Millions of Americans exclusively bank online with providers that do not have traditional physical branch networks, including Ally Bank, Member FDIC. For everyday banking needs, consumers also have turned to “neobanks” that are not actually banks themselves but rather rely on chartered bank partners that carry the regulatory burden for a portion of revenues. Neobanks are one of the big winners of financial technology or “fintech.”
However, the fintech bug has hardly bitten the owners of small businesses, which account for 48% of U.S. employees. If you ask owners of a small business why they have selected their bank, many will likely admit the reasoning was the proximity of their local branch.
Most businesses in the United States are considered SMBs (Small & Medium Businesses). Today, hundreds of technology entrepreneurs are spinning up startups to address the SMB space with fintech offerings, taking advantage of an expansive software infrastructure ecosystem and massive market opportunities. Venture capital and strategic investment from corporations are fueling this trend, along with early adopters in the startup world who are using these tools themselves to manage their high growth businesses. Many traditional banks are partnering with and investing in fintech companies to add SMB fintech features to serve their customers.
While SMB fintech may not have universal adoption any time soon, the progress that has been made is meaningful. For instance, my brother, who has run an SMB real estate consulting firm for over a decade, will likely never deliberately cobble together several tech platforms and refer to them as his “tech stack.” And my assumption is that this will be the case for most “mom and pop” businesses for decades. But there are many opportunities that exist today that could save him and others money, provide a better experience for him and his employees, and potentially even get him access to funding that could be easier, cheaper and quicker than a traditional provider such as a bank could.
Here are five ways fintech is helping people today run their small businesses:
1- SMB Neobanks
As I mentioned earlier, most SMBs have historically selected the bank with the nearest branch for their business needs. Now, they simply need to register online for these services via applications referred to as SMB neobanks. Traditional banks have been open about their struggles to meet the increasing needs of their SMB clients. Opening SMB accounts with traditional providers is rarely fully virtual, something consumers want today for their retail banking experience. In addition, online user experience for SMBs has not been particularly strong for traditional banks, particularly on mobile.
Online providers, like consumer neobanks, are branchless and offer digital onboarding, which takes minutes instead of days. Examples include Novo, Rho and Mercury, which offer online checking, in some cases savings, and debit cards and easier access to data that can help them understand their businesses better.
One item to consider with SMB neobanks is that much like their consumer neobanks, virtually none have their own banking license, and they typically partner with a traditional bank to provide financial services. Because SMB neobanks are still a new thing, more complex transactions such as wires can be challenging.
2- Lending platforms
It’s well documented that most businesses fail because of cash flow issues. Cash flow doesn’t just mean the amount of money coming in and out, but the timing as well. There are many well-worn approaches to raising money for a small business. What might surprise you is that nearly 10% of loans from the Paycheck Protection Program (PPP), which aimed to address the economic consequences of the COVID-19 pandemic with payroll support for small businesses, were provided by fintech platforms. At the conclusion of the first half of 2020, fintechs accounted for $4.7B in PPP loans. These lending platforms are very much still open for business, now armed with enormous amounts of data and thousands more clients who became loyal advocates of their services.
Small banks are becoming quicker and more efficient at offering loans as well via partnerships with SMB fintechs. One example is StreetShares, an Ally Ventures portfolio company, that provides technology specializing in small business underwriting and business lending solutions. StreetShares offers a crediting and decisioning tool that provides community banks with a means to address the lending needs of small businesses.
3- Payroll management
For anyone who has ever run a small business, you never want to have any issues with payroll. For years, this has been an unimaginative area for technology, where large incumbents have become aggravating systems of record and have offered few innovative features.
This is changing quickly. As payroll has gone from desktop software to the cloud, new products and services are offering opportunities for small businesses to serve their employees and be more efficient. Generally, payments technology has enabled SMBs to provide nearly real-time payments to their employees and contractors. So called “Salary Advance” platforms allow employees to access their salaries well in advance of typical paydays. Startups like DailyPay offer an on-demand pay platform that delivers early access to earned wages and works with just about any HR or payroll system a company might use. Gusto, a payroll provider, is now offering a financial health monitor as well as an interest-bearing cash account to its clients’ employees that can also send a small portion of each paycheck into an employee’s savings account.
Many startups are launching today as more user-friendly alternatives for bookkeeping and other payroll tasks where QuickBooks has had a dominant market position. Because of this pressure, QuickBooks has been looking to partner with and build fintech solutions, such as adding employee benefits into online payroll, as well as a feature helping SMBs automate payroll and tax filing. This is a win for SMBs who are getting better experiences and more choices for a typically manual and tedious process where automation can help quite a bit.
For large corporations that operate globally, opening accounts in different countries and making international payments are huge cost centers and require large treasury operations groups. While not as active as large corporations, making payments can be similarly challenging for SMBs. According to a survey by WePay, 39% of SMBs say they spend five hours or more per week dealing with payment issues.
SMB fintech platforms are entering the fray to lower fees for transactions like ACH payments, outgoing wire transfers, and credits/debits from accounts. Players like Melio Payments promise an integrated approach to pay and get paid for invoices quickly. Melio also offers credit card integrations to help with cashflow, schedule payments and offer simple interfaces for payment approvals. Autobooks, another player in the SMB space, partners directly with banks to bring its clients a next-generation experience, allowing banks to offer online payment forms, invoicing, bill pay and bookkeeping right within the banking interface.
5- Expense management
Managing the expenses of small businesses and startups can be complicated for most parties involved. Corporate credit cards may be a non-starter for some SMB owners who aren’t able to make the personal credit guarantee. End-to-end expense approval is quite time-consuming and may require its own headcount. For the employee, submitting reimbursement requests is often a painful experience, and unfortunately, this is also an area ripe for employee fraud.
Fintech companies like Ramp, Divvy and Brex are offering technology SMBs and startups a fully integrated expense management platform along with lines of credit and virtual cards with improved user interfaces. Companies like Cledara are helping startups that spend much of their operating expenses on software subscriptions to identify which of these recurring payments are unwanted, forgotten or duplicated. Additionally, many of these platforms are offering rewards associated with card spend including things like earning points toward ridesharing services and software subscriptions, as well as cash-back and travel benefits.
Data as a service - bringing it all together
Online banking platforms, fintech lenders, cloud-based payroll, accounting, and cashflow solutions have significant benefits for SMBs. New digital products for SMBs by platforms and brands, which disintermediate the traditional financial players, are being built using “embedded fintech” software providers. However, the current state of data integration and normalization remains a challenge in reconciliation and data analytics. The next generation of products for SMBs will require easy access to companies’ financial data. Startups like Codat and Railz are enabling companies to hasten the time it takes to secure funding to SMBs accounts after applying for a loan or to underwrite necessary insurance policies. In addition to fintech, insurtech platforms like CoverWallet are hoping to make it easier than ever to manage commercial insurance policies. The pandemic has pushed many SMBs to digitize very quickly, and technology will continue to have a big impact on SMBs going forward.
Jesse Podell leads the day-to-day fintech activities for Ally Ventures. An active member of the fintech ecosystem, Podell leads investments and partnerships in alignment with Ally’s strategic priorities. As a member of Ally's Strategy & Corporate Development Group, Podell is involved in aspects of developing and executing the firm's corporate strategy, business development, and M&A opportunities. Podell co-founded TechDay, the world’s largest startup event series. Podell spent the first 13 years of his career in institutional sales and trading, including leading distressed equity trading at Jefferies & Co. and was Co-Head of Special Situations Equity Trading at Susquehanna International Group.