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Wake-Up Call for Banks

It is no secret that banks struggle to effectively serve small businesses. Internal battles to serve these clients have existed within financial institutions for quite a while: battles between commercial banking teams claiming to offer more of the functionality these customers need and the consumer teams promising greater solution ease of use. Unfortunately, in recent years, the size of the battlefield has grown. Banks are no longer just fighting internally and among themselves—a new set of players have set their sights on these customers, and their impact is growing.

Fintech companies are out-innovating banks and placing them at greater risk of disintermediation than ever before. An October 2015 Aite Group survey of small businesses found that 40% of businesses generating between US$100,000 and US$20 million in annual revenue believe technology providers (such as Square, Mint, and Bill.com) are more likely than their banks to offer products and services for which their businesses are willing to pay. An additional 26% believe that statement is “somewhat” true. This belief becomes more widespread as businesses grow in size (i.e., 54% of businesses generating between US$10 million and US$20 million in annual revenue share the sentiment). Yikes!

To make matters worse, banks are doing a poor job of charging for those products they do offer. Fifty-five percent of businesses surveyed state that most of the products and services they use at their banks are offered free of charge. That type of business model will not help banks’ bottom line or get approval for new small-business initiatives! Small businesses are more willing to pay for products than banks give them credit for—especially for products that save time, increase convenience, or improve automation. This should be a major wake-up call for banks. They need to broaden their product portfolios and modernize their pricing models, or risk being nothing more than a place for small businesses to hold their deposits.

These topics as well as improving bank success in the small-business space will be covered in greater detail in upcoming Aite Group reports.