In this installment of The Purposeful Banker, Dallas Wells and Alex Habet get real about what it takes to serve today's small businesses. While digital capabilities are in demand and certainly table stakes, there's more to consider. How well do you know the SMB customers you're trying to attract, and what changes does your FI need to make to retain them once you have them?
Aite-Novarica: Delivering the Experience Small Businesses Expect
Barlow Webinar: Are You Prepared for What's Next in Small Business Banking?
Small-Business Banking and Millennials: Aite-Novarica’s 2021 Impact Report
Global Economist impact report: What Is Shaping the Ecosystem of Small Business Banking?
eBook: The Battle for the Small Business Customer
Commercial Loan Pricing Update March 2022
Hi, and welcome to The Purposeful Banker, the podcast brought to you by Q2, where we discuss the big topics on the minds of today's best bankers. I'm Dallas Wells, head of product at Q2, and I'll be your host today. If you got our most recent episode, you know that we are entering a new era of the podcast. We've wished farewell to our longtime host and producer, Jim Young. And over the course of the next few months, we'll take this opportunity to bring in folks from across our team and across the industry to share their experience and perspectives in the world of commercial banking.
So to start that process, I'm joined today by Alex Habet. Alex is a two-year Q2 and PrecisionLender veteran, who was actually a banker and a PrecisionLender customer before jumping over to the dark side. So today we want to talk about an often overlooked but increasingly important set of customers for banks, which is small businesses. More specifically, we want to talk about why we think they're more important than ever, and how you can bank them more effectively and efficiently than ever before today. So, Alex, welcome to the podcast.
Alright, Alex, first I thought we'd start by just setting the stage. So what are some of the characteristics that define this segment, and specifically as you get into that, what makes them so challenging for financial institutions to actually serve effectively?
Thanks, Dallas. It's great to be here. I really appreciate it. The way I like to kick things off when talking about this topic is really crystallizing what the definition is of this customer base. So typically, as you know, most banks are going to stratify this segment usually by annual revenue size. Sometimes you might see employee counts baked in there, but, by and large, annual revenue is the big predominant factor that defines this space. Here at Q2, we take it a little deeper than just simple small business; we split it into two groups generally.
We have the micro business segment, which roughly equates to up to a million dollars of annual revenue. And then we have the business and professional segment, which can go up to $5 million. So most banks will look at anywhere in the ballpark of $2 million to $5 million in annual revenue defined as their small business segment. So then you take a step further into that, what are the problems that this group is facing? So just like consumers, they need somewhere to put their money; they need somewhere to make their money work. They need a way to buy and sell goods and services, inputs, or inventory. And they need a way to take on debt to grow.
That's usually a big next chapter phase that they're facing. So knowing that those are the kind of core needs that this segment looks for, then you start to ask yourself, what are the characteristics of a winning relationship if you are, from the bank's perspective, working with these kinds of clients? So again, congruent to the problems that they're solving, there are three needs there, financing the day-to-day operations and their needs, managing work capital and the complexities that come with that, and then financing that next stage of growth.
So in micro, you'll usually find that most of those experiences happen almost exclusively on the digital channel. There's very little need for that really specialty advisory role that the banks typically will play for larger clients. So they want that to be fully digital. Now, of course, as the businesses grow, the human component does become more influential in that.
Yeah. So it's interesting to me as you talk about the size segmentation there, of course, that's always just like a rough proxy. So what banks and credit unions are really trying to figure out is, like, what services do I need to be able to provide on one side? And on the other side, what's the risk profile of who I'm dealing with? And that to me is one of the interesting things, especially on the smaller end. Which, again, smaller by size, but by the number of customers, number of accounts we're talking about, this is the vast majority of what banks deal with. And especially community banks, this is a big chunk of your customer base.
And I think a lot of times banks don't even know who these folks are. They operate as sole proprietorships, or they're doing business as something or other, this is a side gig or a side hustle that maybe turns into a real business, maybe doesn't. But it gets co-mingled with personal finances, and banks try to draw these clean lines between them, but that's not in reality how it always works. So does that add extra degrees of complexity to this?
Without a doubt, without a doubt.
Yeah. It's messy from the get-go. We don't even know who a lot of these folks are and then we have to go in and try to serve well and compete with all the new competition out there. Anyway, as you frame that, I just wanted to throw that out there that it's not even as simple as just, like, here's the box and then how do we go serve that box. It's, like, we don't even know who's in it to start with.
Yeah. I've been through something personally here. My spouse is actually starting her own business right now, and we're going through this exact scenario where we're like, "Okay, well, let's open up a bank account. Well, what kind of bank account do we want to go with?" There's a whole bunch of new options now, which I'm sure we'll get into a little bit later, but it's a totally different environment on top of that. On top of all those things that you just articulated, it's also new options are coming online all the time.
Yeah. We've outlined the rough box, but just at a high level, before we get too far into the weeds, why are these customers so difficult to serve? If you go and ask a typical bank executive somewhere, they always talk about how this is an important segment for them, but you ask, what are they doing? If they're honest, they're like, "Well, we're hoping to break even." This is a really hard segment to serve well, and most banks and credit unions, if you just follow the data, they're not very good at it. So just at a high level before we get, again, too far down the road, why is that? Just to say it out loud, what are the tricky bits here?
Well, a lot of it is something that you articulated a few minutes ago. There's a lot of just complexity separating the personal from the professional, and at that point, in terms of core needs. So it's messy from the customer's point of view. And then from the bank's point of view, it's still a very traditionally analog channel to work with. Technology has at least the priority within banks to invest in technology. Obviously, the lion's share of that has been with the retail side, not focusing necessarily on the business aspects of some of their retail customers, for example.
And there's just a ton of green space or untapped potential in infrastructure that is to be had there. It's tricky; there's a lot of things, a lot of jobs to be done, let's say, to serve these kinds of customers. And so stitching these technologies together is easier said than done. It's important to have a really good long-term view, understanding, well, what kind of bank do you want to be? And to work with advisors that you might have as an institution, or some of the relationships you have with some of your software vendors to determine, well, what's the path forward you want to move forward with?
It's a huge opportunity, it goes without saying. There's a surge in activity going out there. There are a lot of factors that go into that, but as I mentioned, there's just so many things that are available and at the disposal of businesses today that weren't there 10 years ago. So it's super important today if you are a bank or a credit union to be thoughtful about this, because as each day goes by, it's easier to open accounts elsewhere, outside of a bank. It's easier to find nonbank options. And you can start collecting revenue just with a Venmo account or Stripe, Square, etc.
And then add to that there's this enormous pressure of people looking for new careers these days. You've heard the term: Great Resignation. It's fueling a boost in freelance work. And, of course, the ones that are successful at that are going to turn into businesses and they're going to be thriving businesses. So you want to make sure that you are in a position to be the trusted advisor to a lot of these up-and-coming businesses. If you want to be a primary bank, if you want to be the first call, it's absolutely vital to win them over early on when they're still getting their sea legs.
Yeah. And I guess if I can sum that up, if you look at it from the perspective of the bank, you have a customer who's like, "Hey, I'm going to come to you with this hard-to-decipher basket of needs. I have all these services I'm going to potentially need from you over time." The risk profile is way higher than a consumer account, but out of the gate, my balance is ... I'm going to bring you, I don't know, $20,000 in average collected deposit balances, and maybe I'll need like a $50,000 revolving line of credit that I only use when, frankly, when you don't want me to, when I'm in dire straits.
So you can see from the bank side, they're like, "What am I supposed to do with this? Still, at the end of the day, if you just look at how I make money, it's still a net interest margin business, and I can't make spreads on that. I can't cover the overhead of that at those balances." So I think what you see is the industry trying to find a path to efficiency and scale here and "how do I bleed some of the costs out of this so that I can compete, so that I can do the things that I need to? I can't just ignore this segment. It's too much of a part of the communities that we serve, is too much a part of my future growth. I can't ignore it, but I have to find a path to economic viability."
So this, I think, is the push to technology. Is this the right answer? And is that enough to just be like, "Well, let's just throw some tech at this and surely that solves it"?
Yeah. Without a doubt. Technology is wonderful; it solves major problems in people's lives. Every time there's new innovation, someone is impacted. That absolutely applies here, but it's also not just about the technology. We've seen that time and time again. Where we sit, Dallas, you and I, and working with our customers, it's the institutions that mind meld the two, the human and the technology together, that usually find the successful recipe. You need the technology to solve the low-hanging fruit. Make it self-serve in certain cases, or upload documents or message with the bank, fine. But it's the FIs and the humans in those FIs that make the customers feel supported while allowing at least the technology to do the tedious stuff.
Yeah. One of the things I'd love for you to expand on maybe is, we've talked about this a lot inside the walls here. We have a lot of customers that come to us in that boat where they're like, "How do we do this better? We need some small business technology play; what do we do?" And there's a whole bunch of vendors out there that just want to sell them a platform, and it's like: step one, buy platform, step two is a question mark, step three, profit. So it's that in-between stuff that's really important. So we try to make it functional: What's the outcome that you're trying to get with this?
And each piece of technology that you buy, you said the phrase earlier, should have a job to do for you. So we don't want to just digitally swirl the paper around on the desk. That doesn't really do us any good. We need some sort of outcome. So can you talk about those big categories that we need to serve and maybe how to think about that as you start on this journey of digital transformation?
Yeah. By the way, I'm going to steal what you said a few minutes ago about invest in technology, question mark, problem. That's absolutely ... Anyways, we can have a whole episode on that. Actually, I think we should. But when it comes to this specific issue, how do you revamp your entire stack and build a winning formula? While it would be nice to have a one-size-fits-all solution to all of it, it's virtually impossible because at various stages of a relationship with a bank, there's just going to be different things that need to get done at that stage.
So one way we coach our clients to think about it is to intentionally just break it down into some chunks there that encapsulate ultimately what needs to get done in each of those. So what am I talking about? If you're in the situation where you're looking for new customers, you're out looking for prospects, your technology and the bankers that back that technology have to be doing in completely different activities than when you're at the onboarding stage, when the customer's interested in joining and then you get them on board. So when it comes to winning, you have to make it easy to do business with you.
So if you're looking for that micro segment especially that just wants a fully digital experience, you better have a really great fully digital experience. Otherwise, they're going to just, frankly, look elsewhere. And it's one thing to just have a great online channel, it also means being able to provide them value at any moment in that workflow, They might not know when they're looking for a new relationship that they need a way to send invoices or collect credit card payments, that sort of thing. So being able to give them those insights at that moment is a huge way to build trust early on.
Now, for larger businesses, larger small businesses, it's always going to be a better experience when your technology is backed by a really thoughtful and supporting banker to help them walk through what they ultimately need. And it goes without saying that when you work with a really great banker, you also have a tremendous access to that institutional knowledge, which as a new business, you might not have. So that summarizes the win stage, the finding those prospects. Dallas, I'm curious if you have any anything to add to that.
No, I think that's an interesting thing. And we've talked about it a whole lot over the years here of that intersection of the technology and the humans. Once you enter the commercial realm, no matter the size, there's inevitable human element to it. And so part of the tasks that we see in front of us here is, yes, the technology has to be great, but it has to be great at empowering the humans inside the bank to better serve their customers. Whether that is the white glove service at the top end of the commercial market, or it is really smart context-driven support that is responsive when people reach out and say, "Hey, the digital channel's not answering my questions or doing what I need; I need help."
Can somebody jump in and see, "Oh, I see what they were trying to do and how they were trying to do it and I have an answer for them." Instead of like, "Start from the beginning, tell me your name, what's your date of birth? What's your address?" And you're 45 minutes in before you ever get to talk about what you're trying to solve, which might be, "I need to send a wire," like something fairly straightforward. So it's that intersection and doing those two things well. And I think you phrased it well: Make it easy to do business with you.
So a lot of financial institutions, I get it just from the sheer volume, they focus so much on how do we more efficiently serve the customers that are already inside the walls, but they don't have a solid strategy around, how do we get tomorrow's business? How do we actually go win the next thing besides just undercutting everybody in the market on price? You got to have a real play and that now has to have a digital element to it. So I think that first block's really important and one that frankly probably gets the short of the sticks on sometimes, which is just going out and acquiring new business and doing that with a digital flavor to it. The strategies I think are really lacking there sometimes.
Yeah. It's difficult to ... We obviously, we'd see a lot of institutions work with us early on and they drive this thought process with an RFP. It's difficult to capture that notion that you just talked about through an old library of RFP questions when you're looking to replace your technology. So I just wanted to echo what you shared and remind anyone who's listening to this podcast, there's a lot of stuff you can do these days. And so think big; distill it to what you ultimately want to do, but think big. The sky's the limit if you get that right.
If we were to then go to the next stage, the onboarding phase, this is where the activities now change. You have to not be painful to fill out forms. It has to seamlessly transition. So if you've entered a lot of that information in the early part to get something opened, you shouldn't have to reenter your address again in several different other parts of the workflow. That's just a very rudimentary example, but it's incredibly common. It's all about removing a lot of those paper-based antiquated process. We're all familiar with those, especially those with banking background, a lot of that by and large has disappeared from the retail channel.
So this is just a friendly reminder that small business owners are also retail customers. They will notice when their workflow is inferior when working on the business side. So that's just another sense of urgency that needs to be built into this. It's a fantastic opportunity to make a first impression. Sometimes the business may bank with the same one that they do as retail customers, sometimes they go completely different. So this is your first impression of your technology. So take advantage of that. Trust me, it will result in them making their references to their friends, "Hey, I had a really easy experience opening an account with bank Y." It goes a long way to think about it.
For larger businesses, you're dealing with just a lot of governance and memos and that sort of thing internally, so how that information is collected, how financial statements are uploaded, whether you need to do that thing in that moment, how that information is then handed off within the bank is also vital. Dallas, you mentioned, you have to think about the employees as well. And look, we both formerly worked at banks, it's obvious that, traditionally, employees come second in line with priority on how technology is invested for. There's always someone. I was that analyst when I started, where I was literally taking memos from approved loans, and then rekeying them manually into a database so that we can track it when we probably could have solved it.
So how that information's collected, shared, managed, handed off, that's very important. I don't know, Dallas, anything come to mind for you?
Well, used to onboarding was pretty simple. It was like, sign your signature card and then cart your toaster out the door and boom, you're onboarded. You got a shiny new checking account. Now with all the digital entanglement, even for a relatively new business, there's existing payments already set up, they're tied to a debit or a credit card somewhere, there's ACH originations, there's auto payments, there's all the payee details for any kind of bill pay setup they had, there's direct deposit stuff coming in where they've got personal and business stuff mixed.
These things can be really messy. And so it's easy to map out, well, here's the ideal workflow. You have somebody sign up and they do these three things, but each one is its own unique blend of combination of those things. And so they get really complicated. Q2, we recently acquired a company called ClickSWITCH. And part of what they do is automatically doing some of those changes. So switching some of those auto payments and things like that, direct deposits. And the thing that looks simple on the screen to the user, on the back end is wildly complicated.
And a lot of times it actually just takes a person going in and connecting two things together. So no matter how much you want to automate all that stuff, there's still that element to it. And so I think the inevitable trade-off here that banks have to evaluate is what level of risk and pain are we willing tolerate vs. how smooth do we want this to be for our customers? And how much of that pain do we take and inflict on them to make them do it? And you can see from the process where banks draw that line, but that is your customer experience. That's the decision that you're making.
And so whatever technology you invest in, just know that decision's coming your way and that you're going to have to remake it week by week, month by month, quarter by quarter. Are we OK with where this tolerance line is? And that you're going to have to continually invest in that. So getting customers onboarded, it's not one-and-done. It's a long, painful process. There's constantly new things to add and get onboarded again later. But this is the relationship experience for your customer. This is interacting with you. So I would say just be intentional about where that line is drawn instead of you not really knowing.
It's worth going through the process yourself and seeing what it feels like from the other end. You might be surprised at how awful it really is. Even though the demo of the tech was great, all the checks and mail this in to verify and reentry it again because it's a different system. Those things, they're sneaky ugly. So anyway, this one, it's a big, hairy beast and just expect to invest in this continuously for the next decade. Just get comfortable with that and get your arms around it.
Yeah. That's interesting. I have traditionally thought of it as a one time you fix it, but this is a continuous improvement. There's always going to be some better way to do it, like or not. We might all be doing it in the metaverse one day or something like that.
Yeah. Well, payments changes all the time. That's one of things that we struggle with as a provider is there's new payment rails that come around all the time and it's the next new thing. Well, the businesses are doing that same thing. They're trying to find a better, more efficient, more cost-effective way to handle their payments in and out. And they're going to expect you to keep up, which means if they decide to change, you got to re-onboard them to the new thing. So this is perpetual, and probably it leaks into your next bucket there.
And by the way, the lines between these are fuzzy. Acquiring new business and onboarding, those two things get really blurred in between. And as we've been talking about, onboarding, there's no clear stopping point. Toward them you're just doing ongoing servicing of that account. So let's talk about that a little bit, what's next? Even if the training wheels are still on, they're a customer, they're roughly onboarded, now what?
It's all about serving their day-to-day needs. It harkens back to how we started talking about this whole subject to begin with, what are the problems that these businesses are facing? Are you doing a good job making it as painless as possible for them to manage day-to-day cash, managing their working capital, managing their inventory, whatever? Is it easy to undertake some new debt to grow? You might not even be aware that now might a great opportunity for whatever reason, and so are you being challenged to think about it as a business? "Hey, now is a great time. There's a rate advantage, this is great. We notice that you might be a perfect candidate to invest in X."
And so are you that institution that can do that? As you grow to maybe some larger businesses, then it also becomes, do you play nice with your enterprise architecture to the extent you might have an early stages version of that, are you playing nice with it? When you're initiating payments on one, is it synchronizing to the back end. Can you see it in your accounting software? You made a beautiful comment a few minutes ago. It might look simple up front, but behind the scenes, things like that, enterprise systems talking with your digital banking channel, that's a monstrosity of a problem to solve.
So that would be the core tenets of how I would describe serve. It can go in any direction, obviously, but, by and large, do your customers like trying to solve their problems with you? Are you making it as painless as possible? Are you giving them advice? Are you helping them think about things they might not be aware of? That sort of that thing.
Let's make an important caveat here, too. Your customers are in the business of making widgets or delivering widgets, or doing dental service, or they're a vet. Their day-to-day business is not banking. And so every second that they or an employee has to spend on dealing with bank stuff, even if it's just like, "Hey, push Go on the ACH origination so I can make payroll on Friday," that's a step that is a cost, it's a diversion, and it's something they don't want to do. So we have to make this easy and we have to make it straightforward so that they can spend the majority of their time running their own business and not dealing with our crazy systems and wackadoo workflows that we make them go through because it's smoother on our side.
And I think what banks have figured out is that if we don't do that, well, maybe there's a very specialized SaaS business that's out there serving restaurants, and there's several, by the way, that are also so baking in all those payment capabilities, and we'll just be cut out of the process. So the stakes are really high now and the bar of service and expectations are really high. And so I think that's the trick of doing this service part right. You can't just be nice when you answer the phone and call that good enough. You can't just say, "Hey Judy," when they come in the lobby and call that good enough.
All this stuff has to be simpler, easier and less time that they spend dealing with you. And the banking has to be embedded in their everyday business with as little interference as possible.
That's an excellent point. I can't overstate how excellent of a point that is. You are going to be a better partner to your businesses if you in effect disappear.
That's right. Yeah. That's right.
Thank you for bringing that up. It actually is a great transition to what we view as the fourth major bucket. How do you grow as a partner to your clients? You've already figured out how to allow them to manage their banking needs day to day, maybe pretty well, but where do you go from here? How do you move beyond banking in its traditional sense? You mentioned a moment ago, there's a lot of great SaaS fintech solutions that might focus on one entire vertical and really get good at that, like serving the restaurant industry, and then putting embedded banking services in there. I don't know why you would even consider going to a bank at that point if you can get it all in one, and it's literally designed almost for you.
So it's important to ask yourself at the stage, what type of finance partner do you want to be for your clients? If you want to stick to the old-school banking model, that's fine. If you want to become specialty in working with dentist offices, to use another one of your examples, there's certain things that you need to think about. How do you position yourself to become that one day to the extent that you might not be today?
So there's lots of things coming online, it's lighting up the fintech world with what's going on today, but I'm curious, Dallas, from your perspective, where do you see this all evolving towards one day?
That's well put. We've talked a lot about this from the traditional business model for banks, but a lot of what's being wrestled with, or frankly, what should be wrestled with inside the boardroom and inside the executive suites of every bank out there is, is this still the right model for us going forward? Or instead, do we maybe play some of that embedded banking role in those other services? So banking is moving everywhere, it is being embedded. The SaaS providers for every industry out there are looking for partners where they're like, "Hey, you offer the banking charter, the infrastructure, the rails. We'll be the front end. We'll deal with the customer directly."
And so I think banks are struggling with that. They're like, "Look, do we, do we abdicate the customer relationship? Do we cede that ground to these tech players that can focus on it and maybe do it better than us at the moment, and then we offer the back-end infrastructure or does that feel it overly commoditizes our business?" Well, there's business models and strategies out there going both directions, and there's some that are doing very well going directions. And the problem is, you are going to have to pick a lane there, or at least, again, be intentional in that decision and don't just look up five years from now and be like, "Boy, we just totally missed it. We didn't pick our strategy, we straddled the line and did a little bit of both and we ended up getting left behind in both."
So it's a tricky fork in the road, I think, for banks to figure out how they play. And that's why we come back to this, there are jobs to be done. So just to restate those, we're talking about winning new business, we're talking about onboarding those customers, we're talking about serving them over time, and then we're talking about growing those relationships. Those are the things that you're going to have to do, whatever your go-to market approach, whether you do that through another service provider, whether you do it the traditional way, you have to be able to meet those tasks.
Now, within those, there's a whole bunch. Inside the walls of Q2, we've got 20-plus products that serve those various things. But those are the four jobs, that's it. Those are the only jobs that there are, they fall somewhere in those categories. And you just have to have a clear approach on each one of those and realize that this is a fork in the road, and maybe at least get smart about what your options are. Be thoughtful about what some of the alternatives might be, and it may not be for you, but at least be aware and know that that's a form of competition for you.
Alex, anything else to wrap this up for at least this version of this discussion? Big picture thoughts of an FI trying to serve small, medium businesses, what would you leave us with?
Banks have always planned for the future. They've had a strategy. The problem is, there might not have been as many readily available options to actually realize some of these things in a shorter amount of time these days. So it begins to feel like you're starting to play a little bit with Legos. And I actually think that's a good thing. Think about how banks traditionally used to build all their own stuff exclusively and didn't want to let anyone in on that. That creates a lot of cobwebs in there that grinds everything to a halt effectively in the future. So the last 10 years, whether you're talking about major banks vs. smaller banks, there has been a lot of untangling that thinking.
And so now you're at the point where you can start to think about Lego sets. Here's a block that's perfect, that addresses an acute weakness I have in my workflow. Let's see where it would fit in and how it would play nice with some other Lego bits. We've seen here at Q2, a wide variety of configurations of these Legos. And there's certainly, I think you would probably agree with me, Dallas, there's certainly a certain type of configuration that tends to work better than another. But regardless of how you decide what direction you want to take your infrastructure in, at the end of the day, we can help you find the right Lego set or the Lego block at least.
But it's again, important to just have that long-term view because now you can within a reasonable amount of time, completely revamp everything: large bank, small bank. So that would just be my parting thoughts in this discussion. Dallas, thank you so much. This was awesome, and I look forward to many more of these.
Yeah. Thanks Alex. I appreciate you joining. And yeah, definitely more to come. So thanks again for being here. And I want to also thank everybody else for listening. Now it's reminder time. If you want to listen to even more shows, you can go to the podcast page at explore.precisionlender.com, or you can head over to q2.com and learn more about the company behind the content. If you like what you've been hearing, make sure to subscribe to the feed in Apple Podcast, Google Play, or Stitcher. We'd love to get ratings and feedback on any of those platforms. Until next time, this is Dallas Wells, and you've been listening to The Purposeful Banker.