American Banker Small Biz Banking:

The vast diversity of Small Businesses requires nuanced banking solutions and experiences

The American Banker Small Biz Banking conference took place this week, November 13 – 15, in Nashville TN. It was my first time at this conference and my first experience in Nashville. Both exceeded my expectations! I was impressed with the keynotes and panel discussions with leaders bringing unique perspectives and some conflicting opinions.

The mix of attendees across community banks, credit unions, larger banks, and digital-first small business fintech providers created some interesting conversations, particularly around digital innovation and the importance of human relationships. The small business banking market is vast with many different sectors and approaches—and it was fascinating to speak with a wide array of providers serving the industry.

Here are some themes that emerged from the many conversations:

Advances in technology and access to external transaction data can allow banks to look beyond their internal data to better understand their customers. Banks now can augment internal data with external data to achieve a more holistic and real-time view of the health of a small business which could have a profound impact on marginalized customer segments and communities. Despite its power, there will be challenges for the industry. Customers still need to gain comfort with sharing their transaction history, and data is not uniform across the lenders. Standards and a common framework are needed, including consistency, reliability of connections, and security.

Marginalized customers have had difficulty accessing small business credit. This was highlighted during the pandemic when marginalized small business owners who needed support most were not getting it. Recent regulator activities, including Rule 1071, illustrate their position that small business aligns more with retail/consumer versus commercial, and this focus will continue. Small business bankers need to strengthen compliance efforts to meet regulator expectations. Rule 1071 is a fair lending rule, not a data collection rule—and it is not going away. Banks need to keep their foot on the gas pedal and spend time preparing before their lending decisions and data are published for all to see. The CFPB will be looking for good faith efforts of banks to implement the rule into bank policies and procedures, validating the accuracy of data, developing effective training programs for data collection, and timely and accurate data submissions.

Small business lending has slowed considerably. Banks have modified their risk appetite and small business owners are more hesitant to take on more credit given increased interest rates and market uncertainty—they are in a “wait and see” mode. As a result, banks are shifting some focus toward ancillary services and core small business banking needs such as receiving and making payments.

Banks need to constantly innovate to stay in the same place or they run the risk of being left behind. Building from scratch takes time and is expensive. “Speed to market” requires partnering with fintechs. There is a need to work with them to enable better banker and customer experiences — anything to create ease, speed, ancillary service, or the ability to get to “yes” more often. Banks are partnering with fintechs to strengthen operational capabilities (e.g., analyzing alternative data for LMI lending opportunities, fraud decision engines, compliance support, etc.) and to provide complementary services and experiences to small business customers (e.g., small business cash flow visibility and forecasting through a visual platform).

Generalization will not work any longer and banks should be approaching the market with unique specialization and product bundles to solve nuanced small business needs—for example, the banking needs of a doctor or dentist are very different from an agriculture business—further, size matters. Banks are resetting their philosophies away from being “lenders” to being “bankers.” Some best practices include focusing efforts to deepen the relationship within the first six months of the relationship and forming integrated teams of the relationship banker and specialists (e.g., payments, wealth management) to have conversations with small business owners to uncover specific customer needs and goals to create a compelling value proposition for that customer. One small business account relationship can lead to new personal accounts, wealth management, mortgages, home equity loans, employee accounts, etc. Small business deposits are the most attractive compared to deposits for other customer segments, given their lower cost/interest rates. With the increase in customer churn because of bank failures this past Spring, product bundles can help improve the stickiness of small business deposits.

Digital is accelerating but the extent and perceived relevance differ greatly by customer segment. Many discussed the requirement for a human element (even with digital onboarding) to cultivate the relationship and support the business owner in specific situations (e.g., fraud events) and for overall advice. You can automate transactions, but not trust, and you need bankers where the people are. Even some digital-first providers discussed the need for bankers, whereas others are delivering on customer experience and not on relationships. These differing approaches can still succeed and work well for the intended customer segment.
Significant opportunity exists for automation across many aspects of small business banking (onboarding, marketing/prospecting, underwriting, compliance). Technology investments are most commonly going towards mobile banking, security/fraud, and automation to serve SMBs.
Digitization and e-signatures come with a cost of fraud, which has increased significantly in recent years. For example, there has been an increase in corporate identity theft of dormant companies, with fictitious tax returns or even payment of tax liabilities and penalties to put the business in good financial standing to subsequently take out loans across multiple banks.

Small businesses are incredibly diverse, and their owners have varied financial service needs. They are passionate about their businesses, not necessarily specific bank products. The industry is working hard to better support small business owners’ needs and experiences —with the dizzying array of small businesses it makes sense there would be different approaches to solving their banking needs. This is a fascinating and complex market sector with the potential for great value creation as providers continue to dive deeper and deliver nuanced financial solutions and experiences.