New fintech-led trends in the small business banking space

From digital payments to frictionless lending, we take a look at the latest trends in small business banking – and how they’re impacting the industry

While the pandemic and digital transformation have, together, driven many positive changes in the fintech and insurtech industries, small businesses, in general, have suffered catastrophically. Unable to cope with the costly demands placed on them by lockdowns and enforced closures, many of them took loans to survive. 

Now, as inflation rises on a worldwide scale, they are struggling against a rising tide again. Banks and financial institutions can offer a lifeline, in terms of new products and services, that can ease the challenges of running a small business in challenging times. But what exactly is on offer?

Large enterprise vs small business banking

A significant difference between small business and large enterprise banking is that small business owners don’t have CFOs or finance directors to manage most of the financial aspects of running a business and, instead, often act upon gut feeling, according to Rob Straathof, the CEO of Liberis.

“Entrepreneurs are great at day-to-day execution, operating their business, and setting the strategy of a business, but when it comes to the management of finances, they often need help from their financial advisor or bank. 

“Usually, the help they need is around managing working capital, getting their invoices paid on time, and making sure they have enough liquidity to pay staff and suppliers versus their incoming revenue. Of course, if they need loans, there are a plethora of solutions available to them, but the problem is that they don’t have a good enough understanding of what the right products are and whether they’re available to them when they need them.”

Roger Vincent, managing director UK and Ireland, Trade Ledger, also points out that small businesses have more in common with consumers than large enterprises and therefore have an expectation of tailored services from their banks. 

He says: “They may even manage their business finances alongside their personal finances, so they expect the same level of digital capabilities that they experience in their personal lives. Fintechs often understand this better than incumbent banks – and, more importantly, they have the technology and agility to innovate rapidly. This means they can very quickly create new products and solutions that serve the needs of small businesses.”

Products and services for small businesses

Small businesses also have different needs when it comes to support services, and therefore, banks that provide products to large-scale businesses won’t necessarily be a good fit. Rather, fintechs are generally more suited to helping small businesses because they offer innovative products such as cash flow forecasting, says Straathof, noting that Tide, Xero, and Nuula provide cash flow forecasting and instant access to critical business metrics. 

“They can bridge the gap to plug into lenders with your existing data dashboards and bank accounts through third-party Open Banking providers like Plaid and TrueLayer. They can provide forecasts of cash flow needs, so you know whether you are short of funds, what invoices are still outstanding, and, if needed, help with collections. Kolleno is another excellent example of a fintech that helps small businesses drive short-term working capital cycles.”

How to choose the right bank for an SME

Ultimately, small business owners need to shop around for the right banking services and make sure they choose a fintech that best suits their needs. Straathof says the standard functionality needs to be there, but there are a whole host of questions a business needs to ask itself. These are:

  • Does the bank integrate with Open Banking?  
  • Does it integrate with your accounting packages?  
  • Does it have automated cash flow forecasting?  
  • Do they have adequate SME lending products?  

He points out that many challenger banks don’t have SME lending products yet, while “the traditional high street banks often do have appropriate lending products available but have a very low appetite for approving SMEs”.

It’s not yet an easy task to find the right banking partner. So, the question is, which bank fits specific requirements such as Open Banking, cash flow forecasting, integration into accounting packages, and business finance? 

“These can be difficult questions to answer up front but should be explored nevertheless. Companies like Liberis are agnostic and can work with many different ecosystems to provide the right funding, to the right businesses, at the right time by using and leveraging the data that they have.”

The future of SME banking and fintechs

“If we look at the trends in retail banking, then the future looks bright for small business banking,” says Vincent. “Digital services that we see in our everyday lives are steadily making their way into the small business banking segment. We’re seeing financial service providers across the board investing heavily in improving their products and propositions for the benefit of small businesses.”

Straathof concludes: “A mega trend for the next two years will be a digitally integrated bank with the functionality of a ‘Super App’, showcasing products like business insurance, accounting, pay requests, invoicing, crypto acceptance, commodities, stock monitoring, etc., along with funding options available to businesses at the right time – all in one dashboard.”

He adds: “It requires small business banks to invest in their underwriting practices and make sure they have an appetite to take the risk, to support these businesses for their future growth.”

Six new trends in small business banking

Integration of Digital Services - One dashboard that integrates with accounting packages and provides an overview of things like transactions, cash flow, outstanding invoices, tax return filings, and funding eligibility.

Speed - Neobanks provide a bank account set up within minutes, and traditional banks such as JP Morgan, Investec, and Marcus are following the trend. For businesses that need funding, Liberis can integrate with their bank account and dashboards to provide access to instant funding that can be retrieved within minutes. 

Super Apps - PayPal and Revolut are developing omni-services within their existing ecosystems. For example, through Revolut, users can take out pet insurance, and travel insurance, buy commodities, and link to their other bank accounts and credit card statements through Open Banking. 

Open Finance - This provides the ability to aggregate user data from a range of financial apps in one place. Having all bank transaction, sales ledger, and credit bureau data in a single application means customers can get a real-time view of their cash position, capture any emerging risks to their business or identify working capital gaps before they become critical.

Digital Working Capital - For too long, small businesses have relied upon bank overdrafts or personal credit cards to support their fluctuating working capital cycle. With the emergence of new lending technology, banks, specialist lenders, and fintechs are creating new frictionless finance products that use real-time data feeds to assess their eligibility for a wider range of lending products like term lending, invoice finance, and asset finance. 

Embedded Finance - The ability for financial service providers or specialist applications to embed their propositions into other third parties channels. This may mean that a small business can get access to a range of marketplace solutions in their banking app. 

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