The enormous market of US small businesses — composed of roughly 30 million small and medium businesses (SMBs) and another 16 million freelancers — has up til now been largely ignored by traditional financial institutions. Seen as high-risk and low-profit, SMBs have been pushed to the edges of banking and financial services. But that might change. Here are some lessons we have learned.
Where does one make money in banking? Traditionally, the answer would have been two-fold: either in the extremely high volume retail banking market, or otherwise in serving large enterprises. The retail banking market is characterised by large populations of relatively homogenous consumers, and it was here that the first explosion of Fintech offerings took place. On the other side of the spectrum, banks serving large enterprises could tap into their large financial flows with bespoke, tailored solutions.
Yet in between those extremes sits the main driver of the US economy: the market of SMBs. A market that has mostly been ignored and neglected, and could even be considered some sort of modern underbanked.
The SMB market represents a vast spectrum of business customers, ranging from single-person freelancing businesses to enterprises employing hundreds of people and generating tens of millions of dollars in annual sales. Each of these businesses tends to have financial and banking needs far more complex and unique than a retail customer, yet deliver financial streams far smaller than their large enterprise counterparts.
As such, financial services providers have often perceived the SMB market as an unattractive middle ground: too complex for one-size-fits-all offerings, and too small to profitably offer tailor-made solutions.
Thankfully, that view is shifting, and in the next few years we expect to see a rapid expansion of Fintech offerings in this market. The success of Fintech offerings in the retail space has both proven what is possible and normalised the idea of financial services offered through digital-first platforms. As competition in the retail space continues to intensify, the mostly untapped market of SMB customers will start to look more and more compelling.
Soon enough, we will see adventurous entrepreneurs bringing modern financial services and Fintech conveniences to every small business in the country. Those who can build elegant solutions and find viable distribution pathways will likely be well received — most small business owners are ready to say goodbye to their mix of feature-limited business checking accounts, hard-to-access lending options, and error-prone Excel spreadsheets.
For the brave-hearted Fintech entrepreneur willing to venture into this new territory, we offer a few pointers and hard-won insights:
Fintech products heavily rely on their underlying Banking as a Service (BaaS) platform and bank relationships. In fact, they can only innovate and disrupt to the extent that their infrastructure enables it. In order for Fintech to innovate more quickly, strong infrastructure platforms are needed. Most big BaaS providers have a focus towards the retail consumer market, leaving the BaaS space for small enterprises relatively nascent. There is a pressing need — but no satisfying solution — for a business-first platform that makes it easy to quickly and efficiently stitch together attractive Fintech solutions that cater to the needs of SMB clients.
A Fintech entrepreneur with a SMB-focused offering in 2021 should not (yet) expect to find the maturity in platforms and infrastructure that is available for consumer Fintech. It goes without saying that building a platform sturdy enough to serve this market yet flexible enough to innovate and iterate at the speed of business is a major engineering challenge. For the moment, know that the BaaS offerings in this space are still relatively nascent.
For practically every SMB entrepreneur, doing their finances is a pure cost center and often an emotional drain to boot. Rather than acting as a part-time CFO and spending time pulling financial services together, they seek solutions that let them focus on scaling their business.
For Fintech providers to cater to these needs though, the complicating factor is that every small business is different, and thus has different needs in their financial services. Expect it to be hard to build a one-size-fits all solution that satisfies a large percentage of SMB customers sufficiently to make it work. Instead, embrace the heterogeneity of the market, which leads us to our third point…
With such a variety of needs, the best way to approach the problem is to start with something small. For example, when we started our engagement with SteadiPay, they were focused exclusively on offering a service for small businesses to reap the benefits from credit cards while avoiding painful overdraft fees. That’s a simple, narrow problem to start with.
Once that was up and running, they added additional services: a cash optimiser to put unused cash to proper use, as well as a dashboarding tool to aggregate all financial streams and help predict and optimise a small business’s cash balance. In a world where hardly any infrastructure exists, even narrow problems like that take significant engineering resources. So start narrow and expand from there.
In its current state, US infrastructure to support SMB Fintechs is a decade behind leading markets like Singapore and London, but the signs are clear that the ecosystem is starting to pick up momentum. In 2020, investment in US Fintech companies outpaced EMEA investments by a factor of five. In the long run, the US market of small and mid sized companies provides an area of opportunity far greater than small national markets like Singapore or the many European markets.
For the US, the market of small enterprises represents such a significant economic driver that it is impossible to ignore for much longer. Even though US Fintech players didn’t get the early start and favorable tailwind of government stimulus or standardisation efforts like open banking, the first successes will be able to grow much faster and with fewer restrictions than their European or Asian counterparts.
In conclusion: we see promising movement in the US SMB Fintech space, with players like Steadipay, Wise and others carving out their respective niches in this growth market. Just as in the retail Fintech space, there’s ample opportunity for those willing to explore and pave their own track.
Curious to learn more about this space? Contact me at phil.gillman@vacuumlabs.com to exchange ideas and discuss trends and make sure to tune in to our podcast with Anthony Strike from SteadiPay to get more insights.
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