Banks used to be the only game in town for small businesses looking to set up an account, get credit and hear advice about managing their cash flow.
Luke Voiles, Chief Executive Officer of embedded solutions FinTech Pipe, told Karen Webster that the point of interaction — for capital, for credit — is shifting from the bank branches to the software platforms SMBs leverage to help them do everything from match up with customers to manage the back office. That’s especially true, he said, when the banks’ definition of small businesses are the companies with $25 million in sales, so they don’t give these smaller firms a second glance.
That presents an opportunity for Pipe’s “capital-as-a-service” operations — embedded within those software-as-a-service platforms and solutions, and launched about six months ago — to solve several pain points. As many as 85% of small businesses, Voiles said, use the capital they get from the likes of Square and Intuit (where he previously led those firms’ small business lending operations), and now Pipe, to grow their businesses.
Pipe embeds financial services within its partners’ software stacks. “If you’re the owner of a nail salon that does $500K a year at your small location,” he said, “if you can borrow $80,000 with three clicks of a mouse, you can go and open a new location and buy the equipment you need to scale your business.”
But for the smallest firms — the micro-businesses that line Main Street — well, those firms are underserved. Especially when seeking access to a credit product that helps manage day-to-day operations and their working capital.
“There’s a huge gap in the market for the micro-merchants that just can’t get those same features they’d want from an Amex card, or from the cards offered by digital only neobanks that are typically offered to larger firms,” Voiles said.
Those features include spend management options and rewards. All too often, these same business owners wind up running their firms via their own personal credit cards.
Pipe’s sweet spot lies with the firms that see sales of $100,000 to about $1 million on an annualized basis (a range that encompasses most of the firms in the United States). Fresh off the heels of its expansion into a new market — the U.K. — on Monday (Oct. 28th), and broadening its reach to help SaaS clients target the smaller firms, Pipe announced that it launched an embedded Pipe Business Card for software and payments companies based in the U.S. Pipe Business Card is a charge card that provides an extension of working capital that must be paid in full at the end of the billing cycle.
The nail salons, hair salons, spas, coffee shops, “the physical mom and pop retail stores are all perfect fits,” said Voiles.
The cards are issued by First Internet Bank of Indiana, and exist as a pay-in-full card, wherein balances must be paid in full within 15 days of a statement closing date. Pipe’s customers can draw down money from a line of credit to pay the balance, but the new Pipe offering is not a credit card.
The same risk underwriting models that underpin Pipe’s core embedded capital-as-a-service product can be leveraged by Pipe’s SaaS partners, based on revenue from their own end customers, to offer those cards to improve micro-businesses’ access to capital. The SaaS firms don’t manage the underwriting or take on the credit risk.
“When you partner with a software company that has a year-long or two-year-long relationship with that small business customer, you can see real transactions…and that ‘de-risks’” the card issuance, the capital tied to those cards and the underwriting on Pipe’s part, Voiles told Webster.
The embedded card programs can be launched in a matter of days, where that process has typically taken months. Rewards include 1.5% cash back, the firm noted on Monday, and the cards carry no annual fees.
Asked by Webster about the economics of the cards, Voiles said that interchange pays for the rewards.
“We’re not trying to make the card a massive profit center,” said Voiles. He explained, further, that if an end customer gets to the end of the aforementioned 15 day period to pay off the card, they can pay with cash or draw down Pipe capital lines (“we’re monetizing this with our core product,” said Voiles) to pay off the cards and keep spending. If they don’t pay, the card is locked and a percentage of the firms’ daily sales will be used to reduce the balance until the card’s paid in full. Pipe creates bespoke models for every partner, said Voiles, with five years worth of data and history — with real-time inputs that help fine tune underwriting efforts.
“I want businesses to be able to spend money knowing that they’ll have the available capital to do so,” said Voiles.
Pipe will be rolling out additional services through its partner firms through the next several months, said Voiles, including spend management solutions that reconcile automatically with accounting and billing, which cuts down on the manual tasks of running the business.
“The charge card will be more about just spend,” said Voiles, who added that “allocating the right expenses to the right projects, and categories” will allow business owners to actually concentrate on strategy and opportunities that are at hand.
Pipe also is in the midst of readying its “AI CFO” for eventual rollout, said Voiles — “productionized in the next month” — that uses industry vertical-specific data to help SMB owners gain better insight into industry benchmarks, their own revenue trends — and to create forecasts too. AI-driven, automated payroll functions are also on the horizon, too, he said.
In terms of other partnerships, Voiles said that it’s possible down the line that banks will partner with Pipe to create a referral network where the FIs refer SMB clients “into” those embedded ecosystems.
“We’ll need to find a bank that’s sophisticated enough to start testing all of these things, and to put all the pieces together,” said Voiles, “but that may be the future here.”
As he told Webster for SMBs and the SaaS firms they turn to for everything from capital to back-end operations management, “our goal is to solve all of these problems….one industry at a time.”
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