Nonbanks Leapfrog Banks in Small-Business Cash Management and Treasury
In 2008, glassblowing entrepreneur Jeremy Pyles outgrew his small-business banking service from Bank of America. So he switched to a service offered by a nonbank, Bill.com.
The service gives him everything he wants, and Pyles said his small business really doesn't have much use for a bank's cash management services anymore.
Pyles is partner and co-founder of Niche Modern of Beacon, N.Y., a hand-blown-glass lighting concern that grew explosively between 2005 and 2010. Revenue quadrupled, to about $2 million, over that time, and Pyles said he has gone from writing a handful of checks to vendors to paying around 300 bills and invoices each month.
To deal with the onslaught of paperwork, Pyles initially cobbled together an awkward system that flipped back and forth between Intuit's QuickBooks and Bank of America's small-business online banking.
"Until I found Bill.com, I was drowning in bookkeeping," Pyles said. "I did not feel like we were in a position to hire someone full time to do this." Pyles said his time spent bookkeeping has now dropped to about five hours a week from 20 hours.
For years banks have paid lip service to their small-business customers. They have served these customers either by dumbing down the cash management products for bigger businesses or by adding more bells and whistles to the standard consumer online-banking offering.
But small-business owners like Pyles have not been impressed. Many are turning to third-party vendors, which are innovating in the small-business online banking and cash management space at a faster pace than banks are. Experts say this momentum is similar to what has been happening in the consumer space for personal financial management, or PFM.
"So many financial institutions say they have a small-business service, but for the most part that is not true," said Jacob Jegher, a senior analyst at the research firm Celent.
"There are all these different services cropping up online by nonbanks in the financial services space serving small-business needs," he said.
Some bankers agree, and they said as a result, they have attempted to better attune their products to the needs of business owners.
"What many [financial] institutions have done is say, 'Here is our corporate offering; we will take away a few features and offer this to our small-business customers,'?" said Richard Weeks, a senior vice president and manager of the business segment strategy and support group for Wells Fargo & Co.
In contrast, Wells Fargo offers Commercial Electronic Office to 330,000 of its 2 million business customers who bank online.
Aimed at the upper end of the San Francisco banking company's small-business customers, CEO is a Web portal that gives entrepreneurs access to cash management, foreign exchange and trade services, desktop check deposits and lockbox services.
Bill.com gives Pyles and other small-business owners the kind of 360-degree view that PFM does in the consumer world, but with a lot more functionality. Among many other features, the product creates an audit trail of accounts payable and accounts receivable, and pulls from that information to generate a calendar that predicts a small-business owner's daily cash-flow position.
"This is all actionable information because you can, from the calendar, delay a payment or make a payment," said Rene Lacerte, chief executive and founder of Bill.com.
"So if an invoice is due tomorrow, but you know from talking to the customer he won't be able to pay, you can push this payment out a week, and it gives you a projected balance of where you are going," Lacerte said.
Les Dinkin, a managing director for Novantas LLC, said that although small-business owners represent between 10% and 12% of a retail bank's customers, they account for up to 35% of retail banks' revenue.
"When you add in the value of the small-business owner, who tends to be more affluent than the average customer, that number goes to 50% of retail bank revenues," Dinkin said.
Dinkin added that in today's economic environment, where consumer fee revenue has been reduced, it would behoove banks to invest in "very practical, straightforward and easy-to-use cash management tools that are priced appropriately for small businesses."
All the vendors — including Fidelity National Information Services, Fiserv, Intuit and S1 — that offer banks core processing services also have small-business banking products. But much smaller companies have appeared as innovators with specialties in things like bills, invoicing and expense reporting. These include Bill.com; the FreshBooks unit of 2ndSite; and Expensify.
For its part, Intuit Financial Services, which sells its small-business product, Business Financial Solutions, to banks directly as a white-label product, is taking heed of small-business needs. It offers services with the same functionality of large corporate cash management systems, but Intuit removes the complexity on the front end.
"Most small-business owners don't know what ACH is," said Rodney Nilson, business financial solutions platform manager for Intuit Financial Services, though they want to be able to make automated clearing house payments.
Intuit said its small-business product was influenced through talks with the tens of thousands of small businesses that use the company's QuickBooks accounting product.
"Small-business owners are in a business they love, but they are not necessarily there to manage the business, and they may not be experts in accounting or finances," Nilson said, "so we had to take a measured approach with the information we give them."
The service presents small businesses with information in tiers. The first tier, which business owners see when they log in, is found in a dashboard, which has become popular for consumer PFM sites. The dashboard has three elements: cash positions, the ability to transfer funds between accounts and a third item that the product "learns" from the entrepreneurs as they interact with the site. That could be ACH, wire transfers, bill payment or anything else in the second tier of services the product offers, Nilson said.
Intuit has also begun testing a "trends forecasting" piece, where entrepreneurs can examine segments of their business and compare them with those of their peers.
Such services have gotten a lot of traction in the PFM world with entities like Bundle and Intuit's Mint.com, which both let consumers compare their spending habits against those of peers.
Banks are also learning from the feedback they receive from small businesses.
"We have spent a lot of time and energy listening to our small-business customers," said Kerrie Campbell, small-business segment executive for Bank of America's consumer and small-business banking division. The bank has nearly 4 million small-business customers, and Campbell said its online banking and cash management service has matured significantly since Pyles used it starting back in 2005.
B of A's small-business suite now includes things like merchant reporting, invoicing, payroll and tax-payment services, among other things.
Campbell said Bank of America is also able to pull from both the retail and corporate divisions of the bank in order to serve its small-business customers more effectively, depending on the complexity of the business' cash management needs, and as the businesses mature and grow.
"If ACH was what was needed, they would clearly be matched with an expert in the commercial bank with an expertise in treasury management," Campbell said.
Experts say the ability to pull from different sides of the bank is critical to the creation of small-business banking services. But banks have rarely performed the segmentation exercise necessary to ascertain whether their small-business customers should be served from the commercial side of the business or the retail side.
"From a relationship management perspective it is difficult [for banks] to grasp what a small business really means," Jegher said.
Jegher said that banks are also in a unique position, since many already have the relationships with small-business customers. They can examine these relationships to improve their products based on their customers' needs.
Instead, "they have been leapfrogged by the nonbanks," Jegher said.