A different kind of small-business-focused bank is about to emerge and these newcomers will look very different than current lenders in this sector. They will provide best-in-class services, no longer treating small businesses as poor cousins within large consumer lending divisions. And some will target a single niche, tailoring their services to a specific type of business.
Innovations in fintech, driven by big data and artificial intelligence, are converging to create a new world for small businesses. Now all of their financial services can be interconnected, predictive, intuitive and readily available. And business owners can focus on what they do best — running the business, rather than trying to be their own financial adviser, payroll clerk, loan officer and more.
This is a world where Alex, a local coffee shop owner, will be able to pull up her small-business dashboard on an iPad. She’ll look at a graph in the upper right corner showing her predicted cash position at the end of the week. After payroll expenses, she’ll see there will be $5,000 left. She’ll wonder whether she should make a payment on the term loan she took out two years ago to start her shop, or buy a much-needed espresso machine. Her robo-adviser will tell her: “You can do both. Given your expected sales for the month, you’ll be able to use your savings to pay down the loan and put the espresso machine on your credit card, which has available credit of $3,500. When the credit card payment comes due, you will have the cash to pay it off.” With a few swipes, Alex will make the loan payment and buy the equipment.
This intuitive and seamless banking experience has its roots in the fintech disruption that began in earnest around 2010. Small-business owners were still reeling from the Great Recession when credit markets froze. A slow recovery exposed both the cyclical and structural challenges in the small-business lending market. With banks hesitant to step back into the market, particularly for small-dollar loans, others stepped up.
Technology has helped overcome two of the longstanding frictions that have plagued small-business lending. The first is information opacity; it is very hard to see inside a small business’ operations to determine if it is creditworthy. The second is that all small businesses are different. The auto repair shop is unlike the landscaper. This heterogeneity makes small-business loans riskier and more complicated to do than consumer loans or mortgages.
But new data streams are available through increasingly ubiquitous application programming interfaces, and fintechs, traditional banks and tech companies like Amazon, Square and PayPal are creating new credit algorithms, which are likely to become increasingly predictive. As that happens, small-business lending can become much more profitable.
Digital banks will be able to serve a national footprint at a low cost, and specialized banks, which focus on niche business segments, will become a new competitive factor.
These small-business banks of the future will provide an integrated gateway to loans, lines of credit, payments platforms, business intelligence and numerous other products and services. They will create easy-to-use digital experiences that cater to the time-strapped small-business owner and automate functions that used to require paperwork or a trip to the branch. Yet they will not abandon personal relationships. Whether it is by telephone, online or in person, the successful banks will find ways to feed the insatiable need of small-business owners for personal advice.
Specialization, or focusing on small businesses in specific industries, is one way banks will improve their expertise in underwriting and deliver more customized services and advice. As the best solutions emerge, word of mouth, facilitated by online small-business communities, will send customers flocking to the provider.
Who will be the winners? It could be anyone — whether Amazon, new entrepreneurial entrants like Starling Bank in the United Kingdom, or community banks that have deep small-business customer bases and find new ways to serve them in the digital age. Small businesses already expect more from their banks, and that trend will accelerate.
