The small and medium-sized businesses (SMBs) that power America’s economy have faced two years of uncertainty and unprecedented challenges, with more seemingly on the way.
From corner bakeries to regional furniture makers, from construction companies to nationwide service providers, SMBs that survived the pandemic now face an unsettling economic environment. At the same time, one such fintech that thousands of these businesses counted on announced last week that it will soon stop serving most SMBs. Instead, they’re focusing on companies that can demonstrate scale with proof points such as investor backing, one-million-dollar-plus annual revenue, or at least $500,000 of cash on hand.
Just a few years ago, such challengers entered the market without those caveats, promising new, innovative experiences that disrupt the $40-trillion payments industry. SMBs voted with their feet–and it’s easy to see why. Most Main Street banks at the time were offering either repackaged consumer products or overly complex enterprise solutions, neither of which solved the unique needs of SMBs.
Small and mid-market businesses needed spend management solutions that could integrate with their accounting platforms. They needed solutions like touchless payments and virtual credit cards they could easily create, send, and manage to simplify expense processes. They hungered for digital products.
Entrepreneurs saw the opportunities and launched dozens of startups focused on delivering financial services to SMBs, steering those businesses away from their existing banks. While these “neobanks” delivered those products, most didn’t build the sophisticated practices traditional banks rely on to keep their balance sheets safe in uncertain economic times and deliver best-in-class service to their clients. As a recession becomes more likely, an unknowable amount of risk is on the horizon. Cash is king again, and less funding will be flowing into fintech.
This cloudy outlook will force many fintechs to make hard choices about the segments they serve. We will likely hear more announcements in the months ahead from neobanks that narrow their scope to focus on unit economics, in many cases for the first time in their relatively short existences. When this happens, traditional banks will be there to capture the opportunity, just as they have in the past with mobile payments, peer-to-peer transfers, small-business lending, enterprise payment solutions, and more. And this time, the banks are better prepared.
The rise of neobanks has forced traditional banks to innovate. Many have forged strategic partnerships or made acquisitions to provide reliable digital spend management solutions.
The message to SMBs is clear: Traditional banks noticed when you left; they’ve been busy extending their offerings to win you back, and they are ready to support you when you need them most.
Andrew Jamison is the CEO and co-founder of Extend, the fintech providing digital payment infrastructure for trusted financial institutions to enable modern card experiences.
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