The Untapped Market Hiding in Consumer Bank Accounts

Banks are sitting on an untapped opportunity to increase revenue and deepen relationships hidden within the data running through their ecosystem. It’s the small or micro businesses operating out of customers’ personal accounts — not through business accounts.

These small and micro businesses have a significant impact on the economy. According to the Small Business Administration, there are 31.7 million small and medium businesses; 81% have no paid employees. Additionally, there are 41.1 million self-employed workers, according to MBO Partners, redefining the needs for small business banking. According to a 2021 survey by gig economy platform Upwork, 59 million Americans performed freelance work in 2021 and contributed $1.3 trillion in annual earnings to the U.S. economy.

The scope of this untapped opportunity may surprise bankers, especially those without robust data analysis services. It impacts banks of all sizes. According to data pulled from transactions of two financial institutions by Segmint and recently presented at the Experience FinXTech Conference, 26% of U.S. consumer deposit accounts have ongoing business transactions and payments.

The research methodology involved examined data from a number of banks ranging from $600 million in assets to $15 billion. Here’s a snapshot of the findings at two community banks:

The $15 billion bank:
• 520,603 total customers
• 51,842 business accounts
• 136,476 consumer accounts with ongoing business transactions

That’s 2.6 times more “hidden” business accounts than actual business accounts.

The $600 million bank:
• 18,431 total customers
• 1,659 business accounts
• 5,625 consumer accounts with ongoing business transactions

That’s 3.4 times more “hidden” business accounts than actual business accounts.

These numbers represent an opportunity for banks to gain revenue by converting consumer accounts to business accounts and processing their transactions. It can also serve to deepen relationships with those customers, increasing product utilization and brand loyalty. But how do banks identify those accounts?

Robust data analysis of account holder activity is the best — if not only — way to identify small and micro businesses operating out of consumer accounts. Financial institutions are flooded with transaction data, the richest kind of data that can produce insights to target these consumers.

Merchant payment cleansing
Merchant payment cleansing is a critical tool to help banks better understand customer transaction behavior and model spend patterns. It is nearly impossible to indentify merchants in transactions without merchant payment cleansing translating the cryptic merchant name on the transaction description to the actual company name. For example, “JDF Revolving” on a transaction translates to John Deere Financing, categorized as business equipment lease financing. “VSA PUR ETI Financial Corp” is actually Honor Capital, which provides business financing services. Without merchant payment cleansing, banks won’t have that important information.

An FI can leverage this clean, categorized and tagged data to evaluate a more organized and select audience. The right partner should offer the bank a robust taxonomy and execute at tremendous speed and scale — all while protecting the privacy and security of account holder data. Knowing the actual merchant names and type of business allows a bank’s data analysis to dig deeper into things like: 

Spending With Competitors
Some identifiers of business spend with a competitor include:

  • Competitive loans for business and business insurance
  • Competitive equipment financing
  • Competitive invoice factoring
  • Competitive merchant services

In our analysis, the total of competitively processed deposits came in at more than $8.6 billion, representing 70% consumer and 30% business accounts. Competitors included Venmo, Cash App, Zelle, Ally Bank, Apple Cash, WorldPay, Square, Intuit Payment Solutions and more. 

Business Customer Receipts
Transactions with business-type receipts are also indicative of businesses operating out of consumer accounts. These can include:

  • Uber freight income
  • “Vendor to” transactions
  • “Supplier to” transactions
  • com marketplace recipients

Business Expenditures
The companies below are widely known, but they could have cryptic transaction descriptions that leave banks wondering. However, they’re easily identifiable after merchant payment cleansing.

  • Facebook advertising
  • Intuit Quickbooks
  • Etsy sellers fee
  • Shopify
  • Amazon Web Services
  • Calendly
  • Canva
  • HubSpot
  • Salesforce
  • Constant Contact

For more unknown brands, merchant payment cleansing becomes even more critical.

Banks can use these insights on transactions to deliver unique, personalized engagements with their customers and make data-backed decisions. With it, banks can:

  • Identify how big of an opportunity small business accounts are for them.
  • Decide if they should invest in small business loan origination service or payment technology.
  • Invest in group buying opportunities.
  • Develop integrations with platforms like Quickbooks, Shopify, Etsy and others.
  • Organize small business workshops around certain vendors to support your small business banking products

By targeting the right bank customers with products like business loans, business checking, equipment loans, and merchant services like remote deposit capture and payment processing to customers, banks can increase revenue, reduce competitive business spend and deepen relationships with their customers.

Where the CFPB’s Faster Payment Vision Falls Short


NACHA-8-24-15.pngOn July 9, 2015, the Consumer Financial Protection Bureau released its “vision” for faster payment systems, consisting of nine “consumer protection principles.”  The principles build on concerns about payment systems raised by CFPB Director Richard Cordray in a speech last year. These well intentioned principles pose a number of practical problems and ignore the inherent interdependence of consumer and commercial benefits as payment systems evolve.

Background
The CFPB’s nine principles stake out a bold policy stance aimed at ensuring that faster payment systems primarily benefit consumers. The principles are:

  • Consumer control over payments;
  • Data and privacy;
  • Fraud and error resolution protections;
  • Transparency;
  • Cost;
  • Access;
  • Funds availability;
  • Security and payment credential value; and
  • Strong accountability mechanisms that effectively curtail system misuse.

Release of these principles follows initiatives by the Federal Reserve System, The Clearing House, and most recently NACHA, through its same-day ACH rule approved in May, to promote the development of faster payment systems.

Practical Concerns with the CFPB’s Faster Payment Systems Principles
The CFPB’s principles undoubtedly deserve consideration, and few industry participants would disagree with them at a high level. Though reasonable in theory, certain goals articulated by the CFPB may prove impractical, counterproductive, or unduly optimistic in practice. Here are four examples:

Data and Privacy
The CFPB generally wants consumers to be “informed of how their data are being transferred through any new payment system, including what data are being transferred, who has access to them, how that data can be used, and potential risks[,]” and wants systems to “allow consumers to specify what data can be transferred and whether third parties can access that data.”

This amount of disclosure and degree of consumer control is unrealistic for routine payment transactions, unnecessary in light of current and evolving security measures and fraud and error resolution protections, and likely to thwart the goal of faster payment processing.

Transparency and Funds Availability
The CFPB expects faster payments systems to provide “real-time access to information about the status of transactions, including confirmations of payment and receipt of funds” and to give consumers “faster guaranteed access to funds” to decrease the risk of overdrafts and non-sufficient funds (NSF) transactions.

Here and throughout its principles, the CFPB expresses its desire for faster payment systems to benefit consumers immediately. Implicit in this goal is a rejection of staged implementation of consumer protections, as in NACHA’s same-day ACH rule where same-day funds availability for consumers follows same-day settlement of debit and credit transactions. Additionally, real-time access to information about transaction status seems costly and unhelpful until consumers can act upon such information in real time.

Cost
The CFPB envisions affordable payment systems with fees disclosed to allow consumers to compare costs of different payment options.

The CFPB’s vision of comparative cost disclosures across the ecosystem of available payment options is unrealistic given the existence of competing independent payment systems, multiple payment channels and devices, and varying degrees of intermediation. The total cost to consumers of using different payment systems depends upon many unpredictable variables, making comparative cost disclosures little more than rough, imprecise estimates.

Access
The CFPB expects faster payment systems to be “broadly accessible to consumers,” including “through qualified intermediaries and other non-depositories.”

This principle focuses on unbanked and underbanked consumers. Although broad accessibility should be encouraged, it is difficult to imagine a safe and widely accepted payment system evolving in which banks would not be heavily involved in the origination and receipt of transactions. Indeed, payment systems that have evolved independent of banks—such as virtual currencies—pose substantial consumer protection concerns.

Implications of the CFPB’s Principles
CFPB Director Cordray emphasized that “the primary beneficiaries” of faster payment systems should be consumers and the CFPB’s principles reflect this view. Creating faster payment systems is an enormously complicated industry-driven undertaking, the cost of which is borne by industry participants. As such, faster payment systems must offer tangible benefits to industry participants, not just to consumers, if they are to succeed. The CFPB’s principles would be more effective if they expressly recognized the need to balance consumer and commercial benefits.

Further, the CFPB may intend to use its principles as a chokepoint for policing consumer protection features in evolving payment systems. We hope the CFPB’s adherence to these principles does not become rigid and overzealous or threaten to derail useful payment system improvements before they get off the ground.