lot of, what I’ll call, ‘business jargon’ and business flow that, for small businesses, can be very complicated and unnecessary.”

It leaves a space for solutions developers, like Digital Insight, to swoop in, develop a solution for SMEs and hand it to the banks so they can actually meet the needs of small business clients. But with a customer base considered high-risk, low-reward, do banks even want to service SMEs?

For some FIs, the answer is a resounding “yes,” said Potterton.

“In many cases, these small businesses are also their retail customers,” he explained. Many of these small business owners are existing customers of banks with home loans, personal accounts and other consumer-focused services. If that SME owner won’t get the business services he or she needs from the bank, that financial institution might lose all of that personal business in one fell swoop.

Plus, Potterton added, when the banks are able to service their SMEs through a third-party solution, these institutions can then scale with those businesses for when they need more profitable services, like commercial loans, lines of credit or payroll services.

As Potterton and Digital Insight look ahead towards the new year, he said the company has its eye on integrating greater capabilities into the Business Banking tool based on the shifting landscape of small business FinServ customers.

Today, the “sweet spot” for small business banking is payments, he said. At present the tool offers wire, ACH and recurring payment capabilities for SMEs, as well as security and fraud mitigation. And while the tool can already be accessed via mobile device, Potterton noted that Business Banking will see its own mobile app in 2016 as the demand for mobile banking solutions among small businesses increases.

[bctt tweet=”The “sweet spot” for small business banking is payments.”]

Also ahead are international payment capabilities for small business banking customers. The developments will all roll in in response to a new generation of entrepreneurs, Potterton explained.

“One of the things some banks are overlooking is the millennial piece,” he said. “Most millennials are entrepreneurs in their soul.”

This means an entirely new generation of small business owners and an entirely new generation of what they will demand from their financial services providers.

“There are a number of things millennials will look for in terms of mobility and ease of use,” Potterton said. “We are thinking about the business owners to come when we design the solution. FIs aren’t as focused on it, but it could absolutely be an area of growth for some of our smaller institutions.”