The Future of SMB Banking Part II: Where We’re Going

In Part I of this three-part series on the future of SMB banking, we looked at the challenges SMBs face today and discussed how – in the absence of bank-provided solutions – SMBs are increasingly turning to fintechs for their core business needs. In “Part II: Where We’re Going” we’ll share some of our predictions of what the SMB banking stack of the future may look like.

It Starts with Data

In the near future, SMBs will have access to an integrated financial “command center” through which they will be able to monitor their business on easy-to-read dashboards, build projections for a range of potential scenarios and unlock valuable insights.

SMB pain points don’t stem from a lack of data; in fact, data is plentiful. But whereas enterprise-scale companies employ teams of data scientists to make sense of the vast streams of information coming in from various vendors, most SMBs lack the resources to do the same.

Several companies have emerged to tackle this problem. Leveraging open APIs, these companies are building direct integrations to core business applications for accounting, banking, e-commerce, marketing and more.

By partnering with these vendors, banks can offer immediate value to their SMB customers. Integrations with accounting and banking data will give SMBs an accurate picture of their finances, updated in real time. Connections with expense, payroll and AR/AP software means that businesses will spend much less time “closing out the books” at the end of each month and can instead focus on growing and running the business.

Because integrated data offers a holistic picture of the business, SMBs will be able to forecast more accurately. Data pulled directly from Salesforce will give clear estimations of revenue pipeline just as information on marketing spend, upcoming capital expenditures or yearly taxes will be factored in dynamically. The best bank-provided offerings will feature scenario-modeling capabilities, allowing SMBs to see in real time how a certain purchase, customer win, or hiring decision might affect the business.

Machine learning models will be able to extract and deliver valuable insights that help SMBs make business decisions and efficiently manage resources. Combining information from numerous streams of data, these insights will provide color on a broad range of critical business questions that historically have been difficult to answer.

Importantly, the value of these offerings won’t be limited to SMBs. In the same way that integrated data will yield valuable insights for businesses, banks will also receive insights that help them better serve their customers. As we’ll discuss, increased confidence in the accuracy of SMB financials will make it easier for banks to underwrite SMB loans, provide just-in-time capital and cross-sell new products at the appropriate time.

A deeper understanding of their SMB customers’ needs – and the ability to act quickly to provide them – will set the stage for banks to transition away from being just another vendor in the SMB stack to instead playing a central role as financial hub, strategic partner, and trusted advisor to SMB customers.

Speedy Access to Capital

The information unlocked by data aggregation and analysis platforms will make it much easier for banks to underwrite lending products for SMBs.

SMBs have been historically difficult to underwrite for several reasons. For one thing, without standardized financial reporting, understanding an SMB loan applicant’s financials can be a headache for credit officers. Whereas enterprise-scale companies have large corporate treasury departments and strong relationships with banks, most SMBs lack these luxuries. Additionally, the loan application itself can be a deterrent – 30-plus page applications take time, effort and resources that many SMBs simply can’t afford to allocate.

With accurate data from accounting and expense platforms updated in real time, banks will soon have a much better picture of the ongoing financial health of their SMB customers. Integrations into payroll, tax, and business management software will keep banks apprised of changes to headcount, filing status, and key business information like location, address, and contacts.

Novel underwriting criteria will emerge that allow banks to offer capital more readily. Pipeline projections from Salesforce, marketing success data from Instagram, product reviews from Amazon – all of these can potentially be factored into lending decisions once SMB data begins flowing freely between the business and their bank of choice.

Perhaps even more crucially, because this data will be continually available and constantly updated, there will no longer be a need for long and involved loan application processes. In fact, SMBs will be able to apply for lending products with a click of a button. Often, bank relationship managers will reach out proactively when they notice their customer may require a loan for a new marketing campaign or large business purchase.

As banks develop deeper relationships with their SMB customers, they will build a strong understanding of the specific capital and strategic needs of different business segments. Similar to the examples set by Toast for the restaurant industry or MindBody for fitness, successful banks will embrace verticality in their SMB strategy. Burgeoning embedded finance solutions will enable banks to move into crucial sector-specific workflows like payments, equipment capital and customer engagement tools.

Ultimately, banks will benefit from heightened underwriting confidence while SMBs will be able to focus on running their businesses with the knowledge that should a capital need arise, they’ll have access to the funds they need, when they need them, at rates that reflect their true ability to pay their obligations.

AR / AP and Cash Management Features

As banks refine their ability to understand their SMB customers’ needs, they’ll start to resemble what is essentially an external corporate treasury department, efficiently managing SMB cash to optimal effect.

With robust data integrations and improved lending workflows, cash management struggles will soon be a thing of the past for SMBs. As potential cash shortfalls arise or cash surpluses emerge, banks will be able to proactively offer lines of credit, factoring products, high-yield savings or investment opportunities that help the business most effectively manage its cash.

Banks will leverage emerging fintech vendors to help manage AR/AP processes, which has historically been a time-intensive function. AI and smart communications will improve AR/AP and eliminate many costly hours of human labor. Banks that work with vendors to offer these features will gain ongoing proximity to the most crucial aspect of every SMBs’ operations – how they get paid. Beyond creating significant operating leverage for their SMB customers, there will be meaningful payments revenue opportunities for the banks.

As SMBs develop firmer control of their AR/AP processes and optimize cash management, they will be able to better forecast and budget for the future. Increasingly accurate business forecasts will give banks higher confidence in underwriting, leading to faster access to cheaper capital. More readily available capital, in turn, will only further improve cash management and smooth out AR/AP processes, resulting in better forecasting, which… well, you see where we’re going with this.

A virtuous flywheel thus emerges, with banks at the center, which empowers SMBs to run their businesses under the best possible conditions.

Advice and Support for Growing the Business

With the flywheel turning and core business needs squared away, SMBs’ attention will turn to growing their business through targeted campaigns that leverage digital channels and novel means of customer communication.

Large fintech incumbents like Square and Shopify are already building solutions in the space, helping their SMB customers with marketing, advertising strategy and positioning. Newer vendors are emerging with features that help SMBs navigate the rapidly evolving digital landscape.

Banks will have an opportunity to function as crucial providers of advice and support that goes beyond capital. As banks build up their offerings across a broad range of diverse SMBs, they’ll unlock valuable insights into key trends and best practices for SMBs operating in today’s environment.

Through partnerships with vendors that leverage the latest innovations in AI and machine learning for marketing and growth, differentiated FI’s will offer value-added services that help their SMB customers execute on their core growth objectives and scale quickly.

The SMB banking stack of the near future will give SMBs the tools they need to succeed. Leveraging integrations into top business applications, banks will deliver SMBs a true business command center, from which SMBs will monitor the ongoing health of their company, make important business decisions, and build forecasts with confidence.

Improved data quality will give banks the information they need to offer easy, just-in-time capital to SMB customers, which in turn will help smooth out cash management cycles and optimize AR/AP processes. Over time, as core SMB pain points are solved, banks will re-position themselves as advisors and strategic partners, offering the tools that SMBs need to grow their business in an increasingly digital world.

Here at Canapi, we’re excited at the prospect of this not-too-distant future. We love the idea that SMBs will soon have access to the tools they need to succeed and that banks will have the chance to return to their community-oriented roots – serving as a trusted partner to this important and crucial segment of the US economy.

The vision is clear. The pieces are in place. But before this future becomes our reality, there are a few things that banks, fintechs, and SMBs will have to do. In the final installment of this series, we’ll discuss the steps the ecosystem will need to take to achieve it.

‍