Will Neobanks Seize Control of Small-business Banking?

Neobanks are challenging traditional banking institutions' small-business customer base. Furthermore, nonbank firms that do not identify as neobanks, such as QuickBooks, Square, and Shopify, are adopting banking products for this market.

Currently, at least 100 fintechs provide digital solutions that make cash-flow management, accounts payable, invoicing, and other operations reasonably simple. According to Robin Borelli, head of the financial services group at CI&T, a New York-based digital transformation company, a dozen or more neobanks offer comparable management capabilities in addition to at least one traditional banking product such as loans.

In addition to digital technologies, neobanks aspire to provide quick money movement and goods. When a client makes an online purchase, for example, some neobanks can quickly credit the merchant's account. Another common benefit promoted by neobanks is quick loan funding, however, interest rates may be higher.

Furthermore, neobanks may be able to finance loans more rapidly by employing different underwriting processes, according to Peter Wannemacher, principal analyst at Forrester Research. Is it just because neobanks are better at serving the SMB market? "It depends on what a company wants and needs."

The benefits of banking

Businesses that favor banks do so for three main reasons, according to Wannemacher: "rates, dependability, and roots." Indeed, relationship bankers who have gained client confidence are routinely cited as a significant banking benefit by bankers and academics alike. However, he believes that banks would need to plan on how or if to address the neobank issue in the near future.

Wannemacher expects that the majority of companies will improve their SMB services, while a minority will decide not to invest in this area. That's acceptable, he adds, as long as it's a strategic choice that there's not enough to gain from putting in the effort—or not enough to lose from ignoring neobanks.

Wannemacher predicts that some will concentrate in an SMB niche "that can be based on anything—including location." Others, most likely huge institutions, would strive for full-fledged products for a large SMB clientele, he says.

While neobanks provide speedy loan funding and enticing product features, their main selling point is the automation of a variety of managerial chores.

Banks that implement similar digital features and empower relationship managers to assist owners in using such technologies, according to Borelli, may boost their client relationships. For example, if a bank provides invoicing and cash-flow projections, a relationship manager may engage with an owner to discuss where the firm should be at different times in time.

Many industry analysts believe that banks have not responded to neobanks with a full-throttled resistance. However, "the progress community banks and other financial institutions are making... to compete with neobanks should not be overlooked," says Chris Zingo, senior vice president of Finastra, a London-based financial services provider.

TowneBank, a $15 billion bank headquartered in Portsmouth, Virginia, has invested heavily in treasury management software and mobile experiences. The bank, which focuses in supporting firms with less than $10 million in yearly revenue, offers a variety of digital services, including a breakeven and profit-margin analysis. Companies can also link their TowneBank accounts to QuickBooks or Quicken.

However, this does not imply that TowneBank is attempting to imitate the neobank experience. Its primary link with its "business members"—the bank's preferred word for customers—is the bankers who visit the locations of current and potential business members on a frequent basis.

According to Brad Schwartz, president of TowneBank, TowneBank used its close contacts and expertise with its SMB customers to steer its purchase of online products that members were likely to value.

According to Lynn Heitman, executive vice president and business banking sector leader at U.S. Bank, the bank acquires or manufactures a wide range of products to "simplify management."

Regular surveys and panel discussions with members of the bank's diverse SMB client base give insight into the skills required. For example, U.S. Bank purchased Bento Technologies in order to increase the bank's software products and improve its accounts receivable, payable, and associated services.

There is also informative material on management topics available. "What makes it so strong is the combination of tools and information," Heitman explains. "That's what we're hearing from (companies)."

Heitman emphasizes that digital help does not replace, but rather supplements, human relationships. "Our managers may get down and go over a working capital conversation, as well as exchange ideas and insights from digital technologies."