While the problems in the banking sector that began with the failure of Silicon Valley Bank (SVB) have so far remained contained, recent news has nevertheless unnerved businesses and consumers with memories of 2008. Inflation too remains stubbornly high and, while the banking sector seems to be stabilizing, august voices like Jamie Dimon of JPMorgan warn against complacency.
This uncertainty has a particular impact on small and medium-sized businesses (SMBs). These businesses are the backbone of the economy and of communities across the U.S. Unlike corporates, however, SMBs often have far more delicate cash flows and fewer capital reserves and are therefore more vulnerable to economic shocks.
So, as we face uncertain economic headwinds and jitters in the finance sector, it’s unsurprising that SMBs are rethinking their banking needs—as highlighted by a recent survey from the National Federation of Independent Business. Reflecting the recent news from the banking sector, 51% of small-business owners revealed that they are slightly or moderately concerned about the health of their bank, while nearly a fifth (19%) said they were very concerned.
Alongside the things that concerned them, the survey also revealed the core services that SMBs value when it comes to their banking provider. These included good customer service, convenience and online banking capabilities.
Back To Main Street?
All of which present an opportunity to Main Street banks.
The last decade has seen the prolific growth of the fintech sector. Driven by technological innovations in mobile technology, artificial intelligence (AI), analytics and ever-more-advanced user interfaces, fintech investment globally ballooned from $61.1 billion in 2015 to $238.9 billion by 2021.
2021 was a bumper year, driven in part by investment decisions that had been delayed due to the pandemic. Nevertheless, 2022 saw a significant decrease in investment. Similarly, the fintech market has been diversifying into regtech and other business-to-business (B2B) services, so investment into fintechs providing core banking services may be even less.
Difficult economic circumstances always lead to a degree of consolidation in emerging tech markets, and fintech is no different. Where does this leave SMB customers, however, who enjoy the convenience, analytics and digital-first services fintechs provide, but feel uncertain about the market and worry about an over-invested tech sector?
This is where Main Street banks can step in and claim back some of these customers. The key for the big banks is partnership. Building great fintech from scratch is challenging and time-consuming and doesn’t align with a bank’s natural skill set.
Teaming Up With Tech
It’s no secret that recent years have seen Main Street banks lose market share to fintechs when it comes to SMB lending. Research indicates that between 2013 and 2018, fintech business lending grew from $121 million to $2 billion, as customers increasingly opted for functionality and convenience when it comes to finance, over the reliability of Main Street banking.
With customer satisfaction with digital-first lenders lagging behind Main Street banks, however, could it be that fintech lending is plateauing and the scales could tip back toward traditional banking?
We’ll never go back to the days of making physical deposits and withdrawals at a physical bank, and neither would we want to. But by working with tech partners, banks can give themselves two significant advantages in the hypercompetitive world of digital finance.
First, they bring a degree of brand recognition, trust and caliber that customers will always respond well to. After all, a key priority for SMB customers will be to know that the institution to which they entrust their funds or from which they borrow is safe and reliable. The collapse of SVB and subsequent events have shaken trust in fintechs and the tech sector more widely. Well-established financial institutions with long histories are well placed to step in and provide that trust.
Second, larger financial institutions have larger data sets, although these are not being harnessed fully at present. But imagine if they were. What if banks could utilize their data to develop customer-focused insights? To forecast exactly when an SMB might need credit to get through a seasonal lull or to invest in further growth? Or if they could use data to help SMBs forecast year-over-year (YoY) income and returns at the touch of a button?
By onboarding the right tech, they can. This means all the tech and convenience that comes with a fintech, but all the reliability and institutional capability that comes with a bank.
Whether the current banking crisis escalates or not, competition for SMB customers will continue to grow as digital-first players continue to develop. With uncertainty abounding, however, well-established banks have an opportunity, albeit a time-limited one, to harness their natural advantages here and offer SMBs both the reliability they crave and the tech that helps them take their business forward to success.
This is good news for customers, but also good news for banks. With the right technology and the right approach to data, banks can grow their merchant acquiring opportunities all while giving customers the services they need, right when they need them.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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