Jim Young welcomes Ian Benton from Javelin Strategy & Research to talk about the value of small businesses in today's market and what financial institutions must do to attract and grow their relationships.
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[Panel Discussion] Want to Boost the Value of Your SMB Portfolio? Make It Personal
Transcript
Jim Young
Hi, and welcome to The Purposeful Banker, the leading commercial banking podcast brought to you by Q2 PrecisionLender, where we discuss the topics on the minds of today's best bankers. I'm your host, Jim Young, and for those of you who are regular listeners/viewers who are starting to panic, I promise you all is well. Alex Habet will soon be resuming his hosting duties. This is not a Lou Gehrig/Wally Pipp situation for those of you who like very old baseball analogies. Anyway, I digress. Let's go to today's topic, and for today's topic about the SMB sector, I'm welcoming in Ian Benton, senior analyst of digital banking at Javelin Strategy & Research. Ian, welcome to the show.
Ian Benton
Thanks for having me, Jim. This is great.
Jim Young
Ian is also going to be joining Q2 for a panel discussion tomorrow, August 30th, about what it takes to compete for small business relationships in today's market. Joining Ian on that webinar will be our own Dean Jenkins, as well as Nick Boron from M&T Bank, and Shon Cass from Texas Security Bank. Highly, highly encourage you to register for that. It is going to be a great discussion. So to do that, you just go to q2.com/webinars and you'll see it right there. Click on the icon and you can register for it. In the meantime, Ian has been gracious enough to join me here, not necessarily to give away any of tomorrow's discussion, but still to provide some perspective around attracting and serving the extensive SMB market.
Alright, Ian. Well first off, let's start with the basics here. Tell me a little bit about yourself. How did you get to where you are and what's your background when it comes to the topic of serving SMBs?
Ian Benton
Yeah, so I think like a lot of people in the financial services industry, in digital banking, I did kind of fall into it. I mean, I started out in California politics growing up there. I went for my master's in international policy, I studied Arabic, so I was on the route to being a terrorism professional or international development. I took an internship in Sacramento after getting my master's, and we basically put together a loan program for refugees because I was really passionate about refugees. We had a lot of them at the time from Iraq and Syria and Afghanistan in Sacramento. And I got really into the data analytics piece of that, really putting together the financial aspects of that program for a nonprofit.
And I took some of those skills and was hired by Javelin in 2013, where we actually had no small business banking product back then at all. It was all consumer focused. And we really built the small business banking product practice from the ground up starting in 2015, and I've actually been the head of that practice for the last eight years. So that's how I came into the current job.
Jim Young
I have to hand it to you, Ian. Generally speaking, when we ask people about their background, they generally start off with some sort of, "Yeah, I kind of came to this by a roundabout way," but I don't think anyone's going to beat you for the most roundabout way of getting into banking.
Ian Benton
Yeah, true.
Jim Young
That was not where I was expecting it to go, but that is really interesting. Alright. Alright, cool. Well, so getting down to the topic today of SMB, and I did a little bit of Googling as part of the show research, and saw—these numbers can vary—but it’s more than 33 million SMBs in the United States. That's a large number, that's not small potatoes. But at the same time, I always hear … it's like I can't see the word “SMB” in a banking piece of content without the phrase “underserved segment” in there. So 33 million of them out there, but underserved segment. Why is that?
Ian Benton
So first of all, when you think about those 33 million, they're so different from each other. Within that 33 million, and I see that number all the time, of that, I think it's something like 8 million employer firms and 25 million sol props (sole proprietorships). And so within that, a lot of those sol props are actually just people. It's basically anybody that files a Schedule C. So anybody who does any contracting work throughout the year is included within that. So obviously those people have business financial needs, but they're probably not going to fit within a traditional business checking account where they're paying 12 bucks a month or 15 bucks a month or 20 bucks a month and getting all these different payments services. We like to think about it from a revenue perspective. So when we talk about small businesses, we talk about between $100,000 and $10 million in revenue, and within that revenue band there's about 8 million. It's about 5 million employers and about 3 million sol props.
And even within that, they have a pretty wide variety of needs. And I think traditionally banks have really focused on consumer banking, for obvious reasons, just a massive market, and on commercial banking because highly profitable, you can devote a relationship manager to it. So I think small business has kind of traditionally sat within this uncomfortable space in between, from a product perspective and also I think from a digital banking perspective, where they tend to be kind of the last to get a lot of these features. And I think we're going to see that. We can talk about real-time payments, but I think we've seen that throughout history where businesses are a little slower to adopt digital banking, they start to use it on the consumer side and want to use it on their business, and you get this trickle down and trickle up effect. So I think that's where banks have traditionally seen small business banking, that it's kind of difficult to serve and it's not as lucrative as the corporate, but I think that's changing too.
Jim Young
Yeah. And you sort of touched on this, when I've usually put this question to people at Q2 and to bankers, they basically say, "Here's the deal, if I'm a retail banker, if I'm an SMB, I look at it and I say, well, I'm more than a consumer, you don't have all the stuff that I need." But on the flip side of it, if I'm a commercial banker, I look at it and go, "I just don't know that you're lucrative enough for me and you don't need all of the services that I provide." So is that a sort of fair characterization? It's kind of a reverse Goldilocks situation, it's like it's almost in the perfect difficult place.
Ian Benton
Yeah, no, that's a good way of putting it. I mean, businesses are difficult to serve because they're so different from each other compared to consumers. So they differ by number of employees, or by revenue size, or by the maturity of the business, whether it's a startup or somebody who's more mature, by industry, by internal financial savvy, do they have a CFO or not, by their lending appetite, by how they interact with their customers and receive payments. And so it's really difficult to create a personalized, at least traditionally, it's been difficult to create a personalized experience and a really engagement-building experience that you want as a bank for that type of population, but it doesn't make financial sense to really devote an RM to every single one of these relationships. And I think that's changing.
I think digital banking has allowed us to start personalizing those experiences a little bit more and can go into some of the features that are important for that sort of engagement and that sort of relationship. But I do think it's changing. I think that's why you're seeing so much excitement in the industry, saying, "Hey, we can finally start offering a more tailored or personalized experience to a specific type of small business without having to devote a ton of resources to it."
Jim Young
Yeah. Well, you pretty much answered almost my next question, which was you were laying out really the case for why it is difficult for banks to serve this segment. But then you started to get into ... but at the same time, like, heck, you're going to be on this webinar with us tomorrow, you're on this podcast, and I feel like people are talking about the SMB segment all the time now. And is it because essentially we've finally reached that point in the evolution of digital banking and what's available, that now finally we're at a point where the industry has enough capabilities to finally serve this group and serve it at a way that allows for profitability, I guess?
Ian Benton
Yeah, and I think there's also a recognition of really the value of a small business banking relationship, where maybe you didn't see it previously. I think the other piece of this is that people now, I think, understand that small businesses are extremely sticky relationships. They're very loyal to their primary banking relationship. They hold more deposits, they tend to be much more likely to only hold a single banking relationship. They spend more on credit cards. You also have the personal banking relationship that you have to deal with with the business owner. And actually, we ask in our business survey every year if you have your personal accounts at the same bank as your business accounts, it's like 75% of business owners.
So when you think about the value of retaining a business banking relationship and making somebody happy and keeping all their products under one roof, you have to think about the principles side. And you also have to think about what are the value of those deposits? What are the value of those credit cards? So when you think about making a loan that maybe isn't going to be as profitable as you want it to be, you have to think about all those other services that businesses are paying for and the deposits that they're bringing in the door and the personal banking.
Jim Young
The stickiness part of it there, because you're hitting on another one, primacy, those phrases we hear as well. What is it about with SMBs that maybe make them more prone to stickiness? Is it maybe that because they're a small business, they don't necessarily have the time and energy to go hunting for multiple banking relationships or what is it?
Ian Benton
Yeah, I mean, I think that's a big part of it. I think also because a lot of people tend to already be at the institution when they start their business, they tend to already be personal or consumer customers there already. This is another thing to remember in business banking is that it's really an acquisition game much more than on the consumer side, because businesses are being created and dying all the time. It's like a million in each direction every year in the United States. So it's really about saying how do you transition people when maybe they're already on your consumer platform, maybe they're already operating the business as a freelancer or whatever, and they want to grow into a business credit card, grow into business checking, grow into business loan, how do you convince them that you're the primary place that they want to hold that? So yeah, I mean, I think that's just another thing to consider when you're thinking about the business banking environment.
Jim Young
OK. Well, I want to get into a little bit of that, sort of what can make a financial institution attractive to an SMB in terms of capabilities and what they can offer and what SMBs are looking for. But before we get into that, can you give me a little bit of the competitive landscape out there? Is this an area where, are we talking mostly traditional FIs or is this one where we see more of the fintechs making inroads in it?
Ian Benton
Yeah, I think the competitive environment has really changed. It's really expanded over the last couple of years, four, five or six years with the growth of PayPal and Square and QuickBooks really trying to position themselves at the front and center of a business' financial life. They start with payment acceptance, but they're moving into managing your customer relationships for a business or marketing or providing credit, short-term loans, or even now a lot of them are providing checking accounts. QuickBooks has a checking account. Square has a checking account for business. I don't know if they want to be banks, but they are certainly trying to be de facto banks and they're trying to act as the primary financial relationship.
One of the problems there is that relegates, unless the bank is able to counter that, it really relegates the bank to a more transactional role and a more commoditized role. And when someone's thinking about what their next financial product's going to be, they're not necessarily thinking about, hey, this is a really valuable relationship that I have with my bank as a small business. It's really going to be, they'll be shopping on price and they're going to be shopping on rates and things like that. So I think, before we go into that, one more thing to mention is the credit unions.
I think we actually looked at our data, only about 2% of businesses consider a credit union to be their primary FI today, but amongst consumers it's quite a bit higher. It's like 20% or something like that. So you would think that as you're starting a business, you're banking at a credit union, you would want to go to your credit union, but obviously a lot of credit unions aren't even offering this today. But we're seeing a lot of excitement amongst credit unions and amongst digital banking providers like Q2 to say, "Hey, we want to start serving credit unions," not only standing up business banking in the first place, but also creating that digital banking experience from the ground up.
All this is to say that I think the competitive environment, the competitive landscape has really changed and you're seeing a lot of fragmentation, a lot of businesses going elsewhere for singular services. Once they do that, you lose engagement. So I think it's really about bringing that engagement back and really providing those services within the digital walls of the bank. So things like accounting, payment acceptance and invoicing, business analytics, cashflow analysis, really convincing the business or making the argument that this is where you should be monitoring, managing your finances on a daily basis, otherwise, they can very easily go elsewhere for it.
Jim Young
Yeah. And you mentioned price, and so if you're a bank or a credit union and you've got this customer who is starting up their small business and they're reaching that point where they’re just going to need some services, is it simply a race to the bottom? Is it simply you’ve got to offer the lowest price? Or if not, what's the alternative? How do you make the case to a customer if you can't offer the lowest price, if you don't want to offer the lowest prices on it, then how do you keep them?
Ian Benton
Yeah, I think it's really about, I mean, businesses will pay for added-value services. I think we've seen that. They will pay if they feel like they're getting value. And that may be different from a consumer perspective where they expect every account to be free and have fewer fees. Businesses will pay for payment services if it's saving them time or invoicing or cashflow analysis or business analytical tools. So I think we kind of have to change that mindset of saying, "Here, this is the kind of value that you'll derive from this relationship. We can save you time. We can help you with your business financial health and help you better understand what the impact of borrowing is going to be or savings going to be, or help you with your day-to-day operations and help streamline those."
So I think it really should be centered around, here's the value that we can create rather than really trying to race towards the bottom. I mean, certain types of businesses that's going to resonate with, especially smaller businesses. But I think if you can articulate that value of holding it all under one roof, your personal and business finances, I think there is a great marketing message there.
Jim Young
So how do you do, and this may be trickling a little bit into tomorrow's webinar a little bit, but the case you just made, I can absolutely see a relationship manager making that case one-to-one to someone. "Here's all the things I've got. We're having a meeting, I've been looking at your account, looks like you could add this," that sort of thing. But we've just discussed about SMBs, they're on a different scale in terms of the numbers. So how do you deliver that sort of pitch or show your value when you're not able to do it on a one-to-one personal level?
Ian Benton
Yeah, we're going to go into, we're going to be asking the same question tomorrow at the webinar, so hopefully everybody attends that. But just a quick-
Jim Young
Yeah, I don't want to spoil too much, so feel free to go vague with your answer on it, but it was sort of the logical way our conversation was going here.
Ian Benton
No, no, for sure. And we're going to be going into, I think the number one is cashflow analysis. I think this is … we've seen Bank of America rolling this out, PNC, some of the larger banks are finally starting to roll this out to customers and build it into the overall digital banking experience. And I think this is going to be more and more available to some smaller institutions through their digital banking provider. But I think helping a business really understand where they stand over the next 14 days, whether they need to think about making a payment earlier or going to collect a payment so they can make a payment, or giving them a loan offer if they have a short-term cashflow issue. And then also helping them understand the implications of borrowing long-term or hiring or expansion or if they can put aside for savings.
So there's so much that goes into cashflow, one of the challenges there is obviously you have to have the data. So whether it's incorporating data from an accounting platform or bringing in the outgoing and incoming payments through digital tools. But I think the holy grail there is really giving someone an entire view of their business. Another piece of this I think is going to be real-time payments, and we'll be talking about that. Obviously a big issue with the FedNow rollout. I think corporate, that's going to be going to corporate first for obvious reasons: the internal expertise, they recognize the need. It'll go to certain consumer applications and just like I talked about earlier, the trickle down and trickle up effect.
But I do think that small businesses would derive a lot of value from real-time payments, whether it's being able to hold onto their cash longer or being able to collect more quickly from their customers.
So yeah, I mean, I think building in real-time payments into the overall digital banking experience is going to be a pretty big challenge. And we'll talk about some of the data that we collected from small businesses on how they expect to use it, whether or not they're willing to pay, whether they even understand what real-time payments is. So I think that's a big piece of it.
Digital account opening and the onboarding process can be pretty massive when it comes to getting somebody engaged when they're first starting the account, getting them enrolled in a lot of these services when they're most engaged. So I think we're going to talk about a number of those things and some other things as well. How you can kind of build a really engaging relationship that encourages somebody to center their financial life within the bank.
Jim Young
Yeah, no, that sounds great. And what you mentioned, last thing is that you think about it with a business, a larger business, and they've got people that already know the landscape. An element of the SMB part of it is education. I mean, just letting them understand the things that they might need because they might not be inherently obvious to a small business owner.
Ian Benton
Yeah. And I think a big piece of that is communicating it within the context within digital banking, rather than just education on public sites and things like that. Obviously there's some value there, but if you can put that within, you're making a payment, would you like us to deliver this two days quicker? Or it'll cost this much such and such, or this is what the implication of your cashflow crunch is going to be for your business financial health and things like that. For somebody that isn't fluent in the language of payments and fluent in the language of banking and financial analysis, that can be incredibly valuable if they don't have a CFO or somebody that's talking to them on a daily basis about it.
Jim Young
Alright, well, I'm going to stop it here, Ian, before we give away too much of the store and Dean and the rest get angry with us on it. But thank you so much for joining me for today's conversation.
Ian Benton
Yeah, this was great. Appreciate you having me on.
Jim Young
And again, it's Ian Benton and Ian is with Javelin Strategy & Research, and again, he will be a guest on our August 30th, tomorrow, panel, talking about small business and personalization. And again, you can reach that at q2.com/webinars, webinars with an S, to register for that.
And thanks again to our listeners for tuning in for this week's episode. If you want to catch more episodes, please subscribe to the show wherever you listen to podcasts, including Apple Podcasts, Spotify, Stitcher, and iHeartRadio. If you prefer a visual podcast, you can find us and subscribe to us on YouTube. And if you have a minute to spare, let us know what you think in the comments. You can also head over to q2.com to learn more about the company behind the content. Until next time, this is Jim Young. You've been listening to The Purposeful Banker.
