Why Payments Modernization is Essential For The Future of Your SMB Banking Proposition

If you’re a small or medium business (SMB) in the U.S. you are underserved by regional banks. Banks know this and Jack Henry, a banking software provider has reported that in response, ‘65% plan to expand services for small and medium-sized businesses (SMBs)’.

But, how have we got here? We are going to make the case that banks have created a revenue trap, the result of the success of legacy payment systems which have generated predictable income for decades. Those income streams are now the source of active inertia. This has left the door open for tech savvy competitors to win market share.

We are bold about this based on precedent. Alipay in China showed how rapidly a market can be captured when customers learn about and adopt a better offer en masse. Alipay outmaneuvered banks with a compelling payment product and then used it as a foundation to grow revenue with services like Zhima Credit, with tailored financial products that helped small and medium businesses be more successful.

In defense of the US banking industry, the regulatory landscape is different to what was the wild wild East of Chinese financial services, but banks aren’t dealing with a small market, the SMB sector in the US is colossal. Over 30 million small businesses contribute significantly to the economy and a compelling digital SMB banking proposition that helps business people succeed will be more appealing than branch proximity.

We know that regulatory guardrails can often be a fig leaf for a lack of innovation, but in this case there are genuine barriers to change that need to be navigated nimbly while protecting customers.

This brings us to the connection between building a compelling fit-for-the-future SMB banking proposition and modernizing payments systems and infrastructure.

We have identified four core reasons why a modern payment system will help banks to build a better SMB banking proposition:

1. Richness of data from ISO 20022
2. The speed of processing from Real-Time-Rails like FedNow
3. Interoperability through an API first approach
4. Access to powerful ML and AI, provided by hyperscale cloud providers

By combining these together banks can significantly improve the ability to meet the needs of SMB customers, with offerings such as predictive financial support products.

Richer ISO 20022 payments data with real-time settlement capabilities through payment rails like FedNow, will generate a wealth of real-time transaction data. Using AI and machine learning, banks can analyze this data and derive insights that provide a better understanding of how SMB customers are operating their businesses, including seasonal patterns of revenue and expenditure. Using the same data banks can build a highly accurate picture of their customers’ creditworthiness and share this with lending arms or external partners through APIs.

This enables the seamless delivery of the right financial product at the right time, whether that is a bridging loan sourced and paid out immediately or line of credit. Predictive financial support coupled with business insights will help banks become a true business partner and allow business owners to focus on growth.

Implementation of this use case will require new capabilities and an uplift in tech intensity. But with the right technology strategy, we predict that banks who are prepared to transform away from the comfortable revenue streams that their existing payment systems provide will unlock new revenue opportunities and their payment systems will become the foundational platform that new digital products and financial propositions can be built upon.

New revenue streams will be unlocked by banks who create compelling SMB value propositions, built on the foundations of rich data, speed, and interoperability. With a huge market to serve, forward thinking banks have the potential to lead in the next wave of economic innovation.

To conclude we recommend three questions to ask your executive team.

Are we embracing lessons from around the globe?

• Banks must be willing to learn from global counterparts beyond the US and Europe, and adapt those lessons to the US context.
• Africa, LATAM, and Asia are hotbeds of innovation.

Are we prioritizing investment in payments?

• The addressable market should motivate higher investment in technology and modernization.
• If not you, rest assured that someone is investing.

Are we being customer led?

• Putting the customer at the centre of the conversation helps to think outside of the frameworks that legacy payments models were built on.
• Talk to the customer before they leave, they will have strong opinions on your existing SMB offering.

If you want to know more about what we’re doing, come and visit us at https://www.globallogic.com/