Will neobanks take over small businesses?

The small business clientele of traditional banking institutions faces competition from neobanks. On top of that, non-banking businesses that don’t market themselves as neo-banks, such as QuickBooks, Square, and Shopify, are also adopting banking products for this market.

Currently, at least 100 fintechs offer digital tools that make cash flow management, accounts payable, invoicing, and other functions relatively easy. A dozen or more neobanks offer similar management tools in addition to at least one traditional banking product like loans, estimates Robin Borelli, financial services practice leader at CI&T, a New York-based digital transformation provider.

Besides digital tools, neobanks aim to provide money movement and agile products. When a customer makes an online purchase, for example, some neobanks can immediately credit the merchant’s account. Quick loan funding is another typical advantage of neobanks, although interest rates may be higher.

Additionally, neobanks could also fund loans faster using alternative underwriting methods, says Peter Wannemacher, principal analyst at Forrester Research. Are neobanks simply better at serving the SME market? “It depends on what a company wants and needs.”

The advantages of banks

Companies that prefer banks do so for three main reasons, Wannemacher explains: “rates, reliability and roots.” Indeed, both bankers and experts consistently cite relationship bankers who have earned their trust as a key banking advantage. But in the near future, he says, banks will need to strategize on how or whether to meet the challenge of neobanks.

Most will strengthen their offerings for SMEs, predicts Wannemacher, although a minority will decide not to expand resources on this front. That’s fine, he says, as long as it’s a strategic decision that there’s not enough to gain by making an effort or not enough to lose by ignoring neobanks.

Some will specialize in an SME niche “which can be based on anything, including geography,” says Wannemacher. Others, most likely large institutions, will target full fledged offerings for a large SME base, he adds.

While neobanks offer quick access to loan funding and attractive product features, their main appeal is the automation of a host of management tasks.

Banks that embrace similar digital capabilities and empower relationship managers to help owners use these tools can strengthen their connection to customers, Borelli says. For example, if a bank offers a billing and cash flow forecasting feature, a relationship manager can work with an owner to discuss the company’s position at different times.

In the opinion of many industry observers, the banks have not met the neobanks with an ironclad defense. But “the strides that community banks and other financial institutions are making…to compete with neobanks should not be underestimated,” observes Chris Zingo, senior vice president of Finastra, a London-based financial services company.

TowneBank, a $15 billion bank based in Portsmouth, Va., has put a lot of energy into cash management software and the mobile experience. The bank, which specializes in serving businesses with annual revenue of less than $10 million, offers a range of digital offerings, including break-even analysis and profit margin analysis. Businesses can also connect their TowneBank accounts to QuickBooks or Quicken.

But that doesn’t mean TowneBank is trying to replicate the neobank experience. Its primary link to its “member firms”—the bank’s preferred term for its customers—is through bankers who regularly visit the sites of current and potential member firms.

TowneBank leveraged its intimate ties and experience with its SME members to guide its purchase of online tools that members were likely to appreciate, says Brad Schwartz, president of TowneBank.

U.S. Bank, headquartered in Minneapolis, buys or builds a wide range of products to “simplify management,” says Lynn Heitman, executive vice president and business banking sector leader.

Regular surveys and roundtables with members of the bank’s large SME client base provide insight into the capabilities needed. For example, US Bank purchased Bento Technologies to expand the bank’s software offerings and improve its accounts receivable, accounts payable and related services.

Informative content on management topics is also available. “It’s the integration of tools and information that’s so powerful,” says Heitman. “That’s what we hear (from companies).”

Digital assistance does not replace the human relationship, but rather complements it, adds Heitman. “Our managers can sit down and skim through a working capital discussion, and share insights and insights from digital tools.”

Marilyn Kennedy Melia is a Chicago-area financial writer.

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