In recent years, banks have spent millions of dollars developing the mobile and online experiences that their retail customers want; for the most part, the results have been quite good. Large financial institutions, digital-only banks, and even community banks are building apps for the mobile devices that people want to use for banking. Banks are also building strong online experiences that enable self-service and empower retail customers to wean themselves off reliance on brick-and-mortar locations.
“Like retail bank customers, small businesses take mobile and online capabilities for granted: They’re no longer differentiators—they’re simply table stakes”
When it comes to serving their small-business customers, however, I believe that banks are not providing small businesses with the kind of deep engagement that they want and need. Like retail bank customers, small businesses take mobile and online capabilities for granted: They’re no longer differentiators—they’re simply table stakes.
What would truly be a differentiator for banks is to offer technology that helps small-business owners save time and money; better understand their business; and make their lives more convenient. Few, if any, banks are doing this today.
Taking Payments beyond Basic Merchant Services
There’s a big opportunity for banks related to how they offer payment services; specifically, banks need to expand their engagement model beyond basic merchant services. Small businesses need a lot more from their banks than the ability to process credit and debit cards. They want tools that will help them manage and grow their business, and the best way for banks to do this is to put themselves in the center of what we at Sage Payment Solutions call the “golden triangle”—payments, payroll, and accounting.
For small businesses, everything comes back to cash flow. For banks wishing to capitalize on their trusted relationship with small merchants, what better place is there to be than right in the middle of the small merchant’s most crucial processes? Those processes are money coming in (payments processing), money going out (payroll) and cash-flow reconciliation (accounting). Yet, banks are doing very little to be at the center of those key functions.
Why are banks so reluctant to integrate themselves into this golden triangle and be the central, focal point of the small merchant’s day-to-day functions? I think it’s because it would require banks to rethink how they distribute their services, which would then require them to provide the consumable APIs and software developer kits that enable third parties and ISVs to create independent applications and services.
The people reading this article will point to the risks, exposure, and compliance issues in opening themselves up to developers; there are also issues with legacy technology systems. Sooner or later, however, banks will realize they need to play a central, meaningful role within the three touch points of payments, payroll, and accounting. The bank(s) that do this first will have a huge competitive advantage over their competitors.
Consumable APIs are the Starting Point
How can banks put themselves at the center of the golden triangle? Consumable APIs are the obvious starting point. There is a precedent in the payments industry. When new entrants came into the payments space circa 2009, they disrupted the industry and changed its focus forever. Innovators introduced mobile capacity, but they also simplified enrollment and underwriting. Payments was changed forever, and the change is continuing thanks in large part to third parties who create the innovative payments applications and services that small businesses want.
Banks should be rethinking the distribution of their services to small businesses. By putting themselves at the center of the golden triangle, I’m not suggesting banks need to own the payments, payroll, and accounting systems. In fact, I think it’s better if they don’t own them. But banks need to be players in these areas: They need to be open just like Google is open to allowing developers to consume APIs and create applications and services on top of Google software.
Banks should take their capabilities and make them available to the leading accounting solutions, the leading payroll solutions, and the leading payments solutions. We’re talking about banks creating a more open, interconnected framework. The opportunities for banks that take on the challenge are enormous: Were banks to embrace the kind of software development kits that are now a necessity for any business wanting to compete in the payments industry, banks would empower their customers to take their bank of choice with them whenever they change software.
New Distribution Model: Moving into Banking as a Service
In the final analysis, we’re talking about banking as a service. The challenges are big, but at some point, it seems inevitable that banks will have to join the many other industries that have given third parties and ISVs the opportunity to be creative with the APIs that companies like Sage Payment Solutions offer. Small businesses want to be able to take their bank along with them when they change software; banks need to make it easy for small businesses to do this. Distributing a set of banking capabilities, all packaged up, so that third parties can innovate around those APIs, would make for a truly digital bank.
For banks to truly evolve, it’s time to take the risks and act as if they were really digital companies focusing not just on customer experience, but on the innovative distribution of their banking services that meets small business’ needs.