Improving operational efficiencies and outsourcing noncore tasks allows small-business owners to focus on growing their business. To do that, they’re turning to digital tools. A 2019 Deloitte survey of more than 1,000 small and medium U.S. businesses found that those using advanced digital tools are three times more likely to experience revenue growth and three times more likely to see customer growth than their “less digitalized” peers.
One of the digital tools areas that can improve efficiencies and solve various business challenges is fintech, or financial technology. A broad category of financial services and products that apply technology and new models to traditional processes, fintech can help, among other things:
- Save time on business processes
- Improve customer experience
- Increase access to capital
- Reduce operating costs
“Many of the processes associated with running an SMB have traditionally been very paper-based, difficult and slow. But with the advent of new technological solutions, all of these processes will be transformed,” explains Karen G. Mills, senior fellow at Harvard Business School and author of the book Fintech, Small Business & the American Dream: How Technology Is Transforming Lending and Shaping a New Era of Small Business Opportunity.
What is FinTech?
Think of fintech companies as next-generation vendors that combine innovative business models and technology to improve business processes and enable or enhance financial services. While some fintech companies cross into multiple categories, the main buckets include:
- Lending (or financing)
- Payment processing
- Payroll and accounting
- Insurance and wealth management
The typical fintech is a digitally native, virtually based startup focused on a point solution. Traditional institutions such as banks, as well as nonfinancial sector companies, are also adopting fintech to expand their services.
FinTech Adoption Among Small Businesses
A 2019 survey by EY of more than 1,000 small and medium enterprises found that globally, 25% were fintech adopters (which EY considers a high adoption rate for technology) and 23% were adopters in the United States. The EY defined adopters as companies that used all four of these categories: banking and payments, financial management, financing and insurance. Another 22% of surveyed businesses were on the verge of becoming adopters because they were using three of those categories.
The technology is only one aspect of fintech. According to Paul J. Bailo, who teaches digital transformation and e-commerce at New York University and applied analytics at Columbia University, the technology is not necessarily advanced—often, it may be “bolted together” to develop new business models.
“It’s a new way of thinking,” says Bailo. “For example, do you need a branch to start a new bank? Why do you need people? All you need is an algorithm, and an app and a banking license.”
How FinTech Solves Business Challenges
The EY survey found the highest adoption rates in the banking and payments category, followed by financial management, then financing and insurance. Mills believes that financing is an area that could have the biggest impact on small and medium businesses because access to capital is a big need.
“The typical SMB has less than a month of cash on hand. As a result, when they need a loan, they tend to need it fast,” says Mills, who served as the administrator for the U.S. Small Business Administration as part of President Obama’s Cabinet in 2009-2013. “However, applying for a bank loan has traditionally been an onerous process that involves stacks of paperwork and waiting weeks for a decision.”
According to the Federal Reserve 2020 Small Business Credit Survey (based on more than 5,500 responses), 43% of small-business employers struggled paying operating expenses in 2019 and 33% struggled getting credit. More than a fifth obtained financing from online lenders—and decision speed was the most common factor that influenced the choice of lender, followed by the chance of being funded.
Small businesses are looking to outsource complexity to somebody else because they have enough to worry about. [...] SMBs want to rely on providers and operators that will make their lives simple and easy.
—Marwan Forzley, co-founder and CEO, Veem
“Pulling vast quantities of data from nontraditional sources like bank account statements, the fintech use AI and machine learning techniques to automate previously manual processes like risk modeling and credit decisioning,” Mills says. “These automated processes cut loan decision times down from weeks to minutes, with the funds arriving in a small business’s bank account in a matter of days.”
The slow pace of traditional services is also one driver behind the growth of insurtech (fintech companies that sell insurance), says Bryan O’Connell, co-founder and CEO of Huckleberry, which has thousands of small businesses using its platform to buy business insurance online.
O’Connell launched the company after going through the weeks-long, traditional process of buying business insurance and thinking that there had to be a better way.
“The genesis for Huckleberry was essentially to make purchasing insurance as easy and understandable as buying any of the many other things online,” he says.
On the Huckleberry site, businesses can buy insurance in as little as five minutes online—but also have access to an insurance adviser via chat, text or phone call if they need assistance. Other services, such as obtaining a digital certificate of insurance, are also fast, and businesses don’t have to contact an insurance agent like they would with traditional brokers.
Transforming Business Processes
The EY fintech survey found that the three top reasons small and medium businesses buy fintech services are:
- The range of functionality and features
- The 24/7 availability of services
- The ease of setting up, configuring and using the service
Many fintech solutions provide a broad array of integrations with other services, automating processes. For example, payment services and payroll integrate with accounting apps and accounting integrates with banking.
This kind of simplified experience is a big draw, says Marwan Forzley, co-founder and CEO of Veem, a B2B global payments network that works with more than 200,000 small and medium enterprises across the globe.
“Small businesses are looking to outsource complexity to somebody else because they have enough to worry about,” says Forzley, who describes Veem as Venmo for businesses. “SMBs want to rely on providers and operators that will make their lives simple and easy.”
Companies like Veem are also attractive because they typically lower both transaction times and costs. For example, Veem, which uses blockchain as one of five “rails” to move money, provides a host of add-on services such as accounting integrations and reports without a subscription fee.
“The key thing is to give customers something they can’t get from their bank,” Forzley says. “They’re looking for an alternative provider that’s going to give them a fundamentally different experience.”
Mills says another advantage of fintechs is that they provide business leaders better insights into their cash flow. Those insights are what April Rudin appreciates. As the founder and CEO of The Rudin Group, she uses fintech platforms for making payments and likes the ability to automatically track finances.
“It creates one record, one version of the truth, so that business owners can find out more about their business in one place,” says Rudin, who writes and speaks about fintech globally and whose firm provides marketing services for fintech and “wealthtech” (fintechs that offer wealth management services).
But fintech is also a way for small businesses to differentiate, Rudin says. A 2019 global survey of more than 2,000 leaders of small and medium businesses by Salesforce found that keeping up with changing customer expectations was the top challenge. Additionally, 58% of those surveyed identified this as their biggest challenge for growth in the next two years.
As an example, businesses like restaurants could accept alternative payment methods beyond credit cards, Rudin suggests. “It’s all about what’s in it for the customer,” she says.
Rudin says small-business owners should continuously evaluate how they use next-generation technology.
“If you find you’re spending too much time on administrative or operational tasks and not enough time to sell, you may want to look at new resources,” she says. “It’s always a balancing act, and you need to be on the lookout for how new technologies can help you be more efficient.”
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