For banks, supporting small businesses in the pandemic goes well beyond lending

The impact of the pandemic on small businesses has spurred changes in banks’ lending practices – but the upheaval hasn’t stopped there. While the shifts underway in functions such as trade finance and mortgages are typically more nuanced, they speak to how important small- and medium-sized businesses (SMB) are to banks – and how critical it is to find new ways to support SMBs in the wake of COVID-19.

Despite being battered by the pandemic, SMBs represent an iconic institution for consumers. A surprising 75% of Americans surveyed in August expressed confidence in the sector, exhibiting a groundswell of support far exceeding respondents’ faith in the medical system (51%) and public schools (41%). The public, it seems, is rooting for SMBs’ comeback.

Change is indeed churning through the sector, and some of it is rooted in the opposite end of the corporate spectrum: As big companies get bigger, they’re further penetrating the small business market and generating ramifications for banks on several fronts. The squeeze continues in lending, with American Express announcing plans to acquire fintech standout Kabbage, a move that strengthens the credit card giant, already the largest U.S. card provider to small businesses. But we’re also anticipating an impact to banks’ high-margin trade finance products as a result of Amazon’s recent partnership with Goldman. (Amazon, it should be noted, emerged from the pandemic stronger than before.)  

The evolving SMB workforce is likely to affect banks’ underwriting standards and products. The rise of the gig economy has triggered huge growth in the number of freelance employees, and independent freelancers are expected to outnumber W-2 employees by 2027. With freelancers’ 1099 income sources less consistent than W-2 sources, development of new income validation tools and policies will be a priority for banks’ mortgage functions. The transition will also open opportunities for banks to service the gig workforce through apps such as the new tool by Sabius that enables freelancers to track and submit required tax payments.

New ways to serve SMBs

Given the shifting ground, we hear from increasing numbers of banking leaders who question what their role could be in serving the SMB segment. While the answers are complex, it’s clear banks not only can support SMBs and ensure the segment’s economic vitality but also serve them profitably.

Here are key issues that banks need to tackle as they sort through their options in the post-COVID SMB market. 

1. Reevaluate your commitment to the branch. When it comes to the branch system, is your bank in or out? The prevailing thought among banks is that SMBs are most efficiently serviced through digital platforms. Yet small business owners favor brick-and-mortar branches for daily transaction such as deposits and cash processing. Existing branch networks are a critical part of an effective omnichannel strategy for servicing the SMB segment as long as branch associates have access to the digital tools and platforms that customers use.

2. Develop SMB-specific products. SMBs require targeted products and services. Bank of America, for example, packages a limited set of treasury management services at a lower price point specifically for the smallest SMB segment. Because business owners often tap their personal finances to cover business expenses, the products that work best for them embody the affordability of consumer products. Think innovatively and consider offering ways to generate reward points that can be used for vacations and other perks for products other than credit cards.

3. Extend finance options at the point of need. Small business owners value convenience. By leveraging advanced data and analytical tools, banks can make financing offers to SMB customers when they need them, such as when they’re making large inventory purchases. These tools can also help them compete with American Express and Amazon, which do an excellent job of basing offers on customer data related to trade cycles and conversion patterns. Cash flow is SMBs’ top concern, and real-time tools offered at affordable price points can help business owners improve the timing of invoices and analysis of cash flow patterns. Daily analytics reports can clarify benchmarks such as lead time and conversion of inventory and receivables. Point-of-need tools can even help SMBs avoid costly overdrafts in deposit accounts that hurt their ability to acquire necessary goods and services and make payroll.

4. Know your SMB customer. To most financial services organizations, know your customer (KYC) is a compliance term for onboarding. But we recommend applying advanced data and analytical tools for a more literal interpretation: Learn about your SMB customers as people. Discover their likes, dislikes and preferences. While small banks can’t outspend large banks, they often best them by taking time to know SMB customers personally. Digital tools can help large banks acquire the same familiarity and determine the next best offer for SMBs based on enhanced insights. For example, we helped a client develop a real-time recommendation engine, which generated custom offers and product rankings based on analytical models, as well as real-time offers based on customer spend patterns through scoring and recommendation models. As a result, the prospect conversion rate rose from 8% to 21%.

5. Be where the SMBs are. Digital marketplaces are increasingly important outlets for small businesses. Tradeshift, the digital platform for B2B supply chain payments, has more than 1.5 million customers. Banking services haven’t been positioned this way – but there’s no reason they can’t be. Options for banks include joining existing marketplaces or collaborating to launch banking-specific platforms.
6. Plug in to area accelerators and SMB resources. It takes a village to support small businesses. For banks, creating SMB programming or participating in others’ offerings is a great way to build good will and networking opportunities. KeyBank, for example, has made a long-term bet on its Small Business Wellness Index, which surveys SMBs annually and offers AI-driven tools for business owners. 

Given the public’s vote of confidence for SMBs, it’s clear how important the sector is to the economy. Now it's time for banks to step up with an equal commitment of support.