Texas Strong: Banks Contend With Dual Threats

“Texas has four seasons: drought, flood, blizzard and twister.” – Anonymous

To that list of afflictions you can add two more — the Covid-19 pandemic and a catastrophic collapse in global oil prices, creating double trouble for the Lone Star State.

There were over 50,500 coronavirus cases in Texas through May 20, an average of 174 per 100,000 people, according to the Center for Systems Science and Engineering at Johns Hopkins University. There were nearly 1,400 coronavirus-related deaths in the state.

In mid-March, Texas Gov. Greg Abbott imposed restrictions that limited social gatherings to 10 people or less, and effectively closed close-proximity businesses like restaurants and bars, health clubs and tattoo parlors. Even as Abbott reopens the state’s economy, many of its small businesses have already been hurt, along with many lodging and entertainment concerns.

Shutting down the economy was probably a good health decision,” says F. Scott Dueser, chairman and CEO at $9.7 billion First Financial Bankshares in Abilene, Texas. “It wasn’t a good economic decision.”

And then there’s oil situation. An oil price war between two major producers — Russia and Saudi Arabia — helped drive down the price of West Texas Intermediate crude from over $60 per barrel in January to less than $12 in late April, before rebounding to approximately $32 currently.

Texas still runs on oil; while it is less dependent on the energy sector than in past cycles, its importance “permeates” the state’s economy, according to Dueser. “It is a major industry and is of great concern for all of us,” he says.

The 65-year-old Dueser has been First Financial’s CEO since 2008, and guided the bank successfully through the Great Recession. “I thought I’d be retired by the next recession but unfortunately, we weren’t planning on a pandemic and it has come faster than I thought,” Dueser says.

This downturn could be as bad or worse as the last one. But so far, damage to First Financial’s profitability from the combined effects of the pandemic and cheap oil has been minor. The bank’s first quarter earnings were off just 2.6% year over year, to $37 million. Like most banks, First Financial has negotiated loan modifications with many of its commercial borrowers that defer repayment of principal and/or interest for 90 days.

Dueser won’t know until the expiration of those agreements how many borrowers can begin making payments, and for how much — clouding the bank’s risk exposure for now. But with a Tier 1 capital ratio over 19%, Dueser has the comfort of a fortress balance sheet.

“We unfortunately have been down this road before … and capital is king because it’s what gets you through these times,” he says.

Dueser made a decision early in the pandemic that as much as possible, the bank would remain open for business. It encouraged customers to use branch drive-thru lanes, but lobbies have remained open as well.

“So far we have been very successful here at the bank in staying open, not locking our doors, not limiting hours, keeping our people safe and at the same time serving more customers than we ever have in the history of the bank,” Dueser says.     

The bank has followed Covid-19 safety requirements from the Center for Disease Control. “The most important things are don’t let your people come to work sick and social distancing,” Dueser says. “We split every department, such as technology, phone center, treasury management and so on with having half the department work from home or from another one of our locations. That way we had only half the people here, which allowed us to put people in every other desk or cubicle.”

To date, the bank has had only four Covid-19 cases among its employees. “Thankfully, all four of those individuals are healthy and back at work,” Dueser says. “With each situation we learn more on how to protect our employees and customers.”

Dueser is one of 39 people on a task force appointed by Abbott to advise him on reopening the state’s economy. “I am very supportive of what he is doing, in the fact that we are getting the state back open,” he says. “The virus is not winning the war, which is good. We have a lot to learn so that we can live with the virus without having to go home and hide in a closet.”

One of Dueser’s biggest priorities through the economic hardship was to make sure retail and commercial customers knew that it would stand by them, come what may. That led to a recent marketing campaign designed around the phrase “Texas Strong,” a slogan used throughout the state that traces back to Hurricane Harvey, which devastated Houston in 2017.

“We want our customers to know that we’re safe, sound and strong,” says Will Christoferson, the bank’s senior vice president for advertising and marketing. “What’s stronger than Texas? We couldn’t think of anything.”

Beyond PPP: Supporting Small Business Through the Covid Crisis

In the first wave of the Small Business Administration’s Paycheck Protection Program, West Des Moines, Iowa-based Bank Iowa Corp. closed around 400 loans totaling $72 million, according to CEO Jim Plagge. When we spoke — just a few days before the SBA re-opened the portal for another $320 billion of PPP loans — the $1.4 billion bank was prepared to submit another 75 or so applications.

The bank’s branch teams — which are split to encourage social distancing and minimize the impact if someone were to get sick — have also taken to ordering takeout every day to support local restaurants that have been particularly hard hit. “[We’re] just trying to support them,” he says.

This desire to support the 23 communities it serves inspired Bank Iowa’s “Helping Hand” program, which is accepting nominations to assist local organizations, small businesses and nonprofits. The bank’s goal is to serve at least one need in each of its seven regions. “We’re only as strong as the communities we serve,” says Plagge. “So, we’re just trying to help where we possibly can.”

Banks play a vital role in supporting their communities, one we’re seeing played out across the country as bankers put in extra hours to help customers, especially small businesses that keep towns alive. Bank Iowa, like many financial institutions, recognizes that supporting small businesses can’t be limited to the SBA program — PPP loans have proved difficult to obtain, and they don’t make sense for some companies that still need help.

Bank Iowa reached out immediately to borrowers to understand the impact of the coronavirus crisis for each one, says Plagge. The bank has deferred loan payments, restructured debt and set up working capital lines. Bankers have also been a shoulder to cry on.

“[We’re] trying to be there to help our clients talk through the difficulties they’re facing,” says Plagge. “Hopefully we can offer some advice and encourage them along the way.”

Relationships matter. “We typically see that business banking account managers get good scores for being courteous, knowledgeable and responsive,” says Paul McAdam, a senior director, regional banking in the financial services practice at J.D. Power. Small business owners will be even more sensitive to their banker’s response in today’s desperate environment, asking: “‘Do I feel like I’m connecting with them? Do they understand my needs and what I’m going through right now?’”

In addition to building long-term relationships, supporting small businesses now could help banks reduce later damage to their loan portfolios. But unfortunately, tough decisions will be required in the coming months. Plagge says Bank Iowa has started stress testing various sectors. With agriculture comprising a significant portion of the loan portfolio, they’re examining the impact of a reduction in revenue for ag producers.

“Our goal will be to try to work with every borrower and see them through this,” Plagge says. “But we also know that may not be possible in every case.”

David K. Smith, a senior originations consultant at FICO, advises banks to segment their portfolio, so lenders understand which businesses they can help, and which pose too great a risk. Does the business have a future in a post-Covid economy? “You can only help so many without sinking your portfolio,” he says.

But banks should also look for ways to keep relationships alive. “As small businesses go out of business, there’s an entrepreneur there … that person who lost this company is going to be on the market creating another company soon,” says Smith.

After the crisis, this could lead to a wave of start-up businesses — which banks have typically hesitated to support. “They’re going to have to rethink policy, because [of] the sheer number of these that are going to pop up,” says Smith. Some businesses won’t fail due to poor leadership; they simply couldn’t do business in an abnormal environment, given shelter-in-place and similar orders issued by local governments. “Bankers will have to appreciate that to a certain degree and figure out a solution, because it will help bring the economy back faster,” he says.

Data In The Best, And Worst, Of Times

Helping their community and delivering personalized service is the foundational differentiation of every community bank. Now more than ever, customers expect that their community bank understands them and is looking out for their best interests.

Customers are communicating with their banks every day through their transactions — regardless if they are mobile, in person or online, each interaction tells a story. Are you listening to what they’re telling you? Whether your bank is navigating through today’s COVID-19 crisis or operating in the best of times, data will be key to success today and in the future.

Business intelligence to navigate daily operations is hard to come by on a good day, much less when things are in a pandemic disarray. Many bankers are working remotely for the first time and find themselves crippled by the lack of access to actionable data. A robust data analytics tool enables employees at all levels to efficiently access the massive amounts of customer, market, product, trend and service data that resides in your core and ancillary systems. Actionable data analytics can empower front-line bankers and risk managers to make data-driven decisions by improving and leveraging insight into the components that affect loan, deposit and revenue growth. Additionally, these tools often do the heavy lifting, resulting in organizational efficiencies that allow your bankers and executives to focus on strategic decision-making — not managing cumbersome data and reporting processes.

A tool that aggregates transformative data points from various siloed systems and makes them readily available and easy to interpret allows your management team to be better prepared to proactively manage and anticipate the potential impact of a crisis. This positions your bank to offer products and services that your customers need, when they need them.

But most community banks have not implemented a data analytics solution and as such, they  must consider how to manually generate the information needed to monitor and track customer behaviors to assist them in navigating this crisis. Below are a few potential early warning indicators to monitor and track as your bank navigates the current coronavirus crisis so you can proactively reach out to customers:

  • Overdrafts, particularly for customers who have never overdrawn.
  • Missing regular ACH deposits.
  • Past due loans, particularly customers who are past due for the first time.
  • Line of credit advances maxing out.
  • Lines of credit that cannot meet the 30-day pay-down requirement.
  • Declining deposit balances.
  • Large deposit withdrawals.
  • Businesses in industries that are suffering the most.

If your community bank is one of the many that are proactively assisting customers during this pandemic, make sure you are tracking data in a manner that allows you to clearly understand the impact this crisis is having on your bank and share with your community how you were able to help your customers during this critical time. Some examples include:

  • Paycheck Protection Loan Program details: number of applications received, processed and funded; amount forgiven; cost of participating for the bank; customer versus non-customer participation, impact on lending team, performance.
  • Customer assistance with online banking: How did you help those who are unfamiliar with online banking services? How many did you assist?
  • Loan modifications, including extensions, deferments, payment relief, interest-only payments and payment deferrals.
  • Waived fees and late charges.
  • Emergency line of credits for small business customers.

Having easy access to critical customer information and insights has never been more important than it is today, with the move to remote work for many bankers and rapidly changing customer behaviors due to the economic shutdown. Customers are making tough choices; with the right data in your bankers’ hands, you will have the ability to step up and serve them in ways that may just make them customers for life.

Seven Small Business Lending Trends In 2020

There are roughly 5.1 million companies that comprise the small to medium-sized business (SMB) category in the U.S. today — and that segment is growing at 4% annually. Many of these businesses, defined as having less than 1,000 employees, may need to seek external funding in the course of their operations. This carves out a lucrative opportunity for community and regional banks.

To uncover leading trends and statistics, the Federal Reserve’s 2019 Small Business Credit Survey gathered more than 6,600 responses from small and medium U.S.-based businesses with between 1 and 499 employees. These are the top seven small business lending statistics of 2019 — along with some key insights to inform your bank’s small business lending decisions in 2020.

1. Revenue, employee growth in 2018
The U.S. small business landscape remains strong: 57% of small businesses reported topline growth and more than a third added employees to their payrolls. Lending to these companies isn’t nearly as risky as it once was, and the right borrowers can offer an attractive opportunity to diversify your bank’s overall lending portfolio.

2. Steady rise in capital demand
Small businesses’ demand for capital has steadily risen: in 2017, 40% of surveyed businesses applied for some form of capital. In 2018, the number grew to 43%, with no drop-off in sight. Banks should not wait to tap into this lucrative trend.

3. Capital need
With limited and/or inconsistent cash flow, small businesses are almost bound to face financial hurdles. Indeed, 64% of small businesses said they needed capital in the last year. But when seeking capital, they typically find many banks turning their backs for reasons related less to credit-worthiness, and more to slimmer bank margins due to time-consuming due diligence.

As a result, over two-thirds of SMBs reported using personal funds — an outcome common to many small businesses owners. This is a systemic challenge, with a finding that points to an appealing “white space” opportunity for banks.

4. Capital received
Too many small businesses are settling for smaller loans: 53% of small businesses that sought capital received less funding than they wanted. Banks can close this funding gap for credit-worthy small businesses and consistently fill funding requests by decreasing the cost of small business lending.

5. Funding shortfalls
Funding shortfalls were particularly pronounced among specific small businesses, with particular credit needs. Businesses that reported financing shortfalls typically fell into the following categories:

• Were unprofitable
• Were newer
• Were located in urban areas
• Sought $100,000 to $250,000 in funding

Of course, not all small businesses deserve capital. But some shortfall trends — like newer businesses or those in urban areas — may suggest less of a qualification issue and more to systemic barriers.

6. Unmet needs
Optimistic revenue growth paired with a lack of adequate funding puts many viable small businesses at unnecessary risk. The survey found that 23% of businesses experienced funding shortfalls and another 29% are likely to have unmet funding needs. Capitalizing on these funding trends and increasing small business sustainability may well benefit both banks, businesses and communities in the long run.

7. Online lenders
Online lending activity is on the rise: 32% of applicants turned to online lenders in 2018, up from 24% in 2017 and 19% in 2016. The digital era has made convenience king — something especially true for small business owners who wear multiple hats and are naturally short on time. Online lending options can offer small business owners greater accessibility, efficiency and savings throughout the lending process, especially as digital lending solutions become increasingly sophisticated.

A Long-Term Approach to Credit Decisioning

Alternative data doesn’t just benefit banks by enhancing credit decisions; it can help expand access to capital for consumers and small businesses. But effectively leveraging new data sources can challenge traditional banks. Scott Spencer of Equifax explains these challenges — and how to overcome them — in this short video. 

  • The Potential for Alternative Data
  • Identifying & Overcoming Challenges
  • Considerations for Leadership Teams

 

The Big Future of Small Business Banking


fintech-8-28-18.pngAccording to the U.S. Small Business Administration Office of Advocacy, there are currently 29.6 million micro and small businesses in the United States. Of those, 80 percent are one-person businesses, and 22 percent are made up of 10 employees or fewer. Businesses that fall within these parameters span every industry from freelancers and bloggers, to designers, developers, and start-up entrepreneurs. All are seeing a boom in sales and dependency from consumers due to the so-called “gig economy.”

A lot has been done by banks and alternative lenders when it comes to providing financing for these micro and small businesses, but given this data, it begs the question: how do they all bank?
Traditionally, banking for micro and small businesses has been limited at best and inadequate at worst. In most cases, small business owners have had no other option but to visit a physical bank branch, fill out endless paperwork, provide documentation, and then transfer items back and forth to the bank through the mail or by email. The technology is typically clunky, out of date, and inconvenient – all adjectives a far cry from how these businesses would describe themselves, and how they need to operate. In addition, these owners are, at their core, consumers. They experience cutting-edge products and technology with their own personal banking accounts, but that same innovation is not replicated on the business side.

To alleviate this burden, the banking industry has a lot of soul searching to do. Some banks have spent a lot of time and energy discussing digital banking disruption in the consumer world. The time has come for the next frontier in the small business market, which has inspired and driven forward-thinking banks to develop customized solutions for small business customers.

For banks considering entering—or reimagining their approach to—the small business segment, it begins with a solid strategic plan. Understanding the demographics and banking needs of your target market will help guide the product development and customer experience process. This covers everything from developing a product suite that will be appealing to both the market and your bottom line, to thinking through the journey as a business going from being a prospect to a customer.

At Radius, we took some learnings from our experience in the digital consumer banking space and used it to build the framework for our small business offering. While small business owners may need a little more complexity with their money management tools than consumers, designing something that was simple and straightforward was the key. The result for us was the Tailored Checking Account, which any small business can now apply for online and get opened in minutes thanks to a partnership we established with Treasury Prime, a San Francisco-based fintech.

Radius isn’t alone in its quest to help business owners better manage their finances. In addition to our offering, we’ve noticed several other fintechs focused and working to fill the void that many small business owners are experiencing. For example, Autobooks helps small businesses manage their receivables, payables, payments and accounting entirely online. Brex creates business debit cards that operate like credit cards without the need for a personal guaranty. And Rocket Dollar helps individuals unlock their retirement savings for things like funding a startup or making a small business loan.

Overall, the sheer amount of micro and small businesses requires the banking industry’s attention. Consumers are increasingly turning to shopping local and supporting small businesses, only hastening the need for small business owners to manage their money on their terms—a trend that won’t decline anytime soon. This is a market that all banking professionals should be paying attention to, as the market only continues to grow. I look forward to seeing the outcome over the next year and am eager to see what the future holds for us and the rest of the small business banking industry.

SizeUp: Friend or Foe


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Making smart decisions at every stage of growth is a critical—and often difficult—process for many small businesses. While larger companies have the money and resources to utilize big data and analytics tools to gain insight into their performance, customers and competition, small businesses are often left guessing and must rely on incomplete information (or gut instinct) to make key decisions like whether to expand into a new location or introduce new products.

That’s where fintech business intelligence startup SizeUp is stepping in. SizeUp partners with traditional banks to offer big data and business intelligence tools to small business customers to engage (and retain) them over the long run. Business owners who want to know such things as the most under-served areas of their markets when they are considering where to expand can use SizeUp to make the best possible decisions.

SizeUp already partners with big banks like Wells Fargo & Co., but long term will it be a friend or foe to legacy institutions? Let’s dive in and find out.

THE GOOD
SizeUp was initially chosen as one of 30 finalists in the TechCrunch Disrupt startup pitch competition in 2016, out of more than 12,000 applicants. TechCrunch Disrupt is Silicon Valley’s leading startup and technology conference, and the Disrupt startup pitch contest is widely considered to be the most competitive in the tech world. One of the important benefits that banks derive from working with SizeUp is that it increases the breadth of services they can offer their small business clients. Wells Fargo’s Competitive Intelligence Tool (powered by SizeUp), for example, helps businesses manage and grow their companies by analyzing performance against competitors, mapping out customer opportunities and finding the best places to advertise in the future. Providing this level of intelligence about local markets, along with a competitive scorecard analysis, can also be used to decide the best areas for potential expansion.

And as successful small businesses scale, SizeUp’s platform is designed to enable banks to anticipate which financial products their clients are likely to need in the next stage of growth.

“SizeUp enables banks to introduce their products and services at each key decision making moment in a business’ life,” says SizeUp CEO Anatalio Ubalde. “So for example, a small business loan during launch, and a line of credit as they grow.”

Big banks quickly realized the value that SizeUp’s platform brings to the table, with institutions like Deutsche Bank and Credit Suisse investing early on in SizeUp’s development through programs like the Plug and Play Fintech Accelerator. Headquartered in France, Plug and Play is a large international fintech venture capital firm and accelerator, and a partner with BNP Paribas, France’s second largest bank. SizeUp has even partnered with the U.S. Small Business Administration to help entrepreneurs and business owners assess how they stack up with the competition and map out potential vendors and suppliers.

THE BAD
It’s hard to find a whole lot of negatives with SizeUp’s platform and partnership model. If there’s one drawback, it’s the sheer volume of data points and information that is available on the platform. SizeUp draws from hundreds of public and private data sources, so the platform might be slightly overwhelming for small business owners who are not particularly tech savvy. That being said, banks are in a good position to aid their small business clients onboard to the platform and accelerate the learning curve.

OUR VERDICT: FRIEND
At the end of the day, SizeUp is a friend to banks and legacy financial institutions of all sizes. Bringing this level of sophisticated big data and business intelligence to their small business clients is only serving to help them grow and succeed, which should ultimately result in increased small business account retention. And as these companies grow, banks can be ready to upsell and cross-sell additional products and services that focus on specific stages of development along the way. SizeUp also provides an engaging product and interface that business owners can use for a variety of purposes, from plotting out an advertising campaign to gaining an in-depth understanding of how they stack up against the competition at any given time.

Big data and sophisticated business intelligence is something that most small business thought was only for companies with large technology budgets, but SizeUp is in the process of changing all that. And in addition to helping small businesses make better decisions during each phase of their growth, the firm is helping banks engage (and retain) those customers over the long haul.

Fundbox: Friend or Foe


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For small businesses and freelancers, successfully performing work for customers and clients is only half the battle. Oftentimes, businesses wait up to 90 days to receive payment for their outstanding invoices. This delayed cash flow can create a variety of problems, especially when it comes to covering overhead expenses like rent and payroll.

That’s why Eyal Shinar developed the Fundbox software service, to help small businesses fix their cash flow problems as it relates to outstanding invoices. Fundbox is the leading cash flow optimization platform for small businesses, and who better to start a fintech company focused on this problem than someone who learned it at his mother’s knee? Shinar’s mother was a small business owner, so growing up he saw the pain and frustration that delayed payment of invoices can cause. According to a recent report, 82 percent of small businesses fail due to poor cash management. Where some see problems, others see solutions, and that’s where Fundbox comes in.

The process is straightforward. Business owners simply connect their existing accounting software to Fundbox and submit their outstanding invoices for immediate reimbursement. The business owner incurs a small fee for this service and they are given up to 24 weeks to pay Fundbox back.

For banks looking to offer new or better services to small business clients and freelancers, though, is Fundbox a good partner? Let’s look a little closer.

THE GOOD
Small business accounts are a much coveted group for banks, so providing new tools to improve service and/or relationships with this group should be of interest area to most any financial institution. The fact that Fundbox already has some traction in the small business space should be a good indicator for banks that the service they provide—instant cash flow—is a needed service for this group.

Once a small business owner submits an invoice to the Fundbox platform, they are typically paid within one to two days. Fundbox connects easily with most existing accounting platforms that small businesses are already using, such as QuickBooks, Freshbooks, Xero, Wave and Sage One, so there is very little to do in terms of importing data. Fundbox connects with a few simple clicks and pulls any outstanding invoices that business owners might want to turn into cash. Also, when the user signs up for their account, Fundbox uses big data and algorithms to quickly determine the consumer’s financial health rather than putting them through a lengthy application and approval processes.

The pricing model is simple and transparent. For an invoice of $1,000, the fee is $48 per week over 24 weeks, or $89 per week over 12 weeks. Fees are reduced if the business pays back what it owes prior to the deadline, which is a good incentive to keep Fundbox’s own cash flow looking good, although they have no shortage of funding—another point that might give banks some comfort in partnering with the company.

THE BAD
While the Fundbox fee structure is quite straightforward and transparent, it’s also relatively expensive and can really add up over time, especially for businesses that regularly choose the 24-month financing option. After you do the math, the annual percentage rate for Fundbox repayments can range anywhere from 13 percent to 68 percent. Fundbox also places a $100,000 limit on invoices that it will fund, so it isn’t an option for companies seeking to turn accounts receivable for amounts larger than that into cash.

While Fundbox is compatible with most of the common accounting software mentioned earlier, small businesses that use less common accounting packages or Excel spreadsheets can’t utilize its service. Other drawbacks are that Fundbox doesn’t provide cash for past-due invoices, and the approval process for credit limit increases can take some time. So while the service is helpful in many use cases, it certainly doesn’t match every situation. Finally, Fundbox is rolling out additional credit products as well, which could increase its presence as a possible competitor in the banking space.

OUR VERDICT: FOE
Fundbox offers an important service to small businesses and entrepreneurs, and does so more conveniently than most banks do today. At a time when so much emphasis is being placed on the customer experience, banks should be taking notice of this heavily-funded bank alternative. If an entrepreneur has outstanding invoices and needs cash to keep the lights on, their only option with traditional banks is to apply for a small business loan, or to go to their credit card company, which charges even higher rates than Fundbox. Furthermore, between the application process, credit checks and agreeing upon collateral, it can be weeks or months before businesses see a penny of the cash they need. For this reason, I applaud what Fundbox is doing, and I think it is certainly a —friend’ to many entrepreneurs in their times of need.

As Fundbox encourages more and more small business owners to come to them for cash, though, this obviously chips away from the bank’s importance and its relationship with their small business clients—a relationship they certainly don’t want to lose. And to date, Fundbox cannot boast of any existing bank partnerships or list banks as an area of interest. Of course, if this was to change, we might reconsider our foe designation.

In the meantime, banks would be wise to understand why entrepreneurs are using services like Fundbox, and how they might better address this particular need, whether it’s partnering with fintech companies, investing in new solutions or building them internally. In short, business owners have enough things to worry about, and getting paid on time doesn’t have to be one of them. Who can blame small business owners for looking outside their banking relationship for help?

Welcome to the Wild West for Small Business Management Technology


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Today’s small businesses are empowered more than ever by technology. Start-ups and emerging technologies are colliding with established financial institutions to create a true Wild West for business and financial management in the small and medium business (SMB) sector. But what approaches are different finance and technology players taking—and how will they impact the way small businesses manage their finances?

There’s no doubt that business owners recognize the benefits of technology—one recent survey found that 29 percent of all SMBs say technology is critical to improving business outcomes. The result is a mad dash by incumbents to catch up, keep pace and partner with innovators in the right ways to earn the loyalty of business owners.

Here are four different ways that financial companies are battling it out to help small businesses manage their cash flow, start to finish.

Integrating POS with Financial Management
In a recent report by technology provider Wasp Barcode, a majority of small business owners said that their number one priority for technology investment this year is to replace hardware. For a great many SMBs, this includes front end equipment like cash registers and credit card processing devices. Square was the primary innovator of integrating credit card swiping with iPads, but today the bar is much higher in terms of payment hardware technology design, performance and accessibility.

Take Bank of America’s Clover Point-of-sale (POS) solution, for example. As opposed to Square, which only allows for card swiping, Clover is a fully integrated POS, cash drawer and receipt printer. BofA supplements the basic hardware and software with an app store, where businesses can add extra layers of functionality and customization based on their unique processes. The POS software is then able to communicate and send data back to financial management software, so that the two are seamlessly integrated.

Offering End-to-End Cash Flow Management
Other companies are approaching small business management technology with the goal of providing complete, end-to-end financial management. This means that everything from payments, checking, savings, credit, insurance and investments are all handled by one technology platform. This is the logic behind Capital One’s Spark Program for small business finance, that offers a different Capital One Spark product or service for each of those areas, all tailored towards entrepreneurs.

That isn’t to say businesses can pick and choose from different products within the Spark ecosystem (such as checking, corporate credit Cards and 401(k) account management), but the goal is to have everything tightly integrated so business owners can access everything in one place. The ancillary part of the pitch is that it makes customer service that much more convenient, as you only have one partner to contact if multiple issues arise. The challenge will be for a medium-sized mainstay like Capital One to innovate on a pace with both fintech start-ups and mega-bank competitors that acquire or partner with these new players.

Creating a Best of Breed Ecosystem
Having an all-in-one suite is great in theory, but there are certain small business tools that will always be known as being the best at what they do. Accounting and financial management is an area that Quickbooks has traditionally dominated; it still occupies 80 percent of total market share for SMB accounting. But rather than building additional features onto the Quickbooks product, companies like Intuit are building out tightly integrated ecosystems consisting of first-class applications across the breadth of business management needs.

Intuit is an interesting case also because it owns another hugely popular brand, TurboTax. It has been in Intuit’s best interest to keep these successful brands, and add others like the hugely successful personal finance app Mint.com. The intent is to not only make the business easier to manage, but to handle the business owner’s personal finances as well.

SalesForce.com’s strategy is another great illustration of building out a comprehensive ecosystem under one umbrella. Any business that uses SalesForce.com can purchase proprietary financial management apps on the firm’s cloud platform, and perform multiple functions without leaving the SalesForce interface. Businesses can utilize the Financial Force app for payroll, Accounting Seed for accounting and so forth. In these cases, SalesForce often provides resources and guidance to these start-ups to make the software on their platform as competitive as possible.

Innovating the right way
Fintech startups have the stated goal of disrupting a financial services sector that has become known as overly traditional and lacking in personalization. But as startup technologies for small business management begin to scale, like the example of Mint.com, these companies often face a crossroads in terms of how and where to expand. Some choose to be acquired, as in the case of Mint.com, while others seek partnerships with big banks to gain additional marketing exposure while retaining control of their product.

David Gibbons, managing director at Alvarez & Marshal financial consulting, recently told CNBC that “Banks are partnering to keep in the game and keep relevant. I think they’ve caught up fairly well.” On Deck Capital is one of the foremost innovators in small business lending, using technology to gauge creditworthiness based on the performance of an entrepreneur’s business instead of personal credit score. But rather than be acquired, On Deck has partnered with JP Morgan Chase to build a new lending product for small businesses, under the Chase brand. This is a great example of some “quick win” technology partnerships taking place in the small business space that combine the benefits of innovation with the security and scalability of big banking to better serve SMBs.

And these are just a few of the innovations, technologies and trends that are constantly emerging in the small business sector. The bottom line is big banks now realize that adopting new technologies is critical to retaining SMB clients. With so many startups and established players evolving to offer more services with less hassle, it’s a pretty good time to be a tech-savvy small business owner.

Serving Up Kabbage to Small Businesses, with a Side of Technology


small-business-7-30-15.pngOne way to look at Kabbage is that it’s a company of mostly millennials who are helping to recreate finance in their own image. Formed in February 2009 during the waning months of the Great Recession, when many commercial banks had curtailed their lending and some were taking capital from the federal government to strengthen their balance sheets, Kabbage provides unsecured consumer and small business loans through its online platform. It is one of the leading players in the emerging fintech sector, and to date has made over $550 million in loans.

Neither Chief Executive Officer Rob Frohwein nor the rest of his leadership team are millennials (the company does have a sense of humor, playfully describing the team on its website as the “heads of Kabbage”), but there are plenty of them working at the company. And if you’re going to hire millennials to work at a fintech company, you’ve got to offer them cool stuff like daily catered lunches and snacks, on-site yoga, top-of-the-line Macs and 27” Thunderbolt displays. And of course, you need to give them stock options for the day when the privately-held company either goes public or is acquired. The irony of the company’s name is that many millennials probably wouldn’t know, unless it was pointed out to them by their baby boomer parents, that “cabbage” is slang for money. 

The financial services industry is experiencing a wave of innovation where several upstarts like Kabbage are taking an old product—money lending in some form has been around for more than two millennia—and using technology to create a 21st Century delivery and customer experience.The company provides small business lines of credit from $2,000 to $100,000, and more recently began offering consumer loans from $5,000 to $35,000, with repayment terms of either three or five years. Unlike most banks, which base their underwriting decisions primarily on the credit scores of the borrower, Kabbage takes a diverse range of information into consideration, and because the process is fully automated, the applicant receives an immediate decision. 

Although conventional wisdom would argue that Kabbage is a threat to traditional banks, particularly in the consumer lending space where much of its activity is focused on consolidation of credit card-related debt, Frohwein says that he wants to work with banks and would rather be seen as collaborator than a competitor. Kabbage’s principal offering is an unsecured business line of credit. Most banks won’t provide that kind of funding without some form of collateral, and they can take weeks to make a decision. Prior to this issue going to press, the company was expected to announce agreements to work with two international banks, and Frohwein was hopeful that similar conversations with U.S. banks would also bear fruit.

Like all fintech companies, Kabbage has benefited from growing consumer comfort with doing financial transactions online. According to Frohwein, 95 percent of Kabbage’s customers never interact with a human at any point in the process. And many of them seem to like it that way. Kabbage might be a company with a culture that has been influenced by the many millennials who work there, but it has created a product that is finding acceptance among borrowers of all generations, and that adds up to a lot of cabbage. Frohwein spoke recently with Bank Director Editor Jack Milligan

Let’s talk about why there is a Kabbage.

There is a Kabbage because you can actually access data from online sources on a real-time basis allowing you to do a couple of different things.

First, you can permit a customer to have a very elegant online experience.  The customer lands on the Kabbage website, which provides access to information relating to their entire business, and receives a decision within just a handful of minutes. 

Because Kabbage gains access to these data sources through the customer’s authorization, we have ongoing access to data. As a result, we understand how that small business operates, not just today—at the time of qualification—but how they’re operating today and any point in between. It gives us a very rich understanding of that small business.

When we started the company, we believed this information would better reflect how a business was going to perform as a customer rather than relying on the personal credit score of the small business owner. The whole premise of the company was based on data access and technology. Our DNA is technology and data access and how that access can provide us with unique insights and customers with better experiences. I think that’s probably what separates us from some of the other players that are in this space who continue to have a lot of manual processes residing within their customer experience even though most have adopted the “data and technology” marketing speak.

When the company formed, did you feel as though you were stepping in and filling a void that was out there for small business borrowers? In 2009, obviously, we were just coming out of the financial crisis. The banking industry had closed up like a clam in terms of lending, and there was a real credit crunch, especially for smaller companies.

For sure. Despite being responsible for most of the growth in our economy, small businesses have historically been treated as the redheaded stepchild of the financial services industry. They’ve been largely ignored over the years. Though we serve all small businesses now, when we started, we focused on online retailers. Traditional lenders are reluctant to provide an online retailer with a loan. It’s not that they’re not good customers, but they’re hard-to-reach and they often have limited operating histories. They don’t have a physical presence so you can’t walk into the store and hear the cash register ringing, and see the smiles on the customers’ faces. If you can serve that audience as Kabbage has, then you can serve all small businesses, because you start with the most challenging segment of businesses.

Explain the products that you provide.

We provide a working capital line credit for small businesses. In the fourth quarter of last year we also launched a personal loan product. We have both a small business direct product and a consumer direct product. 

We also started licensing our platform to third parties, which allows them to start lending in the small business and personal consumer lending space. We announced the first deal with Kikka Capital, out of Australia, a couple months ago. 

Have you also had conversations with domestic banks about the possibility of working with you under a licensing arrangement?

Yes. In the U.S., we are working currently with two banks. Those discussions are in a slightly earlier stage, but we believe we will execute agreements with both of them. One relationship will center on a small business product and the other is on the consumer side. 

The reaction from U.S. banks has been very positive, but it’s a difficult regulatory environment, and there’s a lot of caution that goes into that decision. It’s a process of working with the financial institution and getting them to the point where they really understand how we operate, how this compares favorably to their existing approach and how this grows their core business.

Do you see banks as competitors, or do you see them as potential partners? Or both?

I don’t think I see them as competitors, I actually see them as partners.  I try to help them recognize that this is a market they can serve, it’s not a market they should ignore, and there’s a legitimate partnership opportunity here. They don’t need to take a competitive stance with us. We think we can actually work with all the banks. 

How about in the consumer space?  Or do banks not really focus on the size of personal loans you provide? 

In the consumer space, our loans average about $15,000 and many of our customers are consolidating credit card debt so this is a segment in which banks are interested. Although banks may or may not see that as competitive, they should see what we are doing as important and core to them.  However, again, banks do not need to look at us as competitive.  We are working with a large U.S. bank right now to help them enter this space directly. 

Though very focused on the consumer lending space for many years, small business lending has been another story for them. It’s been traditionally difficult for banks to make profitable, and that’s because there’s typically high acquisition costs, and also there’s a lot of operational inefficiencies. Banks apply the same requirements and invest the same resources for a $30,000 loan as they do for a $3 million loan.  It’s just not reasonable to expect small business owners to go through that hassle for that amount of money.

Explain a little bit more about your underwriting process. It sounds like it’s a very sophisticated approach, and one that’s a little bit different than what most banks employ. 

When a bank underwrites a small business loan they will have a checklist of many items they need to collect: three years of financial statements, FICO score, an asset list, whatever it might be. A bank would expect every small business lending applicant to come to the table with the exact same set of documents and information. We take a different approach.

Kabbage must meet the small business owner where that small business owner is. That means if they have a specific set of relationships with accounting companies, or credit card transaction processing systems, or social networks, or shipping companies or whatever it might be, that’s the data we need to collect and decision on. The data helps us determine the capacity, character and consistency of small and medium-sized businesses, or SMBs, just as the items the bank collects attempt to determine.

We’ve had to figure out a way to basically say, “Give us access to any number of data sources.” Without getting too technical, it’s an API, or application programming interface, approach where we’re given automated access on these electronic accounts for specified information. We don’t have the ability to write to the account, so we can’t manipulate anything within it. It does give us the right to read the information that’s contained within the accounts. 

As you would imagine, it also provides us with a lot of historical information. It doesn’t just relate to the most recent period, it oftentimes goes back many months or many years in the past so we can see how these customers have performed over time. 

The real key to what we do is a couple of different things. One is we are able to take all that information and make it relatable. If somebody gives us access to their credit card transaction processing information and shipping information, and another person gives us access to their marketplace information, personal credit score and social data, we’ve got to figure out, “Okay, how do I make a decision on both of those customers, and make a decision that is consistent and fair across the board?” We have developed that capability over time, and we did that through a lot of trial and error, to be frank, where we made educated decisions as to how we were going to view information. Until you get repayment information back and see the customer’s actual behavior, you really don’t know how well correlated that information is to actual performance. We’ve gone through that process over the last several years. 

The nice thing about the way our product works is once somebody takes cash from our line, they pay it back within, on average, less than four months. Therefore, we are able to determine how effective our models are very rapidly. 

How do you find your customers?

SMB owners do not congregate in a single place. There’s not a hall where SMB owners meet each evening and you can advertise there. They’re everywhere the population is. Therefore, we have had to become experts at locating them.

We have a blended approach. We do both traditional and digital marketing. If you log on to Kabbage.com, we’ll probably follow you for a long time online, and you’ll see more ads from us in the future. On the traditional side, we do radio and direct mail. If you watch TV, you’ll be seeing ads in the fall. 

We also have a pretty robust business development arm where we enter into relationships with other businesses that have a lot of small business customers. It can be those that are offering phone systems to small businesses, or packaging for small businesses, or selling accounting software to them or whatever it might be. We try to work with the folks that work closely with small business owners.

When you look at the personal demographics of who your customers are, is there anything that’s distinctive from a generational perspective? What do you find interesting about your customer base?

We work with SMB owners that are super young and we work with folks who are much older.  However, they all embrace technology at least in some manner. Although we started with online retailers, over the last couple of years, we’ve grown to include all small businesses, so you get your restaurants, your dry cleaners and your professional service firms, and everybody in-between. We see a much broader demographic than we did in the past in terms of their technology savviness. 

You’d be amazed, 95 percent of our customers have a 100 percent fully automated experience. Not only do they not have to interact with anybody specifically at Kabbage, we don’t have a person on the backend specifically reviewing that file.  It’s all done through our system. You’d be amazed at how many of our customers are comfortable just interacting with our system. That didn’t happen overnight; we had to figure that out the hard way. We made a lot of mistakes, and we created some bad experiences, and we worked hard to make it as comprehensible as possible. That’s what we’ve really focused on over the last five years.  Now it seems easy, but we had many sleepless nights on the road to getting there.