Payments Meets Small Business Finance

Transcription:

Keren Moynihan (00:08):

Hi everybody. How's everyone doing after the post-lunch slump? Everyone good? Yeah, everyone excited? We are going to make this fun and interactive. No online polls, simple shows of hands, and it will be a lot of interesting facts that we're going to bring to you today. So I'm Karen Moynihan. Yes, CEO of Boston Insights. We just heard the last panelists from Nymbus say that you got to look at the data. That's what Boston Insights is. It's a data and generative AI company. We give access to the data on your business customers that you cannot get internally, accounting, payroll, tax, sales, and we present insights on when they need deposit solutions. Payment solutions. We're working with 80 banks, credit unions and fintechs. And I'm going to leave it to my fellow co-panelists to introduce themselves. You'd like to start Christina? Sure.

Christina Riechers (01:05):

Hi everyone. Christina Rikers. I'm the GM of Square Banking. Square is a business that serves lots of small business owners, several million of them. We started out with what a lot of you might know as the little white reader 13 years ago that allowed small businesses who had largely been left out of the ability to accept credit cards, the ability to do so. They got a free reader, they signed up in five minutes and we treated them as innocent until proven guilty that they could conduct business accepting credit cards. So fast forward a few years down the line, they were taking payments and we saw that they loved getting their funds instantly. I launched a product called Instant Transfers. Lots of them ended up paying for it. I asked why are so many small business owners willing to pay to get their sales instantly? And that led me down the rabbit hole saying, ah, it's because they have massive cashflow problems.

(02:03):

Some of them have a literal cashflow gap and they're willing to pay to not miss a payroll run. And others of them, they didn't start a bakery because they care about accounting. They just want to make sure they had enough in their account for when they needed it. And I saw the peace of mind that really was lacking when it came to what they could do with their cash when they're baking. So ended up launching Square Banking about seven years ago, and today we have small business checking for free savings accounts and then a lending product. And we serve about a million small business owners in the US and globally.

Keren Moynihan (02:42):

What other countries?

Christina Riechers (02:44):

we're in Australia, the UK, Japan, Canada, Ireland, France and Spain.

David Hiller (02:55):

I'm Dave Hiller. I'm with Truist Bank. I'm responsible for deposit products right now. I spent the last probably 13 years of my career in small business, whether it's on the lending side, the credit card side, deposit side, marketing segment strategy. So love the small business space, love being here with you all. I mean, we're all in it for one purpose and that's to serve our small business clients. So it's great to be here to share ideas, love being on stage with as banks, we always talk about the fintechs who are about to eat our lunch or eating small pieces of our lunch. So it's great to be on stage with Christina and just share the love of small business together.

Keren Moynihan (03:36):

I promise. No fighting.

David Hiller (03:38):

We might argue.

Keren Moynihan (03:40):

Actually for real, when we were preparing for this panel, there were some differences in opinions and it had to do a lot with client expectations, which we've talked about. There've been a couple themes in this conference. One is that product is not a thing. You're supposed to be delivering value, not cash management value, not a deposit account. And yet that's how we all measure ourselves and we did not always agree on what motivates the SMB because you have the point of view of a bank that's serving the SMBA FinTech that's serving the SMB and someone who is dealing with banks and fintechs. So that's the first question we want to talk about. How are we meeting expectations and what are the new things that we're rolling out in 2023, 2024 in order to really get that market share? Who would love to start?

David Hiller (04:32):

I was thinking about how have small business client needs changed over time. And a couple things I don't think have changed. One is that from the very beginning of my time working in small business, our motto is always simple, easy, fast. That's what small business clients want. I think that's what they still want. That's still sort of the theme of what they're looking for. They don't want to spend a lot of time on their finances, but they want it to work. I think there's an embedded layer of it's got to be secure and it's got to be good value there. I also think most small business clients still want a personal touch. And in truist our approach is what we call T three Technology plus touch equals trust. I think that as a theme for the majority of small business clients is still there. A couple ways I think client expectations are changing is they want to see more integration.

(05:26):

They want to see, they don't want to go to 10 separate places to do their financial business. They want to see more of their accounts and solutions in the same place on the same screen, particularly within their bank. If they've got multiple solutions within a bank, those have to be integrated. And secondly, I think they're wanting to see much more fluid integration between channels. So what we say is that, or what we see is our clients want to be able to use the branches, they want to be able to call in for service or sales and they want to be able to do anything they need to digitally and those things have to work together. And a couple things that we've done just over the past year to answer your question, we've launched a small business direct sales team that the branches can access, our small business clients can access directly.

(06:17):

They work together with the branches so they're not competing with the branches. But when we do marketing, even if it's digital marketing and provide an option for the client to either open an account in the branch or calling or online, we get a really good blend of clients opting for each of those channels. So I think that's one thing, just making sure our channels work together. The sales team has been really, really great for us, really fantastic for our clients. And the second, I'll say just by way of simplicity, sometimes it's about client perception. We launched a product that we called Simple Business Loan this year. That's exactly what it is. Application, no financials decision the same day funds the next day. And our clients love it. Our clients love it. And part of the magic was calling it Simple Business Loan just like that.

Christina Riechers (07:10):

I love it. I mean a lot of that resonates. I think for us it always starts with what is a seller, which is what we call our small business owners. What do they need? And I think ease of use and speed tend to be the top reasons that then in many case, our small business owners forego that element of in-person connection or they maybe get it from their personal bank when needed and not from Square since we don't have branches. Integration actually really similarly is where we play a lot and we think about cohesion particularly with the revenue and with their sales. So I'll give you an exact example of something we launched recently we're building on, which is, we'll call it IT score savings, but actually to the comment here, we may or may not actually just do away with some of these names like savings and checking because what we're realizing is fundamentally what sellers are using it for and love it for is budgeting.

(08:08):

Here's how it works. So you imagine your cafe, you take payments with Square, you have to pay rent every month, you run payroll every two weeks. You have some supplies and other things. If you're also a small business owner who never goes on vacation, we encourage you then to set up folders, set up a folder where 20% of your sales automatically goes into your rent folder, have 30% of your payroll automatically go into a payroll folder. And then when it comes time to run these, then you can just spend directly from it and know that you have money there and you're not doing that complicated mental math that sellers often are right of like, do I have enough money coming in today? What's my account balance look like? Can I run this one? We're kind of taking some of the mental math out of that and saying how much you spend on these different things, just have the funds automatically and instantly go into those folders and then when it comes time just pay it from there.

(09:04):

And so the types of magical things that we're doing are if you're using Square for payroll, we are watching can see your labor hours. We can see how your payroll run might look a little different next week than it did two weeks ago. And so we have the potential, we don't do this yet, but you can imagine very easily we say, okay, instead of 30% for payroll, let's kind of up your hold rate that we're putting aside to 33% are down to 27% such that you can have the right amount in there, but more, not less when it comes time to run payroll and you go hit a button and you instantly run payroll because we have access to those funds in the account. And so it's all fast. It's the sales from that same day can be used to run payroll that same day to go out to your employees and we just take one more thing off their minds and that's really our goals. How do we give them time back and everything that we do and how can we leverage technology to do that?

David Hiller (10:02):

I love what you said about even thinking about the naming conventions differently. I think if you've been with a bank a long time, you're sort of stuck in bank product names, the client doesn't care, right?

Christina Riechers (10:13):

The client doesn't care. And in this case it's like actually I want 10 folders for these different things. Or actually, I don't want to mess with that at all. I just want one where I want all my funds to come into this operating account that I spend from. So that flexibility, like why should it matter whether you have one or 10? It's just you hit a button and a new one appears. It shouldn't be a big lift every time that you want to open a new, I put account in quotes, it doesn't have to be an account. You can kind of decide if it's a layer on top of it that is a differentiated account or not.

Keren Moynihan (10:44):

I would say that businesses want two things. They want to grow and they're not sure how. And the second thing is they want to pay and be paid and both of those things, and I'm talking now as a former business banker, commercial banker, myself, someone who sells to banks and as a business owner are unbelievably painful. And I think everyone in this room agrees on a philosophical level. We got to put clients first and we've got to make it happen and make it easy and make it fast.

(11:15):

Personally, I have not experienced easy and fast, and I do have a bank that has done away with checking and savings accounts, which is absolutely such an easy win to have. The challenge is that it's really hard to get things done internally and prove it very quickly because when we're outside trying to make tech changes, we have to show a win so fast. It's just impossible. And the SMB always suffers as a result. A big example of that on the data side is that most banks are using the internal data they have and they only have a fraction of that SMBs business, so they can't see a full picture. So as a business owner, you are spending real hours trying to cobble together your full picture to make decisions and when they're polled, MasterCard did a poll, 86% of businesses want faster access to capital, and what they're getting is solutions around deposits and not solutions around capital. And they wish they had a dashboard to show everything, every financial relationship in one place so that they could see how much money they have to make payroll. So I think that's where the dichotomy comes. So we're going to ask our first poll question. Is everybody ready to vote with your hand? Can every, yeah. Okay. In the next 10 years, will banks still be the dominant player serving SMBs?

(12:45):

Vote yes.

(12:49):

Okay.

David Hiller (12:50):

Christina, you got to vote now.

Keren Moynihan (12:51):

Vote no. Vote that fintechs will.

Christina Riechers (12:54):

I was told I should be controversial.

Keren Moynihan (12:57):

We have a data person, a very solid intelligent data person voting for the fintechs. I mean, the first time we asked a question like this on a panel, it was when people were shocked at Radius and Lending Club. So all right, we're going to argue the point back and forth. So why yes, for banks to be the dominant player and why no?

David Hiller (13:25):

I think it's mainly two things. One is banks have scale and we are doing a tremendous job. We've heard examples over this conference of either taking a page out of the FinTech book, partnering building, and so I think we are going to see a lot of evolution in the way that banks go to market that looks a lot more like a FinTech, but keeps the sort of heart of the bank. Many of us operate in community markets where that sort of ethos is important to our frontline teammates. I think keeping that and going full board digital in terms of client capabilities is going to keep banks as the dominant providers, but I do think we're going to lose share for sure.

Christina Riechers (14:13):

I'll give you a reason why banks might not. We have square loans. We lend a billion dollars a quarter. The small business owners in the us, our average loan size is under $8,000.

(14:30):

It's all automated. What we do is we're watching payments data come in from our small business owners and we extrapolate what we think the payments going forward will be. And so what your ability then to take a loan is, and we will send you an email. We'll say, Karen, you're effectively pre-approved. We use slightly different verbiage for a $10,000 loan. Click here if you want to. We've pre-filled your information three minutes later. If you have square checking, we approve the vast majority of them immediately and those funds are instantly in your square checking account.

Keren Moynihan (15:05):

I have a question that we didn't plan for on yesterday's panel. We define different banks are defining SMBs differently and usually it's by revenue, which is not how an SMB would define themselves. I heard someone say No business calls themselves small, so zero to 10 million, zero to 25 million. How does square define small business?

Christina Riechers (15:25):

Zero to 10 million is what? That's in revenue. That's definitely our category. Zero to 10, the vast majority are less than 10 million annual revenue.

Keren Moynihan (15:31):

Would you say less than five?

Christina Riechers (15:33):

Yes.

Keren Moynihan (15:34):

Okay.

David Hiller (15:34):

In terms of number, that just makes, I mean that's just how the numbers stack.

Christina Riechers (15:38):

Yeah, I mean there's definitely some, if you imagine you have a restaurant has two locations, so they're going to be maybe in the 5 million annual revenue ballpark. So those are some of our larger clients, but we're serving everyone from the coffee shops, the restaurants, the hairdressers, the contractors, et cetera. Okay.

Keren Moynihan (16:05):

All right. Onto the next question. Has the payment industry caught up to the small businesses' needs? I will never vote yes on that one personally. Okay,

David Hiller (16:15):

I'm going to say yes and no, and I brought a client quote that I want to read you directly because we were doing some really research, sort of marketing type ethnographic research on what client bill pay processes actually are by getting into their workflow. And this is going to sort of shock us all, but here's a quote from one client I keep a spreadsheet of when we get an invoice, I put it into the spreadsheet along with the due dates and just stay on top of that. I also have it written down if it needs to be a check or pay online or they take credit card. So I've got it pretty well organized.

Christina Riechers (16:57):

I think they have extremely organized.

David Hiller (16:57):

From the client's perspective, they're, we would look at that and think, oh my gosh, why don't you automate all from their perspective? They're making it work with what's available and sort of what works in their system. And every client has some kind of system of sticky notes, online spreadsheet or whatever and they're making it work. So in that sense, I would say yes, we are meeting the payment needs for paying and getting paid because people are paying and getting paid, but there's a lot of friction in the process and a lot we could do better and a lot of innovation. I love the innovation happening in that space and y'all are a big part of that.

Keren Moynihan (17:36):

Well, I am one of those type A folks who would create that spreadsheet, but do I want to create that spreadsheet or do I want to go and grow my business? And here's the thing. Every time I create an invoice, personally I'm annoyed and statistically business owners, 32 million in the US and actually at lunch someone told me, but really 8 million active are all annoyed to have to do that. We've all talked about APIs for 10 years now. After I create that invoice, I get to go and manually put in those payment details to request that I get paid. So now I've had to do the same work twice because we all have computers and we're just not using them when we have bi-directional feeds to accounting software and none of that is actually required. And it takes so much time. And the whole reason accounts receivable days were at 90 was because of the time it took to mail checks.

(18:39):

But yet average days that businesses take to get paid is still around 90. In fact, when I was a banker, that was what was responsible for me meeting my numbers every year. I look manually at my book, how many business owners were getting paid in 90 plus days, how many had good debt service coverage? I gave them that bump to their operating line and we had a winner for getting your numbers met. None of that has to be manual. Even if we are really good at spreadsheets, I feel like we have to start making it really easy. And also, why aren't we telling business owners your average payday here is coming in 90 days, but everybody else in the industry serving a lot of other SMBs in your space are getting paid in 50 days. And here are the things that we gave to the other businesses to make that happen. I feel like it's a win win.

David Hiller (19:33):

We launched Zelle this year, which as you all know is instant payments and we've seen tremendous, tremendous usage growth both on the send side but also on the receive side. And I think that's been a big win for our smallest micro businesses who even if they don't create an invoice, they could have a Zelle request to pay and the money's in their account immediately. And so I think we will edge businesses out of all some of those manual processes. I think the more we can integrate the digital payments and the easier we could make it so a client doesn't necessarily have to sort through well, is it an ACH or is it a wire? Is am I supposed to write a check? We've got to sort through that clutter as financial institutions to make it easier for our clients.

Keren Moynihan (20:27):

So suddenly we have five minutes left, so I'm going to just improvise here. One real, and this is an ongoing discussion that David and I keep having. Is internal data enough or do banks need external data on business owners, private business data in order to compete? And the argument we're having is will business owners actually share their financial data coming from their accounting systems, their sales systems or payroll systems? Are they willing to share that information and do banks need it in order to compete? Who thinks that banks need banks or fintechs need access to external data? Raise your hand. Okay, I love this room. You're all invited to the party that I'm throwing after because you're voting on my topic.

David Hiller (21:17):

I'm going to put half a hand up there and I tell you why we're having this argument. I feel over the past couple years, we've done a lot with our internal data in terms of mining transaction data to do more cashflow based loan approvals, which has been fantastic, versus relying just on credit scores. We've used it to deliver much more intelligent and targeted sales leads to our front lines. We've used it even to serve up client insights in digital banking, all using our own data. And I think every client that has a checking account with us, we have a treasure trove of data and I think banks historically have not used that as effectively as we could have with clients. So to me, that's job number one. Using our internal data. I would love for every client to permission their accounting software, all their other banks, all their loan accounts. So I have access and can see all that. My argument with or debate, debate with Karen has been you've got to show a client real value to permission, all that. It's got to be very, very clear use cases where you can show real value. I think they'll do it, but unless it's very, very clear, why would I share all that with you?

Keren Moynihan (22:32):

And to be fair, truist has done a lot with internal data more than most financial institutions. You've really made a study of it.

David Hiller (22:39):

But I want external data. I want all my clients to permission all the data. I just don't think they will.

Christina Riechers (22:46):

Well, I think that's also shifting. You see regulation in Europe and with open banking in the UK where folks are getting a lot more comfortable sharing it. So I think it does fundamentally come back to it's like first you need to prove to them that you know what you're doing with our internal data. If you're doing things that to them look silly and they say, you know all that about me, why are you asking that? Or Why are you not showing me that? It's going to be hard to convince them that you'll actually make good use of their externalize. It's like start using your internal data really well then have a very clear carrot. What do they get if they share something with you? It needs to be very clear, especially at the start when you have some skepticism there, show them the value they get out of that, and then you can continue to build off of it.

(23:32):

I do think over time customer preferences or I guess comfort with sharing that is going to grow assuming that it is used responsibly. And I think the regulatory landscape here is going to be catching up to have some constraints on there to hopefully ensure that that is the case.

David Hiller (23:52):

I think that we don't think we're feature selling, we have all the best stuff, but that is what we're doing when we show. I asked a question yesterday who's looking at the financial insights on your personal accounts? I kind of want to ask the same question here. Is anyone looking at the financial insights on your personal accounts that banks have spent millions of dollars deploying so that we can get educated? Are people using it on a regular basis? Raise your hand if that's the case. See, because it doesn't matter how much you're spending on gas, I don't care how much I'm spending on gas or groceries.

(24:27):

What I care about is my kids are 10, eight and seven braces are coming up and then cars are coming up and then university is coming up. That's what I care about. But we keep making it about, from our point of view, we need to make it from their point of view. And the biggest thing that they want to know is how much money do I actually have across all of my accounts and what can I do with it to help my business grow? And a lot of banks have wealth management departments, they could easily inform them, how do you get from zero to 1 million in revenue in your industry? What are some best practices that people have done? How do you get from one to five? How do you get from five to 10? Although then it's not in the sweet spot for everybody, but this is the thing that businesses care about and they don't care about any other term. So if I'm going to show you a balance sheet and income statement, I don't think businesses care what they want to see is how they're going to make it because a lot of them shut down with the whole 10 minutes. I'm completely lying, we're at time, but with the time we have left, we want to open it up to questions. Does that work? Sure, yeah. Any questions?

(25:41):

Do not all fight to ask a question.

Audience member 1 (25:49):

Okay. You talked about banks versus fintechs and we mentioned it a little bit, but what about accounting systems getting more into embedded payments? What do you guys think about that, especially in verticalized accounting systems? How is that going to affect market share for both players?

David Hiller (26:05):

I would say that to me is a big unknown. I think there's a lot of potential for vertical software providers, whether the whole package, the vertical of business operations package and the embedded finance and banking within that. Personally I view that as a potential threat rather than an actual threat today for the most part, just looking at our clients and our data. But I think it is a real speaking from the banking standpoint, I think it is a real potential threat.

Christina Riechers (26:44):

I'd say you have banks, payment providers like Square, you've got accounting software and everyone's sort of starting to come together and sort of converge. And so I think that is happening and I think that is natural. I think where you see some of the accounting players having first made moves, which makes a lot of sense, is more in services. So it's like who are the customers that are already spending more time in the accounting software perhaps starting to send invoices from them. Okay, can we actually lend underwrite against those invoices? Have knowledge there. So I think you'll that where different companies find their niche, know who their customers are and know what proprietary data they have, where they can find a unique way to underwrite and serve them differently. And then we'll continue to build off of that. I would say that there are accounting softwares that have clearly made a play for the market share and there are those who are selling to banks as a customer. And the reason they do that is to create a stickier client. So if you're doing accounting software, something you use every day as a business owner, and if you have that and then add invoicing on top of it, you're not selling them a checking account anymore or a payment solution, you are really the CFO for them. The outsource CFO and the innovative banks that we're chatting with are embedding that just as a way to create a stickier client relationship.

David Hiller (28:14):

All right.

Keren Moynihan (28:14):

Is that okay? Thank you guys.

Christina Riechers (28:16):

Thanks everyone very much.