How Fintech is Reshaping SMB Banking: Key Insights on Unbundling, Embedding, and Innovation

Alongside Felipe Penacoba Martinez, CIO at Revolut, David Jarvis, CEO at neobank Griffin and Melinda Roylett, Managing Director of Merchant Services at Lloyds Banking Group as well as host Ioto Iotov, Founder and Managing Partner at Main Set, our CEO Fiona explored the dynamics shaping the future of banking clustered around three themes; Unbundled, Embedded, Reassembled. 

So, what do each of these themes tell us about where banking is headed?

Unbundled

Recent decades have seen the financial landscape fragment. 

Where once finance was dominated by a handful of long-established banks, the twenty-first century has seen the rise of neo and challenger banks, fintechs, paytechs and a whole range of other financial services. This unbundling was driven by a pace of innovation which banks couldn’t match. A whole host of fintechs built models based around the rapid creation, iteration and testing of products, keeping the solutions that work and ditching those that didn’t. 

In this world innovative fintechs focused on delivering one amazing product with an obsessive focus on customer outcomes, and then built businesses and product ecosystems around this product. For banks - where products are developed in suites and over the course of years - it has been difficult to keep pace.  

For retail and SMB customers alike, this has meant more choice and innovation and a move away from the one-size-fits-all approach to finance that had once been the norm. But unbundling has also brought challenges. As explained by Fiona to the panel:

Eight years ago when I was founding Pollinate, SMB banking meant a beautiful app. Banks had made opening a business account an easy, digital experience. When it came to the SMB taking payments however, the experience broke. 

All but the biggest banks in the world use third party payment processors. So, SMBs trying to take payments with a banking app, often find themselves redirected, often to fill in a ten page form and wait a week. Pollinate was founded to meet the challenge of fully onboarding a merchant in 15 minutes, not asking any questions for which banks already had an answer and completely integrating transactions into business bank accounts, giving banks vital insights to direct lending decisions and empowering SMB owners with a data rich view of their business.

Embedded

In response to broken customer journeys and poor CX, the financial sector has since moved in the direction of embedded finance - meeting customers where they are in highly bespoke ways. The panel highlighted the ways in which embedded finance helped smooth the customer experience, alleviating some of the complexity inherent within payments. 

The panel also highlighted how important trust is for the delivery of embedded finance with recent research from Lloyds showing that the more valuable a transaction is, the greater the level of trust is needed. This gives banks a natural advantage given their long-standing brands and highly regulated business model. 

To lean into this advantage however requires data and the key to unlocking this data is merchant services. Fiona highlighted how if a bank isn’t facilitating merchant payments, it can’t truly lean into the potential of embedded finance. When banks succeed in merchant acquiring however, it can use granular transaction data to transform the SMB banking experience. Where previously a bank might have seen that, for example a coffee shop SMB generated $500 revenue on a given day, transaction data paints a much richer, more detailed picture.  Do peaks and troughs in purchases correspond with particular times or days? Are there seasonal patterns? How do different products perform? 

Harnessing this data allows banks to do what at their core they were built to do - lend - but in a smarter way, ensuring SMBs are offered the right finance at the right time.  Crucially this also benefits SMBs. In fact recent research from New York University revealed that the availability of granular data made SMBs previously classified as high-risk were 3.5x more likely to secure lending.

It’s on this CX and data-centred approach however that banks haven’t so far taken the fight to the fintechs. Around 50% of businesses will need working capital at some point in a given year. It remains the case that when finance is applied for, too many banks put that application into a process that takes days to complete, by which time a customer may have moved on to a fintech or other non-bank financial institution. 

So, where next for banking?

Reassembled

This is where reassembly comes in. 

As moderator Ioto Iotov highlighted, after several decades of fragmentation in financial services there’s now a sense of reassembly and it is CX - or the lack of it - that’s driving this. 

Pollinate was built on the realisation that the unbundling of financial services has led to a situation whereby running an SMB increasingly resembles being a systems integrator. Business owners find themselves spending ever more time integrating payments, banking, accountancy and other ISVs and services in an attempt to find a simple experience and a single data set that can unlock business insights. 

Winning the future of finance means being the glue that brings the system back together to help customers achieve this simplicity. For Pollinate, this is where banks come in. 

It remains the case that banks have a level of trust that other financial services players don’t. With reputations built over generations and higher regulatory hurdles to jump than many non-bank financial services, consumers and SMBs alike generally feel safer letting banks handle their cash. While banks have the trust, where they’ve lost out in recent years is in not having the product. Emerging technologies are changing this however, giving banks the opportunity to provide the seamless - and crucially simple - customer experience that SMBs crave.   

So, for banks, after the great unbundling, reassembly presents an opportunity. 

Currently US banks provide payment services for only a fraction of their SMB customers. Leaning into technology and platform partners like Pollinate will allow banks to offer hyper-personalised, real-time lending decisions that help SMBs get the products and data they need to grow and win back time from systems integration. In many ways, the personalisation will resemble that of the golden age of banking where high-street bank managers knew their customers by name. That model could never be scaled, however the tech-enabled version can.

Our thanks to the team at Main Set and to our fellow panellists for a fascinating discussion. 

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