In the wake of interest rate pressure, there is wide agreement that small-and-medium businesses (SMBs) offer an attractive revenue opportunity for financial institutions. Narmi Senior Advisor Norm DeLuca and Director of Product at Grasshopper Bank Luther Liang recently sat down during our Narmi Uplift digital summit to discuss this opportunity, and how an inversion in the traditional banking priorities for small business customers can work in a community FI’s favor.
DeLuca, who brings 30 years of enabling banks to be more competitive in the SMB market, defined the contingent as all businesses with under $50M in annual revenue. “The good news is that’s 98-99% of the businesses in the United States,” he said. “[That’s a] $150B profit pool for the banking industry in the U.S.”
Grasshopper Bank, a digital-only bank running on the FIS IBS core, was formed to pursue that opportunity. But with these businesses representing such a wide swath of the economy, the question of how to specialize within it could potentially induce organizational paralysis. For Liang, it’s meant that they’ve discovered a “sweet spot” in terms of how to segment the market.
“There’s so much possibility that it can be hard to figure out, ‘What slice of that SMB market are we going to?’” he said. “For larger institutions, maybe it’s a little too complicated, and they feel like the juice isn’t worth the squeeze.
“Our clients are in what we call the ‘Innovation Economy.’ And that’s very different from your traditional mom-and-pop. Understanding this can have profound implications on your product offerings.”
With this consumer base in mind, Grasshopper has been able to move forward and offer products less reliant on the whims of the market, and pursue revenue opportunities that outpace interest-based volatility.
“I think there are a few reasons why SMB is so compelling right now. We’re in a world of interest rate pressure. I think SMB in particular offers a really attractive opportunity for both deposits and non-interest income.
“SMBs are less rate sensitive, so there are a lot of treasury opportunities. In some cases — for debit cards, for example — there are better unit economics than consumer. And we’re seeing fintechs pivot from consumer into B2B, for very similar reasons.”
For Grasshopper Bank (and any FI looking to grow its SMB customer base), establishing primacy as a main business banking deposit account is less an endgame, more a runway towards a multifaceted relationship with its clients. Many of these businesses require granular counsel on their finances, banking, and forecasting. FIs with the right strategy can put their SMB clients on the right financial path.
“We’ve seen research that a lot of SMBs go to their primary financial institution first, and they’re seeking guidance in this complicated marketplace,” said Liang. “That fragmentation is a good opportunity to create a nice, unified product offering. Now they’re going to you for those recommendations; you’re a trusted partner in the business as more than just a deposit account. That’s franchise value over the years.”
Many financial services providers make the decision to dedicate outsized resources to developing these functions in-house. While cost savings may exist down the line, the potential for long development timelines and a desire to bring top-notch functionality to bear as quickly as possible led Grasshopper to go the partnership route. By presenting the Grasshopper brand as the infrastructure home for a mosaic of curated point solutions, the bank was able to leverage its technology partnerships – and strong integrations with its FIS IBS core – to provide a sense of reassurance to its SMB customers navigating an equally varied set of challenges as they grow.
“We’ve seen some [fintechs] go really deep into specific areas… I think that’s a really good opportunity for a bank, because you have the ability to be an aggregator of all of these different services and create a really sticky, holistic product that helps the SMB achieve their business goals, vs. being purely a deposit account.”
DeLuca agreed with the notion of the deposit account relationship as a foundation, offering another key priority for banks looking to digitally transform towards SMB clients’ needs – simplification.
“It starts with banks understanding that the real problem is not a list of features and functionalities that everyone else has, but the totality of the experience, solving for that, and simplifying the consumption of financial services for SMBs,” he said. “I’d rather see banks deeply integrated with fewer, more vital partners, than loosely integrated with many that don’t enhance the simplification of the total customer experience.”
“A recent survey showed that when you ask traditional banks what they prioritize in their approach to the SMB markets, it was 80% features and functionality, 20% user experience,” DeLuca continued. “[That’s] completely inverted with digital- and neo-banks. The traditional approach to business banking kind of misses the mark, and when you ask SMBs what they care about the most, they start with a great, unified experience and a simplified UI/UX. ”
Strong, curated integrations – both with Grasshopper’s FIS IBS core and its own technology providers – have allowed for the bank’s partnership approach to appear both comprehensive and cohesive to end users. Banks looking to pursue SMBs should recognize that the sense of functionality they provide to these customers can be secondary to another priority: a certain quality of experience they desire out of their banking platform – simple, seamless, and holistic.
Grasshopper has been able to work with Narmi to carefully integrate relevant technology functions into its Open Platform without disrupting any sense of Grasshopper’s brand or user experience, creating a digital banking offering that feels both fully fleshed out and constantly iterative based on the changing economic landscape for SMBs.
“The concept of having a partner-driven environment that has these deep relationships is awesome,” said Liang. “But do you have the technical capabilities to create a user experience that ultimately is delightful for the customer, vs. feeling cobbled together, and there’s a ton of SSOs, and there’s additional logins? Does it actually feel like an integrated experience?”
This lies at the heart of the value proposition digital banks like Grasshopper offer the SMB market: there’s an alignment on clean, unified user experiences on par with what consumer apps and mega-bank offerings provide. It’s an attitude all community banks can mirror in trying to meet SMBs where they are, and in anticipating where they’re going.
“I carried this quote around with me for years: ‘We’ve got all these great solutions from so many different players. Our fantasy is that someone jams all of our favorite things together, in a way that actually works for us.’”
Approaching the small-and-medium business space, even trying to segment it, can be intimidating. SMB banking needs can vary widely – the same customer can have one set of priorities at a certain point in their business’s trajectory, and a completely different set after a year of growth. But by focusing on what SMBs have in common – their desire to evolve through an open platform, without sacrificing a beautiful user experience – financial institutions can unlock meaningful, mutually beneficial relationships with the pillars in their community.
“It’s very rewarding on both an economic and personal level for me,” said Liang. “Small businesses are the backbone of our economy. I get a lot of satisfaction in helping them achieve their goals. That ultimately helps the country and the communities you’re working in.”
