How Banks Can Grab a Slice of the $11 Trillion B2B Pie

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A team of economists at the Federal Reserve has tracked noncash payment trends in the U.S. since 2001, including the number and value of transactions across all major payment methods.

Leveraging their December 2021 Payments Study update, Visa’s Business Solutions team estimates there were 2.9 billion B2B checks for an estimated $11.8 trillion. This represents 26% of all checks paid by U.S. depository institutions and 57% of paid check dollar value, based on the Fed’s 2018 Check Sample Survey. Given the ongoing decline in check use by U.S. consumers, we suspect the B2B share is likely even higher today.

Despite decades of decline in check use, check displacement is still a massive growth opportunity for electronic payments, particularly for commercial card. For context, commercial card rails process an estimated $500 billion in business spend — equivalent to just 4% percent of the value of B2B checks, according to McKinsey & Co.’s U.S. Payments Map estimating 2020 U.S. commercial card spend at $485 billion.

Readers are likely familiar with the traditional challenges to commercial card acceptance by suppliers: card processing fees, manual processing of virtual card payments, accounts receivable reconciliation, among others. These challenges are real, but payments innovators are making strides on these daily. For example, let’s consider the inertia by corporate buyers who write all these checks. According to the Fed’s last Check Sample Survey, 82% of B2B checks were for $2,500 or less; 55% were for $500 or less.

These low-value transactions can be paid via a commercial card, right? Unfortunately, too few buyers feel motivated to pursue these opportunities. Often the return on investment feels too low to track down all the data about where these checks are going and then convince suppliers to accept card. Generating a consolidated spend file may require tapping into multiple systems with disparate data structures. In the end, fewer than half of a company’s suppliers are likely to accept commercial cards. It’s no wonder decision makers don’t jump at the chance when bank salespeople ask for a spend file simply to determine if there’s an opportunity worth pursuing.

A New Operating Model
But what if that weren’t the model? What if we took the burden of finding opportunities away from the corporate client entirely? What if a card salesperson showed up at the door with a credible opportunity already in hand? There’s one model that client banks can tap into that does just that.

Each of the 2.9 billion B2B checks paid every year is paid by a financial institution. Most financial institutions (or their processors) use optical character recognition (OCR) in the daily processing of those checks. By repurposing OCR data from checks, banks can identify which suppliers their corporate customers are paying that already accept commercial card, and then pinpointing which business bank customers have the greatest opportunity to shift check spend with those suppliers to card. These banks’ salespeople no longer begin a client conversation by asking for a spend file. Instead, they present a credible analysis, based on the client’s own payments volume processed by the bank.

What used to be a data mining project for the client becomes a simple, data-driven decision about how to move forward. Banks are in a unique position to approach business customers about these opportunities. Without the deposit relationship, commercial card salespeople must use the old model.

If it sounds too good to be true, it’s not. But it does take work. Some could make the argument that the easy growth in commercial card is over; that commercial card issuers are in a race to the bottom. We are more optimistic than that. We believe there is a tremendous, untapped opportunity out there: an $11.8 trillion pie in the form of 2.9 billion B2B checks.

Disrupting the All-or-Nothing Mindset in Banking

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Nine and a half times out of 10, you don’t eat the entire pie during dessert. Instead, you opt for a slice – maybe two.

It’s the same with financial institutions and their services.

Most banks don’t originate every type of loan or allow customers to open every type of account in the market. But when they are in need of a specific capability, such as banking as a service capabilities or acquisition, development and construction financing, it can be difficult to find a solution that does only that.

In certain cloud-hosted environments, however, banks can create the exact solution they need for their business and customers.

In this episode of Reinventing Banking, a special podcast series brought to you by Bank Director and Microsoft Corp., we speak to Robert Wint, senior product director at Temenos, a cloud-based banking technology solutions provider.

Wint describes how Temenos’ cloud banking focus is helping financial institutions spin out specific, individual technologies and launch them as stand-alone solutions. He brings to the table some impressive case studies, and introduces a potentially new term to our American audience: composable banking.

Temenos reports that its technology is used to bank over 1.2 billion people. Listen to find out how.

This episode, and all past episodes of Reinventing Banking, are available on FinXTech.com, Spotify and Apple Music.

3 Ways to Drive Radical Efficiency in Business Lending

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Community banks find themselves in a high-pressure lending environment, as businesses rebound from the depths of the pandemic and grapple with inflation levels that have not been seen for 40 years.

This economic landscape has created ample opportunity for growth among business lenders, but the rising demand for capital has also invited stiffer competition. In a crowded market, tech-savvy, radically efficient lenders — be they traditional financial institutions or alternative lenders — will outperform their counterparts to win more relationships in an increasingly digitizing industry. Banks can achieve this efficiency by modernizing three important areas of lending: Small Business Administration programs, small credits and self-service lending.

Enhancing SBA Lending
After successfully issuing Paycheck Protection Program loans, many financial institutions are considering offering other types of SBA loans to their business customers. Unfortunately, many balk at the risk associated with issuing government-backed loans and the overhead that goes along with them. But the right technology can create digital guardrails that help banks ensure that loans are documented correctly and that the collected data is accurate — ultimately reducing work by more than 75%.

When looking for tools that drive efficiency in SBA lending, bank executives should prioritize features like guided application experiences that enforce SBA policies, rules engines that recommend offers based on SBA eligibility and platforms that automatically generate execution-ready documents.

Small Credits Efficiencies
Most of the demand for small business loans are for credits under $100,000; more than half of such loans are originated by just five national lenders. The one thing all five of these lenders have in common is the ability to originate business loans online.

Loans that are less than $100,000 are customer acquisition opportunities for banks and can help grow small business portfolios. They’re also a key piece of creating long-term relationships that financial institutions covet. But to compete in this space, community institutions need to combine their strength in local markets with digital tools that deliver a winning experience.

Omnichannel support here is crucial. Providing borrowers with a choice of in person, online or over-the-phone service creates a competitive advantage that alternative lenders can’t replicate with an online-only business model.

A best-in-class customer experience is equally critical. Business customers’ expectations of convenience and service are often shaped by their experiences as consumers. They need a lending experience that is efficient and easy to navigate from beginning to end.

It will be difficult for banks to drive efficiency in small credits without transforming their sales processes. Many lenders began their digital transformations during the pandemic, but there is still significant room for continued innovation. To maximize customer interactions, every relationship manager, retail banker, and call center employee should be able to begin the process of applying for a small business loan. Banks need to ensure their application process is simple enough to enable this service across their organization.

Self-Service Experiences
From credit cards to auto financing to mortgages, a loan or line of credit is usually only a few clicks away for consumers. Business owners who are seeking a new loan or line of credit, however, have fewer options available to them and can likely expect a more arduous process. That’s because business banking products are more complicated to sell and require more interactions between business owners and their lending partners before closing documents can be signed.

This means there are many opportunities for banks to find efficiency within this process; the right technology can even allow institutions to offer self-service business loans.

The appetite for self-service business loans exists: Two years of an expectation-shifting pandemic led many business borrowers to prioritize speed, efficiency and ease of use for all their customer experiences — business banking included. Digitizing the front end for borrowers provides a modern experience that accelerates data gathering and risk review, without requiring an institution to compromise or modify their existing underwriting workflow.

In the crowded market of small business lending, efficiency is an absolute must for success. Many banks have plenty of opportunities to improve their efficiency in the small business lending process using a number of tools available today. Regardless of tech choice, community banks will find their best and greatest return on investment by focusing on gains in SBA lending, small credits and self-service lending.

Disney’s Lesson for Banks

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When Robert Iger became The Walt Disney Co. CEO in 2005, the company’s storied history of animation had floundered for a decade.

So Iger turned to a competitor whose animation outpaced Disney’s own and proposed a deal.

The relationship between Pixar Animation Studios and Disney had been strained, and Iger was nervous when he called Pixar’s CEO at the time, Steve Jobs. The two sat down in front of a white board at Pixar’s headquarters and began listing the pros and cons of the deal. The pros had three items. The cons had 20, as the now-retired Iger tells it in his Masterclass online.

“I said ‘This probably isn’t going to happen,’’’ Iger remembers. “He said, ‘Why do you say that?’”

Jobs could see that the pros had greater weight to them, despite the long list of the cons. Ultimately, Disney did buy Pixar for more than $7 billion in 2006, improving its standing, animation and financial success. In the end, Iger says he “didn’t think it was anything but a risk worth taking.”

I read Iger’s memoir, “The Ride of a Lifetime,’’ in 2021, just as I began planning the agenda for our annual Acquire or Be Acquired Conference in Phoenix, which is widely regarded as the premier M&A conference for financial industry CEOs, boards and leadership teams.

His story resonated, and not just because of the Disney/Pixar transaction.

I thought about risks worth taking, and was reminded of the leadership traits Iger prizes — specifically, optimism, courage and curiosity. Moreover, many of this year’s registered attendees wrestle with the same issues Iger confronted at Disney: They represent important brands in their markets that must respond to the monumental changes in customer expectations. They must attract and retain talent and to grow in the face of challenges.

While some look to 2022 with a sense of apprehension — thanks to Covid variant uncertainty, inflation, supply chain bottlenecks and potential regulatory changes — I feel quite the pep in my step this January. I celebrate the opportunity with our team to return, in-person, to the JW Marriott Desert Ridge. With over 1,350 registered to join us Jan. 30 through Feb. 1, I know I am not alone in my excitement to be again with people in real life.

So what’s in store for those joining us? We will have conversations about:

  • Examining capital allocation.
  • Balancing short-term profitability versus long term value creation.
  • Managing excess liquidity and shrinking margins.
  • Re-thinking hiring models and succession planning.
  • Becoming more competitive and efficient.

Naturally, we discuss the various growth opportunities available to participants. We talk about recent merger transactions, market reactions and integration hurdles. We hear about the importance of marrying bank strategy with technology investment. We explore what’s going on in Washington with respect to regulation and we acknowledge the pressure to grow earnings and the need to diversify the business.

As the convergence of traditional banking and fintech continues to accelerate, we again offer FinXTech sessions dedicated to delivering growth. We unpack concepts like banking as a service, stablecoins, Web3, embedded finance and open banking.

Acquire or Be Acquired has long been a meeting ground for those that take the creation of franchise value very seriously — a topic even more nuanced in today’s increasingly digital world. The risk takers will be there.

“There’s no way you can achieve great gains without taking great chances,’’ Iger says. “Success is boundless.”

The Rise of the Subscription Society: Three Important Takeaways for Banks

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revenue-8-11-17.pngSubscription services are spreading like wildfire with huge leaps in subscription rates. Amazon Prime saw a 22 million household jump in 12 months, with 85 million Americans currently subscribed. Spotify started in 2011 with just 1 million subscribers and now, just 6 years later, has grown to 50 million paid subscribers. Then there’s Netflix, which just announced it has over 100 million total subscribers, about half of them in the U.S.

Success like this illustrates the subscription model isn’t merely a transactional structure, but has become the way for modern consumers to purchase (i.e. access to and use of product in reasonable installment payments as opposed to buying a product outright and owning it). Banks looking to make their products more attractive to consumers can use these companies’ successes as a model for their own service offerings.

So what makes the subscription-based model so compelling?

High Value, Low Cost
Subscription models provide a high amount of value at a lower cost than purchasing a product outright.

Take Amazon Prime, for example. Members are able to gain access to a large, discounted marketplace of products, free or discounted shipping that will deliver most purchases directly to their doors in under 48 hours, access to video streaming, music streaming, book libraries and personalized recommendations for just $10.99 per month (or discounted to $100 a year if they prepay in advance). These savings not only help the consumer save but also indirectly result in the development of healthier financial habits through Amazon’s network of discounts.

Amazon-Prime-chart-md.png

Spotify’s high value, low cost model offers the ability to pay a low monthly fee for access to unlimited music streaming as opposed to paying for each song individually or buying the DVD.

And a bank is taking notice of and acting on this subscription success. To make the Spotify subscription even more valuable, it has teamed with Capital One to reduce the monthly fee by 50 percent for 50 million potential customers, if the monthly payment source is a Capital One credit card.

Netflix-chart-md.png

Personalized Experience
Subscription services are also usually molded around the subscriber’s habits and preferences to deliver a personalized experience. Personalization ensures value is relevant to individual subscribers, as these services usually offer a wide library of products to ensure they’re universally appealing and accommodate various consumer needs.

This is another example where Spotify delivers. The service includes a so-called Discover portal dedicated to helping users find new music they would enjoy based on their streaming history and even delivers custom playlists on a weekly basis. Netflix and Amazon Prime also create a personalized list of recommendations and display them prominently on their websites so that users are immediately greeted by a relevant experience.

Banks have tremendous access to customers to provide relevant and timely offers and personalized deliverables to encourage engagement that goes beyond just traditional transactional experiences.

Convenience and Instant Access
In today’s technology-rich culture, consumers have come to expect instant access to the services, information and products they need. The subscription model was purposely built around providing convenience and immediacy.
In the not-so-distant past before Netflix, consumers would have to visit a video store or a movie theater if they wanted to watch a title on demand. More recently, they could order movies on demand from their cable or satellite providers, but this required purchasing titles individually and was often costly.

However, with video streaming services like Netflix, consumers now have a whole library of movies and TV shows to stream on demand whenever they want and they don’t have to purchase each title separately. Instead, they have access to Netflix’s full library for only $7.99 per month, which is about equivalent to purchasing one title.

Spotify-chart-md.png

Banks, of course, do have online and mobile banking products. What banks haven’t been able to do is fully monetize, with recurring revenue, this convenience and instant access. The next logical step is to find what new, non-traditional services can be instantly delivered through online and mobile platforms that customers will pay for.

The subscription model that delivers value, personalization and instant access can be successful for banks looking to build a more marketable brand and a larger and steadier stream of revenue. Amazon Prime, Spotify and Netflix are clearly examples of top performers of this model, but banks need to search out ways they can make their products more attractive and provide a value-rich, relevant and convenient experience for their customers.

Driving Revenue with Better Treasury Management

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accounting-7-22-16.pngTreasury services are a large source of fee revenue for banks – selling payment rails, wire services and other bread and butter offerings. However, when it comes to small and mid-size companies, banks can and should be a source for more than just payments and transfers. There is a huge opportunity to be generating more revenue for the bank, and perhaps more importantly, to make themselves an indispensable part of the client’s business operations.

In previous years, treasury services professionals had no need to understand their customers’ finance and accounting situation. They were selling traditional bank services, in which they were well versed. However, today’s increasingly complex fintech environment means that these professionals have a huge opportunity. There are far more technological products and solutions for banks to offer that improve their customers’ lives; and the advantage of offering them is that your customer is less likely to go somewhere else to get them. By better understanding the pain points their customers feel from a business and operations standpoint, they can offer technology that can ease customers’ headaches and drive incremental revenue for the bank.

Accounting Systems–The Heart of the Company
For growing companies, having the right accounting system is vital. Everything from payroll to accounts payable runs through it, meaning mistakes or inefficiencies can lead to everything from cash flow problems to security breaches. For these reasons, every treasury services professional should have basic knowledge of the major accounting systems and should start the sales process by asking what system a company uses. From there, they can begin to understand the company’s workflow and how it might be improved.

Increase Incremental Revenue
By understanding the customer’s pain points, a treasury services manager who is well-versed in the language of accounting will be able to identify and offer solutions to streamline processes, save time and increase security. Perhaps the customer is spending hours each week manually inputting invoices. Offering that customer an automated invoice capture solution will save the accounting team time and resources. Perhaps the customer still is filing receipts in a filing cabinet and could use a document storage system to enable faster search functionality.

Deliver End-to-End Solutions
By fully understanding accounting systems and processes and upselling additional services where appropriate, the bank can deliver an end-to-end solution for the customer and generate more revenue for the bank. For example, if the bank is an issuer of corporate credit cards, there is the opportunity to drive more payables onto those cards and drive more interchange revenue to the bank.

Everything from invoice capture, to accounts payable, to payments and payroll can all flow seamlessly through the central hub. Offering multiple products together will ensure proper integration and mean that systems aren’t cobbled together or require work-arounds. And, these solutions offer additional benefits such as fraud protection, increased visibility and cash flow management and security controls.

However, the treasury services professional’s job doesn’t have to stop after they make a sale. By keeping in touch regularly and nurturing the relationship, he or she will be able to identify when it’s time to upgrade systems. For example, a small business may start with QuickBooks but eventually outgrow the system and graduate to a more robust accounting platform like Intacct or NetSuite. Keeping an eye on data that indicates account health, such the volume of payments or other activity, could be a good indicator of when to check in with them.

Make Your Bank Sticky
It’s all too easy for a business to switch banks–especially if it is using the bank only for payments and transfers. Customers can be fickle and easily lured away by a slightly better rate or lower fee structure. But a treasury services professional can be at the front lines of customer retention by showing value that makes it difficult for customers to leave.

Studies have shown that online bill payers are twice as likely to remain active banking customers and as high as 70 percent less likely to leave the bank. So it stands to reason that the more products and services a bank can offer, the harder it will be for the customer to leave. As a treasury services professional, this is crucial to keep in mind–closing sales is about more than just fee revenue, it’s also important to client retention, and it all begins with understanding the customer’s accounting systems and processes.

What Bankers Should Know About Consumer Checking Financial Performance

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Every financial institution (FI) is trying to optimize the financial potential of a checking account customer. Mega banks are paying up to acquire a checking customer from another institution. And all FIs are pursuing the elusive cross-sell to round out a checking account customer that is inherently unprofitable on a single product basis.

StrategyCorps actively tracks, quantifies, ranks and analyzes nearly 4 million checking account relationships of primarily community FIs (below $10 billion in assets) related to our CheckingScore analytical solution in a database that we affectionately call “The Brain.” Each checking relationship is scored by the total annual revenue it generates on a household basis (the total of demand deposit account fees plus estimated net interest income on DDA balances and related deposits and loans) and then ranked into four relationship segments:

  1. Super: annual revenue over $5,000
  2. Mass Market: annual revenue of $350 to $5,000
  3. Small: annual revenue of $250 to $350
  4. Low: annual revenue less than $250

Based on our experience as well as the research of industry groups like the American Bankers Association, the Federal Deposit Insurance Corp. and banking consultants, we have determined that those relationships scoring below $350 don’t generate enough revenue to cover the FI’s cost to service the relationship. (Click here for some advice on how to make checking relationships profitable again.)

The distribution of these relationship segments by customer count, dollars of relationships and revenue is a much skewed one:

  • 35 percent of Low and Small relationship customers represent only 1.6 percent of all relationship dollars and 2.9 percent of revenue
  • 10 percent of the Super relationship customers represent 63 percent of relationship dollars and 57 percent of revenue.

Below are some more key performance benchmarks that show the average financial performance of all four relationship segments combined for a typical financial institution, according to The Brain database.

Key Performance Benchmarks—All Segments Combined  
 Percentage of Accounts That Are Profitable  65.1%
 Percentage of Accounts That Are Unprofitable(e.g., Sale, IPO)  34.9%
 Average DDA Balance  $6,367
 Avg Deposit Relationship Balance per DDA  $10,081
 Avg Loan Relationship Balance per DDA  $9,563
 Total Relationship Balance per DDA  $26,011
 Annual DDA Service Charges  $8.92
 Annual NSF/OD Fees  $81
 Annual Miscellaneous Fees  $7.26
 Average Estimated Annual Debit Interchange Income  $50
 Average Monthly Debit Card Swipes  12.0
 Percentage of DDAs That Are Non-Interest Bearing  75%
 Single Product Households  32%
 % of DDAs with a Relationship Loan  21%
 % of DDAs with Both Deposits and Loans  14%
 Average Age of Primary Account Holder  51
 % of DDAs with Primary Account Holder Over Age 50  51%
 Average CheckingScore  $1155

It’s no surprise that not all checking products and their associated relationships are alike in terms of financial performance, but which products perform better than others?

In summary, based on the CheckingScore per product type and the percentages of a product type in the Super and Mass Market relationship segments, below in rank order are the most financially productive checking account products:

  1. Interest Accounts
  2. Value Added Flat Fee per Month Accounts
  3. High Interest Checking Accounts (reward checking)
  4. Basic Checking (non-interest, non-totally free)
  5. Senior Checking (mostly free to 50+ to 65+ year old customers)
  6. Free Checking (totally free)
  7. Student Checking
  8. Second Chance Checking (for unbanked or underbanked)

The consumer checking account remains the hub account for a customer identifying which FI is “my FI,” especially with the popularity of mobile and online banking, which are now essential components of checking.

So FIs must have a well considered consumer checking strategy in terms of which and how many products to offer, knowing the reality of checking economics. FIs can’t just “wing it” when it comes to checking and expect to win, given competitive and financial performance challenges.

More specifically, the challenge goes beyond just generally acquiring and retaining customers in a super-competitive marketplace. Protecting the Super and Mass Market relationship segments of customers from being stolen by competitors cannot be best accomplished  if those customers aren’t in the best checking products that provide optimal customer engagement. FIs must also fix and grow the Small and Low relationship segments of customers by successfully offering them better financially performing checking products like Interest and Value Added checking and not the lower performing and less engaging ones like totally Free and Senior checking (which place sixth and fifth out of eight account types), and more effectively cross-selling other non-checking products.

These performance-based statistics are what bankers must know about the financial reality of consumer checking. Not understanding or avoiding this reality is a how-to guide for designing and building a chronically underperforming lineup.

A more detailed executive report on consumer checking financial performance is available if you’d like more information.

Different Routes to Reach Strategic Success

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For Banker, By Banker Video Series
As many banks continue to look for new ways to make up for lost revenue opportunities, a smart and focused strategy that makes the most of available growth opportunities is vital for success. As part of our For Banker, By Banker video series, three leading bank chairmen share their board’s role in developing a foundation for sustainable growth.