Weighed down by regulation and besieged by technology companies on nearly every front, traditional banks have been slow or unable to react to the recent surge in fintech innovation. While the payments battle has primarily taken place on the consumer side, a similar scenario may soon unfold in another major segment of their operation: business banking.
Headlines in the popular media may tell a different story, but the undeniable fact is that banks are in a position of great advantage. They are the “yin” to tech companies’ “yang.”
Banks excel in the areas that tech companies have deficiencies. They have established brand recognition among large populations of small business clients as opposed to tech companies, which are newer in the market. Time and time again, surveys show that the “trust factor” for banks far exceeds that of other players, especially technology companies. And, ultimately, their largest advantage stems from the large number of small businesses that have already fully integrated their financial processes with banks.
The predominant use of legacy payment technology is just one example of the great divide between business banking and the sleek avenues of consumer banking. Take paper checks for example: Checks aren’t just outdated — they’re hurting companies that use them.
The average cost of processing a business payment from invoice to payable and finally to payment clocks in at $65, and with businesses managing 20 billion checks each year, this analog payment method represents a $1 trillion drag on US businesses. Despite innovations such as the introduction of remote deposit capture and easier ways to ACH a payment there remains a tremendous opportunity to drive further efficiencies and accelerate businesses' adoption of electronic payments.
Business and consumer banking perform many of the same transactions; however, considerable differences still exist between them:
Higher levels of complexity. Business payments are far more complex than those of consumers, often requiring information stored in accounting software. It is typical for multiple people to be involved in the payment process, from bookkeepers and accountants to other employees who have to approve payments before they are made.
Business owners aren't "playing around." Unlike the millennial consumers driving demand for electronic and mobile payments, business owners are unlikely to dabble in unproven new technologies and processes, especially those tied to the financial well being of their businesses.
With higher dollar volume comes risk. The average business transaction is considerably larger than those made by consumers. For banks, this means more risk per transaction. As a result, banks are more likely to introduce innovative products with their non-business customers, where lower dollar amounts mean less risk.
Naturally, these unique differences require unique solutions. Applying modern technology to the problem can remedy many of the pain-points in today’s business banking. But not all. In fact, tech companies face an uphill battle in solving the woes of business banking, due to several distinct factors:
Lack of awareness. Financial technology companies are largely unknown to businesses. Whereas banks have expansive offline footprints, tech companies lack visibility.
Credibility takes time.As is the case with many new-age business payment systems, unproven technology isn't something businesses are chomping at the bit to test out, especially when operations are running smoothly.
Small solution, big problem. Every large company starts out small - solving one problem exceptionally well. Technology upstarts may have innovative approaches to age-old problems, but they lack breadth. The more granular a company’s solution, the harder it is to integrate into the existing financial ecosystem of a small business. Banks on the other hand, are a one-stop-shop for nearly every financial need of a small business.
The symbiotic relationship between small businesses and banks is not likely to change overnight. It will take time. In the immediate future, partnerships between banking institutions and technology firms can produce the business banking experience of the future. By leveraging the individual benefits each has to offer, the two can create technologically driven solutions that meet the problems facing business today head on.
In the end, the future success of the two industries is dependent upon the other. Just as the large banks cannot retain competitive edge without incorporating new technologies, the smaller tech companies will not sustain themselves without the resources and distribution of the entire banking structure.
Rene Lacerte is the founder and CEO of Bill.com.