Disrupting small business banking
Recently I’ve been helping start-ups and it has reminded me of how poor and uninspiring small business banking can be.
Yes, there are a number of digital players out there with super easy onboarding processes and nice mobile banking user interfaces (UI’s) similar to the likes of Monzo. However when it comes to banking there are serious shortcomings in service both with traditional banks who appear to make it really difficult for you to open an account, versus digital players that make that easy but just offer very basic banking services with serious limitations. I’m not going to name and shame, but I really do recommend that CEO’s actually try the services for themselves and purposely make sure that they make mistakes in the onboarding to see how painful it is once you are off the happy path!
I shouldn’t really be surprised that I’ve also found very little useful innovation let alone disruptive thinking in the space. But those that know me, know that I’m not just a critic. I’ve presented a talk on small and medium-sized enterprise (SME) disruption years ago, so for those that haven’t been to this presentation here are five ideas for SME banking:
Traditionally banking for businesses revolved around branches. Typically, you open an account near your business and get assigned a banking manager who happens to be the same person that looks after the hairdresser, butcher, solicitor’s office and chip shop. They may have one or two software/technology businesses. They understand balance sheets, P&L and how traditional business works, but generally not the idiosyncrasies of specific business types.
For example, I had to explain in software why our revenues were lumpy (licence deals) and why after strong signings we generally had a year of lower profits (as we focused on servicing those licences, and service have lower margins). Every business type has its nuances so one person servicing multiple business types is going to find it near impossible to provide advice in line with your exact business.
So, isn’t it time banks start centralising the key business advice / expertise such that a business manager only looks after software businesses or hotels or high street retailers? By specialising their role, they will better understand the business and their understanding/learning will get stronger overtime as they see best practices from high performing companies in the same space.
Real time business banking
Small businesses typically live by cashflow and not P&L statements. In high growth businesses like software this is not always the case because they are typically funded by venture capital or investors. However, for the majority of small business cashflow is king and banks are their main option for finance. Whilst the bank account shows actual status of cash in the business, the P&L statements are useful for predicted revenues and costs and this is produced by some accounting software. The two sets of data essentially live separately, though banks do allow you to link your account to third-party accounting like Zero or Sage.
This surprises me, valuable banking data is given to a third-party and the bank has no access to it. Instead, the bank has to ask the business for a copy of the accounting information. If a bank could provide their own accounting capability, it would have a number of benefits: it could charge for the accounting service (or take margin on a third-party service that is embedded), it would have real time cashflow information rather than the dated info typically provided, and it could easily see business trends. I’m sure there are other benefits you can think of and I’m confident the benefits outweigh the disadvantages. Having acquired FreeAgent I’m surprised that RBS (NatWest) have seemingly not already done this, let alone make it easier to open a RBS business account from FreeAgent.
Beyond business banking
Business banking today still follows the traditional model of banking that is to provide purely banking service and products. As a previous owner, I’ve never felt the bank has cared about my business other than when it could profit from me, like giving me a loan when I least needed it and not when I most needed it. Generally, the goal for a bank is to take the least risk and to make the most profit from their customers.
Looking through the lens of the customer I believe that when goals are aligned then both parties succeed together. If the bank measured success based on the growth of a business or its profitability it would generally be aligned to most business owner’s goals. The perspective should be that “the more successful I can help make this business, the more they are likely to stay with us and take more products”. This would require the bank to take a proactive role in a deeper understanding of the business, marrying it with best practices from successful businesses. I am sure this is a strong use case for AI rather than trying to just use people. Combining this with the bionic approach above would create a compelling mix of understand and care/empathy that business customers don’t get consistently today.
Business open banking
Whilst the Second Payments Directive (PSD2) drives banks to create a base set of API’s to provide account data and make payments, most banks do little to open up banking and to drive innovation and choice through third-party providers. Whilst there are some exceptions like Starling Bank for retail customers to name one of a few players, I haven’t found a clear role model in business banking. Ahead of open banking, Saxo Bank provide one of the richest sets of API’s for wealth management and is a great example of a bank that believes opening up is a better defence in digital than just complying.
By opening up more than the basic API’s banks can try to create an ecosystem of third-party providers that can support general or very niche business use cases. For example, Hammock uses open banking to notify landlords of late rent payments and to manage their rental portfolio. In the same sector, LegalforLandlords uses open banking to better risk check tenants. Both these examples can help landlords be profitable, and a profitable business is one that will invest more.
This idea is not mine, it’s one that I consulted on for a bank in the dot com era. The idea was simple and now not a new concept, create an online marketplace for businesses. Every business uses a multitude of third-party services for examples accountants, solicitors, stationers, or couriers.
Why couldn’t a bank provide the equivalent of “trusted trader” for business, or an open marketplace for business services?
Clearly these are just ideas, the winners are that execute well. However, as I have seen in the retail banking side, the focus on digital business banking generally tends to be on “better banking”. As a previous business owner and being involved in multiple start-ups I know businesses want and deserve much more than simply better banking. I’m just saying, I think what we (business owners) really want is an experience driven bank that focuses making business be profitable and to grow.
Dharmesh Mistry has been in banking for 30 years and has been at the forefront of banking technology and innovation. From the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.