Tide CEO: Why SMBs Need Their Own Bank

Small business (SMBs) are distinct from other customer groups, Tide CEO Dr. Oliver Prill told Karen Webster during this week’s Monday Conversation, with a specific set of product and service needs that often go unmet because they are so unique. That means small businesses of all sizes — particularly the small businesses with fewer than 10 employees — simply deal with inefficiencies in their work flow that are actually rather damaging.

“When we talk to small businesses, what we hear over and over is that they are about saving time,” Prill told Webster. “The work flow at the average small business is incredibly intensive and there is always so much to do. These people don’t want to lose their entire Sunday afternoon to low-value [additional] tasks like managing their banking or accounting.”

Tide, a mobile-first digital banking service for SMBs in the U.K., aspires to be part of the solution for the small business sector. Part of that is in the banking and payment services the firm provides for small businesses. However, Prill noted, Tide’s platform play is for more than banking products; it’s designed to allow third-party partners to tightly integrate and distribute administrative or financial services products to Tide members. For example, Tide has just announced a new partnership with European online lender iwoca to initiate its first loan program, offering up to £100,000 ($128,579 USD) starting later this summer.

It’s one of many partnerships that Tide is looking to form as it moves forward, attempting to scale up its small business solution by leveraging its access to SMBs, rich data sets and payments flow. And with the recent injection of £8 million, Prill told Webster, that scaling effort is set to begin picking up a bit of speed.

The Customer Needs

The term “small business” can describe a wide range of corporate activities, but for Tide, its main areas of focus are on microbusinesses with one to nine people. They have clients that are larger than that, he noted — many of them, in fact, and partially because the platform is built to expand and grow up with business. However, he noted, the core demographic involves the very small business, often those that are just starting out.

“The freelancer managing their business from an app on their phone during lunch. These are the sorts of people we specialize in,” Prill said.

Tide works with all stages of business development, he noted, including the ultra-new, just-putting-out-the-shingle sole proprietorship. Key to working with that new, nascent business is just making it easy. In most cases, opening an account on Tide takes about five minutes and, by using that setup, a series of tasks that normally follow becoming incorporated in the U.K. and Europe is now folded into that process.

“The people we are working with often are not familiar with setting up a business account,” he said, “and there are a lot of steps involved in setting up a small business — things like dealing with tax authorities. These are the things we are incorporating because this isn’t what small business owners want to be thinking about, [since] they have other things on their mind[s].”

That, he added, is a fact that will remain true of SMB operators and owners throughout the lifecycle of their businesses. They will always have other things on their minds: They want to improve their products, their marketing, their customer relationships — in short, they want to think about the value-added services that boost their businesses, not about the administrative and financial management tasks that are critical, but complex, and outside their expertise.

“That is really what makes this different from corporate or consumer banking. It’s not only about banking; it’s about banking at the center and [building] the services around it,” he said.

Those services, he noted, are about being able to download and automate a data feed between Tide and its accounting services, or self-classify expense codes, or even manage payroll, invoicing or billing. It means gaining access to a line of credit or other financial management tool that is slightly beyond digital banking or payment services.

There are a lot of needs, which is why Tide is working as a platform play, especially since it wouldn’t be logical to build each of the administrative or financial management services a business might need in-house. However, he noted, it does make sense to be the one-stop shop by which SMBs can enter an ecosystem, where they can manage all those moving parts from a single touchpoint instead of what many are currently doing: managing them as separate silos that they are manually truing up.

Keeping Up With The Risk

A more difficult challenge with SMBs, and a challenge set that affects them uniquely, is risk. It’s risk that breaks up over a lot of categories.

The first, Prill noted, is “involuntary churn,” which comes from the fact that small businesses often wink out of existence. Some succeed and grow, some die off. Tide works to make sure that more of them grow up big, strong and healthy. That is good for Tide, but is a cost of doing business in the segments that the company always has to factor into its growth predictions.

The second type of related risk one can run into is credit risk, as small players are notoriously difficult for which to underwrite.

“It is important to note that a lot of players in this segment don’t have credit risk because they don’t need credit,” he said. “There is a clear differentiation between SMBs that need credit and those that do not.”

Among those that do, however, Prill added that it’s critical to lend responsibly, as businesses getting in over their heads is not in anyone’s interest. Tide is not a direct lender (iwoka carries the debt on its balance sheet), but it provides the data and can help make tailored decisions on managing credit risk, and on when and how to award a credit line, since it has so much lifecycle information from the business.

Though Tide needs a longer time frame to evaluate the data in its emerging lending partnership, the data from the early pilots looks “quite good.” The biggest risk area — and the one that has to be a big investment point for anyone serving the SMB segment — is the risk of financial crime, Prill noted. The vast majority of SMBs are legitimate enterprises looking to sell goods or services, but this is just a segment that attracts a handful of bad actors who want to abuse the segment.

“One of the darker sides to this sector is those who want to hide under SMBs to commit financial crimes like money laundering [ML]. For us, that means we will turn away business and not onboard those who meet our KYC standards,” he said.

What’s Next

Prill is new to his role as Tide’s CEO, but he’s long been a veteran of financial services, having most recently served as the chief operating officer at German online lender Kreditech. He has come on board as the firm is embarking on its journey to “develop all the things that make Tide unique,” he said, which expand the platform to go much deeper into business services while also rolling out credit and other financial services. That’s because, on the march to build scale, sequence and discipline are everything, he added, particularly when tracking toward a bigger vision of building out a comprehensive platform.

“When most players go wrong trying to build to scale, it isn’t that they get their five-year plan wrong. It’s that they try to do everything at once and at the same time, and not in a sequence they’ve set about, because it’s hard to do that. It will involve making trade-offs,” he said.

Sometimes, he added, the data changes and the original, sequential plan has to be modified to reflect that.

However, as Tide is now looking to scale its offerings across its platform and is working in a highly competitive market (with banks on one side, controlling some 97 percent of the relationship with potential consumers, and other vertical-specific FinTech firms looking to snap up the SMB segment), staying on pace and sequentially offering what its multinational customer base asks for is key.

“You have to put the resources and the focus behind [to] determine the sequence of your offering, and then always [stick] to delivering the next item on the agenda,” Prill explained. “That’s 50 percent of the secret to success in scaling a platform.”