How Live Oak Closes the Gap on Small Business

The largest U.S. bank by assets is making a bid to better compete for small businesses, sending a signal to the rest of the industry that there may be an overlooked threat from competitors like Square, the financial services provider owned by Block.

In September, the San Francisco fintech Gusto announced its relationship with JPMorgan Chase & Co., aiming to help the bank build out online payroll capabilities for its business clients. Chase intends to go live with this service as part of its Chase Payment Solutions platform by the end of 2024, according to CNBC.

While big banks like Chase and digital competitors like Square make headway in their bid to attract small business clientele, community bank executives and directors taking part in Bank Director’s 2023 Technology Survey reveal a gap in their offerings.

Respondents say their banks offer a wide variety of digital banking services to retail customers, including deposit account opening (82%) and mortgage loan applications (65%). However, the survey indicates that more progress could be made to serve small business clients. While majorities say their bank offers mobile deposit (93%) and payments capabilities (84%) to these customers, less than half offer deposit account opening (41%), loan applications (37%), payroll services (37%) or treasury management solutions (36%) via the digital channel. Accounts payable/receivable (19%) and cash flow monitoring (11%) are far less common.

“One of the biggest opportunities that banks have today is to serve that small business client,” says Jennifer Geis, senior analyst, corporate strategy, at Jack Henry, which sponsored the survey. “Fintechs, specifically in the business space, are taking market share, along with deposits – plus the loyalty that comes with deposits – from banks.”

Community banks don’t set out to neglect small business customers, but for many, tailoring solutions for these clients hasn’t been a priority, says William Losch, president and chief financial officer at Live Oak Bancshares in Wilmington, North Carolina.

“It’s usually either consumer-plus banking or commercial banking-minus,” he says. “It’s not anything that’s truly specific to the small business.”

A lot of banks already have more small business clients than they realize, but many of those businesses are sole proprietorships that rely on retail checking and savings accounts to manage their money. According to the Small Business Administration, almost 82% of small businesses in the U.S. consist of just one person.

“Many banks already have a lot of small business customers that are currently retail customers, but they’re not providing them the specific service that meets their small business needs,” Losch says.

Small business is a primary focus for $10.8 billion Live Oak, which built up that base with a specialty in making SBA 7(a) loans. With $1.7 billion of those loans made so far in 2023, it remains the biggest SBA 7(a) lender today, based on loan volume. Live Oak’s digital offerings include communication with bankers via its loan servicing and deposit platforms, something that just 22% of survey respondents indicate their bank offers to small business customers.

More recently, Live Oak launched an embedded banking service for small businesses. Initially offered to veterinary clients, it allows customers in certain verticals to manage various banking services, such as accounts payable and accounts receivable, inside their own management software.

“We really think that the business needs for small business customers can be nearly as complex as a larger business, but small businesses don’t have a CFO,” says Losch. “They don’t have a finance team. They don’t necessarily have an operations team or a lot of the back office support [that] larger companies have.”

Small business clients want digital offerings, such as digital account opening and automated loan servicing, Losch says, but “it’s less about the technology and far more about the personal experience.” Live Oak employs 31 people in its Wilmington call center, so small business clients don’t have to wait long or navigate an automated system to talk to a person on the phone. The bank also conducts in-person follow-up visits with small business borrowers within 90 days of receiving a loan.

High-touch, personalized service specific to small businesses may be the key for banks looking to distinguish themselves from fintech competitors.

“Banks are good at customer service. That’s what they’re known for,” says Jack Henry’s Geis. “Especially in working with these sole proprietors and small businesses, fintechs don’t have that. Businesses aren’t going to get that service level that only banks can provide from a fintech. Combined with offering the right technology stack, banks have a real advantage there.”