Why Small Businesses Are Leading the Way in Fintech Innovation
With the recent announcement that Square is acquiring Afterpay, a leading Australian provider of Buy Now Pay Later (BNPL) solutions, I‘m struck by just how much the Small/Medium Business (SMB) space has leapt to the forefront of fintech, and probably shines a light on the “art of the possible” for open banking initiatives globally.
As someone who’s worked in the commercial payments space for a long time, it’s heartening to see just how transformational technology has been in enabling disruptors to offer new propositions to a client segment that has historically been critically underserved by traditional players. Small business owners have, for decades, been offered badly-adapted consumer payment propositions that weren‘t really tailored or suited to their needs or struggled to get access to critical services because the audience was seen as high-risk or too expensive to serve.
From my vantage, there were two key groups that were the first pioneers in this wave of SMB digital disruption – accounting software providers and new digital acceptance players. The last 10 years has seen huge growth in the adoption and influence of Software as a Service (SaaS) accounting providers, such as NetSuite, Xero, QuickBooks or Sage, who digitised and automated the accounting and invoicing processes for their clients. These implementations were often connected to the clients’ actual accountants, whose referrals drove a network scaling that accelerated exponential growth. Once embedded, these players have sought to enhance and enrich the value proposition to their client, developing APIs and flows with third parties, including banks to extract and share information on their clients’ behalf.
The second key drivers were the new acceptance solution providers. For many years, small businesses could not afford the cost of card acceptance – physical terminals with leased lines and long-term minimum financial commitments made it prohibitively expensive for many small businesses to accept card payments. The arrival of players such as Stripe, Square and iZettle for both physical and online acceptance, and Square made the cost of acquisition and servicing viable. The growth in card-accepting merchants amongst the “long tail” exploded as these players lowered the barriers to entry through smart use of technology and simplified pricing tariffs that democratized card acceptance for a key segment. This happened at a time when, with changing employment patterns, we have witnessed a micro-business “baby-boom” with increasing numbers of people deciding to start their own businesses.
These providers initially focused on some key SMB “outcomes” such as:
– Managing and reconciling the company’s books / Pay taxes (Accounting)
– Taking payments (Acceptance)
Other software players also emerged servicing other key needs:
– Opening a business bank account
– Creating the company’s website
– Helping SMBs get access to quick financing
Many of these players who initially focused on one key area are now beginning to re-bundle services and stretch across the SMB value chain, with acceptance providers now issuing cards or loans or accounting providers enabling SMB financing. This has driven a huge demand for “embedded finance” services such as virtual and physical cards, BNPL solutions, real-time spend controls and digital wallet services.
Irrespective of which proposition these providers originated from, they all have some common elements:
– Simplifying access to services. For many SMBs, gaining access to services was the hardest (first step). By providing quick, easy access to their services through their SaaS platforms, these providers have driven huge adoption and reduced their cost to acquire and serve customers. Pricing has been simplified and any possible barriers to adoption are being eliminated in the race to capture the opportunity.
– Consolidation of data. Open sharing and analysis of data has enabled these providers to have a far more holistic view of their clients’ business and offer new credit models and provisioning capabilities through their visibility of payables and receivables for their clients.
– Recognition that it’s all about cashflow. The traditional separation of issuing from acquiring under card payments’ models doesn‘t work for SMBs whose operations are driven by managing cashflow. The new entrants are rapidly breaking down issuing and acquiring boundaries to offer more end-to-end financial propositions made possible by their holistic data view.
When COVID-19 first struck, I had grave concerns that, like previous recessions, SMBs would really suffer as lenders and traditional providers refused to lend to new businesses or reduced credit lines for existing clients. Instead, we‘ve seen increasing numbers of digital providers enhancing their SMB propositions and widening the range of services they provide.
We are witnessing the birth of a connected SaaS ecosystem where providers collaborate and share data to provide propositions and service models that were unimaginable until recently. Many new services will continue to emerge and the B2B payment ecosystem will be irrevocably changed.