Podcast January 6, 2021

Control the deposit, control the relationship

Financial innovation is happening at a record pace.

But when it comes to small businesses…

If you aren’t solving their cash flow problems, nothing else matters.  

In today’s episode, I speak with Derik Sutton, VP of Marketing at Autobooks, to learn why cash flow is everything when it comes to small businesses. 

What we talked about:

  • The cash flow problem for small businesses
  • How Fintechs have squeezed out banks for deposits
  • The different incentives for banks and Fintechs

The cash flow problem

Small business has been traditionally underserved by financial institutions, but in many ways, COVID-19 has accelerated existing issues. 

And while everyone has touted the V-shaped recovery of the stock market, many SMBs are facing a K-shaped recovery — with just as many businesses are going under as those bouncing back. 

The biggest issue

Many small businesses rely on face-to-face interactions for their business models, so it’s understandable that the pandemic would cause major disruptions. 

So, you would think their #1 priority would be PPP small business loans, right? 

Well, that’s not the data Derik has found. 

In fact, their biggest concern is maintaining cash flow — which is already precarious even in the best of times.

“As an industry, anything we can do to make it simpler for a business owner to get paid is the biggest benefit we can provide.” — Derik Sutton

The problem small businesses face

In survey data covering 600,000 small businesses in the US, it turns out that the median cash reserves for small businesses cover about 27 days. 

That’s not an ideal number by itself. 

But how long do you think it takes for businesses to get paid on a low-end invoice? 

You’ve probably guessed it: 27 days. And that number is often much higher, stretching into 40 or more days. 

Most businesses are woefully behind the curve when it comes to cash flow. 

So, sure, PPP loans were a huge priority in the face of lockdowns, but cash flow — just as it was before the pandemic — is the ultimate priority for small businesses. 

Is it too late for traditional banks?

This perpetual concern for small businesses often presents a problem for traditional banks. 

Traditional banking used to mean a customer would pay through cash or check — which would often mean sending an invoice and waiting for a check to arrive in the mail — and there was only one way a business could get access to that capital:

Physically depositing it into an account. 

But digital has changed consumer behaviors in many ways. Look at the rise of Square or Paypal, for instance.

Now, the consumer is dictating methods for payments. 

This means the average small business is getting paid in 12 or more different ways. 

Controlling the relationship

For traditional banks, this is a problem. 

More often than not, they offer 2 verticals: basic banking and treasury or cash management services. 

The first is too simple to cover the expanding financial needs SMBs are facing, while the second has features that are far too complex (and expensive) for the average SMB.

“Whoever controls the deposit, controls the relationship.” — Derik Sutton

Meanwhile, Fintechs are better positioned to address these new and unique challenges because they are often geared toward frictionless and affordable solutions in the space. 

If banks want to succeed in this sector going forward, they need to enable businesses to do more business online and get paid online easily and affordably. 

It’s that simple.

If traditional banks can’t control the deposit, it will be near impossible to keep hold of customer relationships. 

For Derik, it’s not too late for banks. But they need to be more willing than they historically have been to strike the right partnerships with Fintechs more able to provide these services than they have been. 

And Fintechs that are better incentivized to do so. 

Different incentives

One of the biggest challenges for traditional banking when it comes to overcoming this is the different incentives behind legacy banks and Fintechs. 

Legacy banking incentives

Traditional banking centers on managing risk and earning a return in a way that is perfectly measurable. 

This means slow, predictable growth. 

This means safe and reliable decision making. 

Fintech’s motivation

Fintechs are often VC-backed, bootstrapped, and in a hurry. 

Their investors want to see growth — they want to see money being pumped back into the business to fuel that growth. 

The incentives are geared around growing as fast as possible, getting access to more money, and reinvesting it in the business. 

“You have all these FinTech companies that are rewarded for moving very fast and deploying capital quickly, up against an industry that is not built to operate that way.” — Derik Sutton

In Derik’s view, this schism will be the defining principle in the way financial services develop over the next few years.

Regardless of the discrepancy between incentives, the core of the matter is unchanged.

Whether traditional financial services or fresh-faced Fintechs, if these companies are to capture the SMB market, one priority stands above every other: 

Solving the SMB cash-flow problem. 

To ensure that you never miss an episode of Payments Innovation, subscribe on Apple Podcasts, Spotify, or here and don’t forget to check out our YouTube!

Until next time!



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