In this episode of the Purposeful Banker podcast, Alex Habet sits with Dean Jenkins, former banker and leader of Product Marketing at Q2, to discuss the takeaways from recent research into what small businesses say they need from their financial institutions and what they’re not getting today.
Helpful Links
[Aite Report] Delivering the Experience Small Businesses Expect
[eBook] The Battle for the Small Business Customer
[Webinar] Are You Prepared for What's Next in Small Business Banking?
Transcript
Alex Habet
Hello, 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 your host, Alex Habet. If you've been listening to the podcast, at least for the recent few episodes, you may have noticed that we are intensely focused on banking to small and medium-sized businesses. It's a big topic these days, and we're, of course, not the only fintech out there that's putting an intense amount of focus in this space. We've been a little bit on a mission, if you will, to understand and quantify the disruption and the opportunity, particularly in the space. Ultimately, it's about demystifying what small businesses truly want versus what is effectively offered in the mass market to them.
Now, if you take a step back, and we've talked a little bit about this in past episodes, but the size of the market is incredible. According to the SBA's definition of what a small business is, just to keep it simple, we'll use their definition. There are 32 million small businesses out there, and they classify small businesses as any company with less than 500 employees. Now, if you look at the inverse of that stat, there's about 20,000 large businesses. So, it's a huge disparity, 32 million small businesses versus 20,000 large businesses. As you could tell, the SMBs account for the lion's share of all the net new jobs in the market. But the funny thing is 80% of them actually don't have employees on the payroll.
The segment covers 99% of firms in the United States with paid employees in the US. That's a lot, and there's renewed focus on how they're being served. We are constantly reminded of the progress that we've observed and we've participated in throughout the years in the evolution of retail banking. It's really paving the way for the progress that we're now seeing in the commercial side. In this show and as a company, we've spent a lot of time focusing thematically and conceptually on the "why" we are focusing on this. There are a lot of avenues. There's a wide variety of avenues to deliver value to these businesses, and we're going to focus specifically on a lot of these individual avenues in future episodes of this podcast.
But today, we wanted to focus on what these businesses are telling us directly, and we have the perfect guest to share some of what they've been telling us for this audience. I'd like to introduce today, Dean Jenkins. Like many at Q2, Dean is a former banker. He spent 15 years in financial services technologies. Today, he leads Q2's Product Marketing team. If you've been paying attention to many of the announcements and all the activity coming out of Q2 recently, especially on the commercial side, you've likely heard of Dean. More recently, Dean's been sharing a lot of the great research that we've been doing and partnering with some of our partners out there, and really coming to bring a lot of the facts to life about why we are focusing so much on this. Dean, welcome to the show.
Dean Jenkins
Thanks, Alex. Great to be here. Thanks for having me.
Alex Habet
We've published a few recent surveys and reports and things like that. Before we even dive into what we're learning from these, tell us a little bit about who was the basis. Obviously, they're small and medium-sized businesses, but what was the sample size, if you will, that we typically looked at?
Dean Jenkins
Yeah. Typically, we're looking at businesses that are somewhere between or under $10 million in annual revenue, as the definition of the small to medium-size enterprises. We're really looking at businesses that have staff, have five to 20 employees or something like that. And the sample size that we've used, typically is 1,000 small and medium-sized businesses that we interview and ask some various questions about their experiences with financial institutions.
Alex Habet
So, we're looking at a little bit of a range, $100,000 to $10 million, if you will, in sales. So, we're getting a nice, healthy dose across that spectrum, about 1,000. That's a good sample size that gives you a pulse of the market. So, overall, stepping away now from the actual population that we talked to, what were some overall impressions that you got? Help us understand and set the stage for the research.
Dean Jenkins
Yeah, sure. There are really three key takeaways if you look at all of the research. And some of this is very well known; we've known this for a while in the industry. And the first one is really around the overall experience that we're providing to small and medium-size businesses. They primarily have one of two choices: either use the retail solution set that is really geared toward consumers and maybe very small businesses. That's easy to understand, but many of the capabilities that small and medium-size businesses need to run the financial aspects of their business aren't available as part of the retail offerings. And then the second choice they have is to go to the commercial cash management offerings, which may have the business capability that they need, but it's overly complex.
They have to learn how to bank, and they don't have the time; they don't have the interest. So, they're caught in between. And many times what happens is they may have a split experience, where they have their personal accounts on the consumer offering and they have their business accounts on the commercial offering. And really, many of these small business owners are looking for a single painted glass to have their experience. So, that really starts off the whole discussion, which is what is the overall experience for these small to medium-sized businesses?
The second key takeaway is around: What do they expect? How do they want to interact with their financial institution? So, traditionally, we have thought about their engagement with the branch or potentially with relationship managers. What we're seeing as the shift to digital is affecting all of us. We're seeing a small to medium-size business preference start to shift with that and really have a preference for self-service options through the digital channels. That is a big theme that we're seeing: What can I do on my own? It's not that they don't want to talk to the financial institution, but they want the speed and convenience of a self-service model.
And then third, the small to medium-size businesses, we notice, are just looking for help to manage the financial aspects of their business. And so they're turning to other solution providers beyond traditional transactional banking. So, you think about all of the fintechs that are now also serving the small to medium-sized business segment and offering them payroll services and expense management services and everything else that is adjacent to banking. And so that's really the third trend that we're seeing, which is they really want their financial institution to think broader than just traditional transactional banking and think about the other aspects of the business from a financial view.
Alex Habet
Fantastic. You set the stage to recap, at least what I heard, three areas. The banking experience is not robust enough, some might say even poor for the segment specifically, for reasons you already mentioned. The second is there's an intensifying hunger for doing things on your own. However, that's not mutually exclusive. They do sometimes want to talk to the bank, but it's important to them. And then, third, it's how do we expand beyond the traditional channel of banking that the businesses have and start to partner with some additional fintech providers? That's all super consistent with what we've been hearing, what we've been seeing in the market. If it's OK, mind if we just dig in, into each of those a little bit, and specifically look at the stats that show that conclusion very clearly to us? So, I guess starting with the first one, the poor overall banking experience, what are some of the stats that you observed?
Dean Jenkins
So, if you ask small and medium-sized businesses, traditionally, why did they select a financial institution, and so, this goes back, let's say back 10 to 12 years ago, the No. 1 answer traditionally had always been branch location. What's my nearest branch that's convenient, because they were doing a lot of things with the branch. And now you fast forward to where we're at today and over the past few years, and you start seeing that the preference for digital is driving a different response as to why they're selecting a financial institution. And so, now, if you ask, "Hey, would you be willing to change financial institutions if they had a better digital experience that was really tailored to your needs?" And three in four small and medium-sized business owners are saying, yes, they'd be willing to switch if I could get a better digital experience.
And that's really interesting, given the backdrop of the traditional answer was branch location. So, you see in their responses, the importance of digital starting to show up. Then you ask them, "Well, how satisfied are you really with what you currently get from your financial institution through the digital channels?" And 60% to 65% of the small to medium-sized businesses say they are very challenged by the financial institution not providing what they really need for their individual business. And so, if you really ask them, "Hey, what's going on with the digital experience and how satisfied are they?" I'd say two-thirds, let's just call it two-thirds of all the small and medium-sized businesses, really are not satisfied with what they're currently being offered by what they term their financial institution.
Alex Habet
That really stuck out to me, two-thirds. Just in thinking about the stat at the introduction, looking at how many of these companies are out there. If you were to apply that same ratio, it's simple math, 32 million, two-thirds of them potentially unsatisfied with their experience. That's 20 million businesses with an opportunity to improve their life. It's huge. So, let's shift a little bit then to the next one you mentioned, about the self-service side, what are the data points around that?
Dean Jenkins
Yeah. So, we also asked them, "How do you want to start a relationship? How do you want to open a new account? How do you want to apply for a loan?" And what we're seeing is that over 50% of the small to medium-sized businesses that were asked this would prefer to open up a new deposit account or apply for a loan online. And so, they want a self-service model where they can do these things. Wouldn't it make sense for them? If you think about how do they make time in their busy day to go and visit the branch or go and talk to the relationship manager just to open up a deposit account, a business banking checking account, as an example, they don't have the time to do that. They now understand that there are better ways. It's more convenient that at 10 at night, when I'm done with what I need to do with my business, now I can sit down and, oh, I can open up a deposit account with my financial institution or a new financial institution.
And they want that speed and convenience for opening up new accounts, for applying for a loan. So, over 50% would say, "I prefer to at least start that process within the digital channel." What's happening in the industry is, because financial institutions have not really offered this capability to their small to medium-sized businesses, they're turning to non-financial institutions to get the speed and convenience. And it's really interesting when you think about that over half of the small and medium-sized business loans are going to non-financial institutions. And you ask yourself, well, why is that happening? Well, it's really around speed and convenience. Because I can tell you what it's not, it's not interest rate on the loan. They're paying much higher interest rates to non-financial institutions than they would likely pay to their financial institution.
So, it's really about speed and convenience. And then you ask them again, you say, "Well, would you prefer to borrow from your financial institution?" And over 70% reply, "Yes, that is where I would prefer to apply for a loan if I was able to do it in a very fast and easy way." And so, you see this trend happening, where we're not providing the self-service capabilities that they want, that they need to effectively run the aspects of their business, but they really would do more with the financial institution if it were able to provide that self-service option.
Alex Habet
I mean, that's a nice little, I don't know if dichotomy is the right word to use here, but they're almost contradictory stats. They're going to go for the easier path and even pay more for it, but they would still prefer to go to what they feel probably traditionally more safe with, their banks, their financial institutions. So, huge tug of war happening here, I guess, in their hearts and minds.
Dean Jenkins
Definitely. And you think about why, it's because they don't really know those non-financial institution lenders, as an example. And they really still trust their financial institution. They trust their financial institution that the institution understands them, understands them as a business, and will look out for them. And so, anything that they're offering, they trust that that's the right thing for their business potentially. And so, where they don't have that with non-financial institution providers, but they want best of both worlds. They want the trust, they want to do more business with their financial institution, but it's still got to be fast and easy and convenient, and all the things you get from a self-service digital option.
Alex Habet
Would you say that we are currently at a pressure point on this balance? I mean, is there still room for things to go the way they've been going or we're now at a critical juncture where the time to strike is now, to turn the tide a little bit? What would you say?
Dean Jenkins
I think the time is now for sure. I mean, you start seeing trends where 50% of the loans are going to a non-financial institution for small and medium-sized businesses, that's pretty alarming. There's still time for financial institutions to change and change that trend, if they can really offer the capabilities that these small to medium-sized businesses are looking for. And that can be traditional banking services like deposit accounts and loans, but even going beyond, like we've opened in the beginning and talked about going beyond traditional banking. And thinking about holistically, how the financial institution can help the small or medium-sized business to really grow and accomplish their goals. That's what it's all about.
You talk to these small and medium-sized business owners, and many of them may bank with some of the biggest banks. And the biggest complaint I hear is, "Well, my bank really doesn't understand what's best for me. If I can find a financial institution that understands what's best for me in my business, that's what I'm looking for in my financial institution."
Alex Habet
You've mentioned it again, and also earlier the whole concept of going beyond banking. When I first started learning about this space, it just occurred to me that this is all greenfield. Obviously, FIs would put the walls around the traditional banking products and tune everything else out. Now there's an appetite to do the reverse of that. So, what's your take on the whole going beyond banking side?
Dean Jenkins
First of all, there are tens of thousands of fintechs in the industry now. And what fintechs have done a really, really good job of is identifying the problem and providing a specific solution to that specific problem. They've done a great job. And they've done it in all different types of use cases and different segments within the business communities. So, when I talk about different segments, it's not only based on annual revenue size, it's also based on what type of business, what type of industry are they in? And the fintechs have pinpointed that and targeted very specific audiences, very specific problems with very specific solutions. And that's great. If you look at all of the segments that are consuming the fintech solutions, the small and medium-size business segment, by far, it has the greatest adoption. Why? Because they're trying everything they can to get a better handle on the financial aspects of their business.
You have to remember, these business owners may not be experts or certainly not experts in banking, but not even experts in financial management. So, they're looking to all these different tools, how can I do this more effectively and make my business more successful? And the fintechs have done a great job of getting in the middle of those specific problems and solving it for them. Now, the really interesting thing about that is, even though they're acquiring all these different solutions, is that it's actually made the financial aspects of their business more complex, because now they have to bring all this together. And so, I may be using product A for payroll, I'm using product B for my accounting system, I'm using product C for expense management, but when I start doing that, none of these systems talk to each other. So, the business is in the middle, trying to figure out how does this all work together?
This creates the opportunity for financial institutions. Can I start bringing that together? They make it all work together so that the business actually has a suite of solutions that they need, that all now seamlessly integrate together and give them a single experience. And the reason that this is so important, going back to the trust factor as well, small and medium-sized businesses still trust their financial institution. They want to do more business with them if they can give them the right experience. And now it's like, now I have this broader portfolio or pallet of solutions that I can start bringing into the picture, which now from a financial institution perspective starts deepening the relationship with these small businesses, making them stickier and ultimately creating new revenue streams through revenue share programs with the fintechs and increasing the overall profitability of the portfolio.
So, it's a win-win-win. We can help small and medium-sized businesses grow and manage all the financial aspects of their business by bringing in these adjacent financial products. We can help a financial institution grow the profitability and the stickiness and the loyalty of those small business segments. And then lastly, it's a win for the fintechs because they can get to those business customers and provide them the specific solutions in the context of the overall aspects of the financial management. So, everybody wins, if there's effective partnerships between financial institutions and fintechs.
Alex Habet
Just out of curiosity, any examples of fintechs come to mind that you've seen work really well when they tie to traditional banking services, for the benefit really of those in the audience who haven't even contemplated going beyond banking? What's a great, simple example you could share?
Dean Jenkins
Let's take an accounting package. So, many times we think of an accounting package separate: It's only contained within that small to medium-sized business. But imagine where the account balances, the transactions flow seamlessly through back and forth between the accounting package and the bank. And so, the small to medium-sized business owner or their accountant, they don't have to deal with that reconciliation. Everything's right there for them. And so, bringing banking together with these adjacent services, just makes it so much easier, that everything's in sync. It just happens. It's not, download a file and then upload it or manually enter the data to keep things in sync. It just happens because it's integrated into the banking experience. And now I have one spot to go. I log in. We see consumers and small and medium-sized businesses getting on, on a daily basis just about, onto their banking site. Well, if that's a normal place they go, why not have them just have all the additional tools available through that same login and make it simpler for them?
Alex Habet
I guess that means that they will eventually develop more, for lack of a better word, screen time with the institution, which screen time has this negative connotation. But for business, it's a good thing, especially when you're talking about financial services. This was all great. I guess, with those three major takeaways in mind, how would you, in your own words, wrap it all up in a bow for this audience?
Dean Jenkins
Yeah. I think it all starts with the experience like we talked about. So, think about the experience from outside in. Think about it from the business perspective, rather than the financial institution's perspective inside out. We've done that for the last couple of decades. We thought about how do we digitize every financial transaction that we have available. And it was all done, in my opinion, from a bank's perspective out. Let's flip it and think about it from the business perspective in and what you can do to provide them the right experiences that they need to run the financial aspects of the business. That's where it all starts. I think what is really, really interesting if you wrap all this together, is the opportunity that this has created. Technology has started to level the playing field to where all financial institutions, credit unions, banks, small, big, medium-sized can all play in this field if they take the right approach and leverage digital to really create these new experiences.
Where it used to be, you had to have that large branch footprint to make progress in a small, medium-size business market. Now, you can accomplish that through better digital experiences. So, it's going to be really interesting of how this plays out. There's a huge opportunity out there as we've been talking about, to really gain share, gain mind share with small and medium-sized businesses. And it's going to be interesting to see how the financial institutions compete. And I think it's going to be eye opening for some financial institutions that say, "Hey, we're just going to continue to do what we've been doing and just offer traditional banking products," and then start seeing what happens to their market share and to their mind share in that segment. Because I think the financial institutions that take advantage of these trends and really think about it and really provide a better digital experience are going to be the leaders in the future.
Alex Habet
Well, I think that's a perfect spot to leave it at that. With that, we'll wrap this week's episode. Dean, thanks so much for joining today. This was, I think, hugely beneficial for this audience to hear, not only consistent messaging that's been coming out of this channel and our company, but also the actual research to back it up. Hard facts always help to tell. When you tell a story with data, it's always that much more powerful. As always, thank you all for listening today. If you want to dig in even further on this research, you can always find more information at www.q2.com. Before we wrap, just a few reminders. If you want to listen to more shows, you can go to the podcast page at explore.precisionlender.com, or you can head over to q2.com to learn more about the company behind the content. And if you've liked what you've been hearing, make sure to subscribe to the feed in Apple Podcasts, Google Play, or Stitcher. We love to get ratings and feedback on any of those platforms. Until next time, this is Alex Habet, and you've been listening to The Purposeful Banker.
