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Banks Have Failed Small Businesses. Here's How They Can Change That Small and mid-sized businesses have diverse needs. If banks want to survive, they'll need to meet those needs.

By Leonardo Mattiazzi

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

When getting off the ground as a small or mid-sized business, it very quickly becomes obvious that survival means pulling support from every direction possible. And one of the biggest areas this will be needed is financial management. This can be everything from loans to payroll. Banks might come to mind as a first logical choice to handle these points, but these institutions have unfortunately dropped the ball when serving newer companies well.

How banks are stumbling

Banks admittedly do have some services that are specific for small and mid-sized businesses. But generally speaking, they've approached commercial banking -- for this particular segment -- in much the same way overall as personal retail banking. This doesn't work since individuals and businesses have such different assets, activities, and goals. And whereas banks have done tons of research to understand the different habits and needs of people in Generation Y, Baby Boomers, and so forth, these generational or demographic distinctions don't apply to companies. So banks really haven't looked at small and mid-sized businesses thoroughly and appropriately to understand what they need and how to provide it for them.

What an employer or employees are going to need from a bank will depend on a lot of different factors, such as maturity, the size of the organization, and the industry the company falls into. For instance, one company might need to go to the bank pretty often because they need a lot of small cash on hand. Another might need to process checks frequently. Yet another might not have tons of transactions, but they need to make and receive payments abroad. To serve businesses well, banks have to recognize this diversity and create a full range of new products and services to accommodate how different organizations need to operate. They must consider the variabilities that might impact how different businesses would use each product or service -- for example, cash management considerations will vary from business to business and industry to industry. Keeping this in mind and other variabilities, such as the tools these businesses already use, is a must when designing new products and services. Most important, perhaps, is not trying to be everything to everyone at the same time.

Related: How Fintech Innovations are Eroding Banking's Dominance

What initial research is showing

To provide more clarity in this area, we are currently researching to get banks the data they need to connect with and serve these companies better.

As part of our initial findings, we've discovered some clear differences in profiles, such as whether leaders like to do everything digitally or in person or whether they prefer self-service over someone performing tasks for them. And SMBs actually felt pretty well supported during the COVID-19 crisis, even though the pandemic has hit them the hardest. As they try to deal with payroll expenses, navigate the PPP program, and manage their cash more tightly, leaders have felt that banking is the least of their problems.

But the support SMBs are getting isn't coming from the banks. Leaders have low expectations of what banks can do for them, and they don't see banks as institutions that can help them run their businesses. So they're broadening their options and tapping FinTech offerings to meet their needs instead. They already use many different solutions to cover areas like invoicing, accounting, cash management, and other elements of their businesses, and they pay a considerable amount of money given their size to be able to do so.

This really begs the question, what is the role of banks here or what should it be in the future?

Related: 5 Ways Artificial Intelligence Is Already Transforming the Banking Industry

The opportunity for banks is clear

The pandemic is changing behavior on both the customer and bank side and how many bank branches are available, how willing people are to go to bank branches, and other points. With all this upheaval, banks have an ideal opportunity to leverage all these forced changes. They can rethink their traditional model and re-leverage assets they already have to provide more meaningful experiences more effectively.

The size of this opportunity in commercial banking is especially considerable. Small to mid-sized businesses, which have been underserved for a very long time, account for more than 40 percent of the economy. Consider, too, that a lot of the businesses that are small today aren't going to stay that way. They'll grow and evolve. By signing with these companies while they are still small, banks might be able to ensure big clients in the future. There's absolutely no reason why banks shouldn't try to play a larger role in the SMB segment when faced with this reality.

Entrepreneurs are a tenacious bunch. They will do their best to find or create their own solutions to move forward. But banks can make their path to growth much easier, all while financially benefiting themselves. By figuring out what SMBs need and how to deliver it, banks will create a win-win situation that boosts all industries and the overall economy.

Related: 8 Ways Digital Banking Will Evolve Over the Next 5 Years

Leonardo Mattiazzi

EVP, Global Innovation at CI&T

Leonardo Mattiazzi is Partner and Executive Vice President of Global Innovation at CI&T, the global digital solutions partner driving lean digital transformation for the world's biggest companies.

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