SMALL BUSINESS BANKING: A $56.9 BILLION OPPORTUNITY FOR THE TAKING

2

Small businesses are the hottest under-served market segment, offering outstanding revenue

potential for financial institutions. Historically, small businesses have been overlooked as

their needs more closely aligned with consumers, so retail banking services seemed to fit

their needs. However, now that small businesses have evolved into tech-savvy customers

expecting more product sophistication for which they will pay, they are a segment for

opportunity. This revenue opportunity has not gone unnoticed as non-bank offerings are on

the rise to attract these customers. To compete, financial institutions are emphasizing their

unique capabilities for security, broad solutions and the ability to serve as the single source

provider for all financial needs a small business would want.

The first hurdle many financial institutions face when

looking to better serve small businesses is figuring

out exactly what a small business is and how to create

value that resonates with this segment. Is it more like a

high-end consumer? A low-end commercial business?

Something else?

The U.S. Small Business Administration (SBA) uses a

fairly generic definition of a small business, capping it

at businesses with 500 employees or less (according

to this definition, 99% of U.S. businesses are small).

The SBA also says the 28 million small businesses in

the U.S. today account for more than half (54%) of

all U.S. sales and more than half of all U.S. jobs (55%),

proving that small doesn’t always mean slight when it

comes to contributing to the overall economy.

Financial institutions define small businesses a bit

differently. While some do consider the number of

employees, the vast majority use revenue for size, with

about 75% pegging a small business as one with less

than $10 million in revenue and the rest (25%) using

$20 million in sales as the threshold.

Unfortunately, such general descriptions fail to capture

the unique characteristics and banking needs of small

businesses. Does a 10-person startup with less than

1 WHAT IS A SMALL BUSINESS REALLY?

$5 million in sales have the same banking needs as

a 30-person business that’s brought in just under $5

million in sales for the last eight years? Generalities

like this lead many financial institutions to overlook

an opportunity in serving this segment. A better way

is to take a more in-depth look at some specific small

business owners to understand exactly who they are

and the banking challenges they face.

EXECUTIVE SUMMARY

Small Business Banking: A $56.9 Billion Opportunity for the Taking

3

SMALL BUSINESS QUANDRIES:OPPORTUNITIES FOR FINANCIAL INSTITUTIONS

SALMA: MEDICAL OFFICE MANAGERConsider Salma, a medical office

manager for a suburban dental

office. Salma uses everything

from a smartphone and iPad to

a laptop/desktop throughout

her busy day. She is responsible for enabling all of

her patients’ check and credit card payments, as

well as for paying suppliers for ongoing services and

deliveries. She oversees employee payroll and wishes

she had a good option for implementing direct

deposit.

In terms of banking services, she currently uses

online banking to see current balances, view positive

pay exceptions and make electronic payments. Still,

she finds most of the financial reports she can access

online challenging to work with and difficult to drill

down to find the information she needs. For example,

she would love to be able to generate reports and

views to present to the practice’s partners at their

monthly status meetings, but sees no easy way to do

that currently. What she needs is a clear picture of

current cash flow and future spending to address the

needs of the business in a timely fashion.

ALEX: CUSTOM FURNITURE MAKERAlex, on the other hand, is a

one-man show. He handles his

furniture making business in his

spare time, but is itching to quit

his day job and get to the next

level. Right now, however, he has little time to spare

and just wants to be able to manage his business

quickly and efficiently — without getting bogged

down in frustrating, administrative-level tasks.

In terms of banking services, he’s a big fan of

anything that shaves off time spent away from

building furniture, and since he’s an avid smartphone

user, he especially appreciates mobile banking and

easy-to-use features like remote deposit capture. As

he balances his day job, his business and his family,

he looks to his bank to provide up-to-the-minute data

on where he stands, including checking and savings

balances and credit card activity.

KEY TAKEAWAYSWhile both Salma and Alex run small businesses,

most financial institutions would have a difficult time

fitting them together into the same small business

profile. Financial institutions view people like Salma

as having more commercial banking needs, while

Alex seems to fall on the consumer end of the

spectrum. But that kind of categorization is far too

bank-focused and misses the big picture within small

business.

The real common denominator is simplicity. Small

businesses don’t want to have to think about their

banking. They see banking as just one of the many

functions they must perform each day. They are

constantly being pulled in many directions working

with suppliers, serving customers, managing

employees and manufacturing/selling their goods.

Small businesses need banking to be as simple and

efficient as possible so that they can use it as a tool

to gain better control and flexibility — to better run

their businesses.

While it may be obvious that each small business is

unique with its own set of banking requirements and

expectations, what’s less clear is how much time,

investment and infrastructure financial institutions

should put toward serving these varied small

businesses. In the end, few financial institutions

invest enough, primarily because they remain blinded

by the three myths of small business banking.

4

The small business opportunity is real and it can be

lucrative, especially for forward-thinking financial

institutions that, much like today’s FinTechs, focus on

offering the value-added services that truly resonate

with small business customers Instead of considering

the small business segment as one size fits all, financial

3 RISK SEGMENTATION

MYTH 1: THEY’RE FINE

Many financial institutions don’t yet realize the extent

of dissatisfaction beginning to blanket their small

business accounts. Like every business today, small

businesses are being pushed into the digital world,

or in most cases, they are doing the pushing. Small

business owners’ tool of choice is a smartphone or

iPad, and they use it to get business done. Consider

how Salma (see page 3) seamlessly adds Facebook to

the options patients have for appointment reminders,

or how Alex engages with marketing and advertising

apps to schedule time-limited coupon deals.

Small businesses expect the apps they use — including

for banking — to be quick, feature-rich and easy-

to-use. They want real-time data, simplicity and

consistency across all channels, and if they don’t get it,

they’ll look elsewhere. In fact, small businesses are one

of the major customer segments currently propelling

the rise of FinTech companies. Rather than struggle

with something that doesn’t quite fit their needs, small

businesses are quick to adopt new technologies that

are easy to use and help them run their businesses

better.

And while small businesses as a whole aren’t that

vocal, they do tend to vote with their feet when their

needs aren’t being met.

MYTH 2: THEY CAN’T (OR WON’T) PAY

The typical perception of a small business is one that

continually operates on the edge, struggling to pay

its bills or make payroll — not one willing to pay for

banking services. But in reality, small businesses do

pay their fair share of banking fees.

Yes, the majority sign up for basic no-frills banking

plans and work hard to avoid fees for low balances

or excessive transactions, but they are also realistic

about what services they need and how much they

cost. They know how their businesses ebb and flow,

and when stepping up to a premium service makes

sense. They also readily pay for value-adds, when they

need them. The numbers don’t lie; the average small

business customer generates $451 in fees per year.

Small businesses don’t sit still. When traditional

financial institutions can’t (or won’t) offer what small

businesses need, they have no trouble signing on with

and paying a FinTech that can.

2 THE THREE MYTHS OF SMALL BUSINESS BANKING

MYTH 3: THEY’RE NOT WORTH IT

While some financial institutions realize small

businesses have varied needs and challenges and

that they can tailor their services to help, they still

sometimes write off small businesses as too small

to bother with. How much difference can small

businesses (and their average of $451 in fee payments

per year) really make to a financial institution’s bottom

line?

A lot actually. Barlow Research estimates that small

businesses represent a $56.9 billion annual revenue

opportunity for financial institutions. How? Millions

of small business are paying fees to not only their

banks, but also to FinTechs. In fact, a recent Aite study

indicated that 72% of small business are paying for

banking services.

Let’s consider a bank looking to serve their 100,000

small business customers. Assuming a somewhat

conservative 25% adoption rate of customers paying

$451 in fees per year would generate over $11 million

per year. If we use fee income numbers from Aite’s

monetizing small business research, which states that

18% of small business pay over $100 per month, then

we’re looking at over $21.6 million per year. Regardless

of which numbers and estimates you prefer, it’s

clear that small businesses represent a very big

banking opportunity — to banks that take the time to

recognize it.

BARLOW RESEARCH FINDS

35% OF SMALL BUSINESS

CLIENTS SAY THEY WILL

LEAVE THEIR CURRENT BANK

PROVIDER FOR A BETTER

DIGITAL BANKING OFFERING.

5

institutions need to uncover and then leverage various

small business personas like Salma and Alex. Then,

they can categorize the features each persona finds

most important and tailor their service packages to

suit. Most importantly, financial institutions need to

break down their siloed services into quick, easy-to-

use applications from which small business users can

pick and choose as their business grows and their

needs change.

Financial institutions should also look to offer a

“freetail” package. Start small business customers off

with a basic set of must-have features (similar to what

they get at no cost on the consumer online banking)

to get them using the service and realizing your

capabilities, but then offer higher-level value-added

services when they are ready — and at an additional

charge.

Finally, financial institutions need to be the solution

to the small business banking services dilemma —

provide the right digital banking platform designed to

offer business customers the best possible customer

experience for their needs and business issues. A win-

win for both parties.

Contact ACI Worldwide to learn about how ACI

Universal Online Banker™ will enable you to generate

revenue from your small business segment.

6

ACI Worldwide, the Universal Payments

(UP) company, powers electronic payments

for more than 5,100 organizations around

the world. More than 1,000 of the largest

financial institutions and intermediaries,

as well as thousands of global merchants,

rely on ACI to execute $14 trillion each day

in payments and securities. In addition,

myriad organizations utilize our electronic

bill presentment and payment services.

Through our comprehensive suite of

software solutions delivered on customers’

premises or through ACI’s private cloud,

we provide real-time, immediate payments

capabilities and enable the industry’s

most complete omni-channel payments

experience.

Americas +1 402 390 7600 Asia Pacific +65 6334 4843 Europe, Middle East, Africa +44 (0) 1923 816393

© Copyright ACI Worldwide, Inc. 2017 ACI, ACI Worldwide, ACI Payment Systems, the ACI logo, ACI Universal Payments, UP, the UP logo, ReD, PAY.ON and all ACI product names are trademarks or registered trademarks of ACI Worldwide, Inc., or one of its subsidiaries, in the United States, other countries or both. Other parties’ trademarks referenced are the property of their respective owners.

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