In 2008, glassblowing entrepreneur Jeremy Pyles outgrew his small-business banking service from Bank of America Corp. So he switched to a service offered by a nonbank, Bill.com.
The service gives him everything he wants, and Pyles says his small business really does not 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 says he has gone from writing a handful of checks to vendors to paying about 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 Inc.’s QuickBooks and BofA’s small-business online banking.
“Until I found Bill.com, I was drowning in bookkeeping,” Pyles says. “I did not feel like we were in a position to hire someone full time to do this.” Pyles says his time spent bookkeeping has dropped to about five hours a week from 20 hours.
For years, some 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 such as 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.
“So many financial institutions say they have a small-business service, but for the most part that is not true,” says 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.”
Some bankers agree, and they says 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,’” says Richard Weeks, senior vice president and manager of the business segment strategy and support group for Wells Fargo & Co. of San Francisco.
In contrast to that, Wells Fargo offers 330,000 of its 2 million business customers who bank online access to something it calls the Commercial Electronic Office. Aimed at the upper end of Wells’ small-business customers, the Web portal 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 personal financial management does in the consumer world, but with a lot more functionality. For example, among many other features, the product creates an audit trail of accounts payable and accounts receivable, and pulls from that information to create a calendar that predicts what a small-business owner’s cash-flow position will be on any given day.
“This is all actionable information because you can, from the calendar, delay a payment or make a payment,” says 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 says.
Small-business owners represent between 10% and 12% of a retail bank’s customers, but they account for up to 35% of retail banks’ revenue, says Les Dinkin, a managing director for Novantas LLC. “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 says.
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,” Dinkin adds.
All the vendors that offer banks core processing services also have small-business banking products. These vendors include Fidelity National Information Services, Fiserv Inc., Intuit and S1 Corp. But much smaller companies have appeared as innovators with specialties in things such as handling bills, invoicing and expense reporting. These include Bill.com; FreshBooks, a unit of 2ndSite; and Expensify, among others.
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,” though they want to be able to make automated clearinghouse payments, says Rodney Nilson, Intuit Financial Services business financial solutions platform manager.
Intuit says talks with the tens of thousands of small businesses that use the company’s QuickBooks accounting product influenced its small-business 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 says. “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 presented in a dashboard format, which also has become popular for consumer personal financial management sites. The dashboard contains three basic 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 says.
Intuit also has begun piloting a “trends-forecasting” piece, where entrepreneurs may examine segments of their business and compare them with those of their peers. Such services have gotten a lot of traction in the personal financial management world with such entities as Bundle and Intuit’s Mint.com, which both enable consumers to compare their spending habits with those of peers.
Banks also are learning from the feedback they receive from small businesses.
“We have spent a lot of time and energy listening to our small-business customers,” says Kerrie Campbell, small-business segment executive for BofA’s consumer and small-business banking division. The bank has nearly 4 million small-business customers, and Campbell says its online-banking and cash-management service has matured significantly since Pyles used it starting back in 2005.
The bank’s small-business suite now includes such things as merchant reporting, invoicing, payroll and tax-payment services.
BofA also is able to pull from both the retail and corporate divisions of the bank 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, Campbell says.
“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 says.
The ability to pull from different sides of the bank is critical to the creation of small-business banking services, experts say. But banks rarely have 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 really grasp what a small business really means,” says Jegher.
Banks also are in an unusual position because many already have the relationships with small-business customers, Jegher says. They can examine these relationships to improve their products based on their customers’ needs.
Instead, “they have been leapfrogged by the nonbanks,” Jegher says.
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