How Credit Unions Can Beat Big Banks in the Commercial Market

As credit unions look for opportunities to increase profitability, the small business commercial banking sector is rising as a prime target for new acquisition efforts. However, those credit unions that take the lead on market share won’t be approaching the SMB market in the traditional way. Instead, they will need to seize a portion of the $500 billion currently going to non-traditional providers for services such as accounting/bookkeeping, invoicing, bill payment and payment acceptance services.

They will also need to narrow in on the big banks. A Cornerstone Advisors report revealed banks are already generating $11 billion from accounting and payment services alone, but three megabanks have cornered 47% of the market, leaving slim pickings for community financial institutions. In fact, credit unions are at the extreme low end of the scale, serving only 18% of the current SMBs utilizing their financial institution for these services.

Despite their lagging position in the race toward SMB market share, community financial institutions have an opportunity to pull ahead of big banks. Here is how they will do it.

Putting Dollar Signs to the Small Business Opportunity

A recent study conducted by Aite Group revealed that small businesses are seeking a wide array of services to help them better manage their finances and related tasks.  For example, 51% not only had a desire to use solutions that made it faster and easier to collect on outstanding receivables or money owed, but they’d be willing to pay their bank or credit union to do so. Fifty-seven percent would pay for tools that made it simpler to manage business finances.

Products like these push beyond the offerings traditionally provided by financial institutions and into the territory of third-party providers. Aite’s research revealed that 26% of SMBs responding to the survey use a nonbank technology provider to meet the financial needs of their business. Thirty-six percent are evaluating the option to do so.

The reason why SMBs are currently using third-party providers, such as Quickbooks, for crucial financial services is simple. Sixty-seven percent of SMBs said their bank doesn’t offer services they’d be willing to pay money to receive, according to Aite.

As SMBs move toward nonbank providers, credit unions lose the opportunity to expand wallet share of existing members or to extend into the commercial banking market. Perhaps more troubling is the potential to lose existing business.

Due to the small nature of many SMBs, business owners tend to exhibit the same attitudes and preferences as consumers when it comes to banking for their business. That means non-bank disruptors could own the market by offering traditional banking services, such as checking accounts, to small businesses. Amazon provides just one example of how a non-bank competitor could steal customer and member business.

According to Bain, 65% of Amazon Prime members would bank with the retailer. With estimates indicating that Amazon had 112 million Prime members as of January 2020, according to Digital Commerce 360, the opportunity is clear, but customer willingness to bank with Amazon extends even beyond this group of stringent devotees. Forty-three percent of non-Prime members also said they are willing to bank with Amazon, Bain reported.

Now, consider that 79% of small businesses prefer to keep their business and personal accounts with the same financial institution. Since the personal preferences of SMB owners and operators often come into play for business banking, it is not a far stretch to envision a migration of basic banking services to tech-enabled companies in the near future, particularly if the non-bank providers use their tech savvy to streamline the delivery of the additional financial management services that small businesses are seeking.

Meanwhile, nearly a third of financial institutions are facilitating commercial clients from retail platforms that lack business-specific products and services, according to Aite. The attempt to square-peg commercial clients into a round hole is impeding the growth within commercial markets and turning SMBs toward third-party providers. This is happening at a time when financial institution growth objectives are particularly difficult to attain.

With only $1,800 in the average customer’s checking account and low interest rates compressing margins, financial institutions are seeking alternative avenues to boost profitability. Serving SMBs offers a mechanism for generating revenue through fee-based income, often for products and services that many businesses are already paying to receive. To be successful, however, credit unions will need to migrate commercial business to commercial platforms.

Facilitating the Migration to Commercial Platforms

As SMBs seek tools to streamline financial functions, financial institutions continue to serve business needs from outmoded consumer platforms. However, the table stakes are about to change with 57% of large and mid-sized banks currently migrating business customers onto commercial platforms that have the capacity to fill SMB product and service needs.

When it comes to digital transformations like these, the cost can be a significant impediment to community financial institutions. PwC reported that the top universal banks spend 12 times that of the top regional banks on technology. To remain competitive, credit unions need access to the same leading technologies as larger financial institutions, only at more competitive scale.

Aite recommended that credit unions work with platform solution providers that offer leading capabilities. These commercial platforms provide the banking experience that SMBs are seeking, with a wide-ranging suite of capabilities that benefit both the end user as well as the bank or credit union:

• Ease of use. The user experience needs to be more akin to the consumer products they are using now. Think of it as the “Amazon Effect.” Your digital experience will be compared to the look, feel and navigation of other apps like Amazon, TikTok or Netflix.
• The ability to offer unified business self-service channels across a variety of functions, such as global cash, trade, supply chain, lending and treasury business. SMBs gain the advantage of anywhere, anytime access to products and services. Credit unions realize a single point of access to member information.
• Targeted insights that improve financial institution decision-making by delving deep into SMB consumption of products and services. With the right data in hand, credit unions can more effectively target marketing messages, provide pro-active service, and plan for cross-selling opportunities.
• APIs to support continuous innovations, allowing third parties to build the products and services that SMBs want, and enabling banks and credit unions with “flip-the-switch” functionality.
• Rapid platform deployment in the banking environment, putting credit unions on the fast track toward increasing their share of the SMB market.

For now, the ability to serve SMBs from a commercial platform is a competitive advantage. As big banks spend their time building on-premise solutions, credit unions can get the jump on customer acquisition by serving the wide range of SMB needs now, improving the efficiency and cost of service to gain market share today.

Michael Abare is Senior Product Manager for Finastra in Austin, Texas.