The banking industry is undergoing a seismic shift—one that many traditional banks are either overlooking or resisting.

For decades, business banking thrived on relationship-driven models, where commercial clients relied on banks for financial accounts, loans, and merchant services. But that model is rapidly unraveling due to the rise of embedded finance in small business banking.

Fintech platforms like QuickBooks, Square, Shopify, and Toast are systematically dismantling traditional banking relationships. Instead of seeking out banks, business owners now prioritize convenience, seamlessly integrating financial services into the platforms they already use to run their operations.

This shift is happening fast. The question is: Can banks adapt before they become obsolete?

Embedded Finance in Small Business Banking: A Growing Problem

A recent Federal Reserve Small Business Credit Survey revealed a startling trend: 68% of small businesses now use at least one non-bank financial service alongside their primary bank. Even more concerning for banks, 23% of small business owners reported plans to shift even more financial activity away from traditional institutions within the next year.

This phenomenon, dubbed the “silent switching trend,” is quietly reshaping the industry. Banks that once relied on relationship banking as their competitive edge are now losing customers to fintech solutions that offer efficiency, automation, and better user experiences.

For example, a local machine shop may have always worked with a community bank for its lending and deposits. But as soon as it starts using QuickBooks for accounting, it may also tap into QuickBooks’ lending services. Before long, its deposits, credit lines, and payment processing have all moved out of the bank—without a formal decision to switch providers.

This is how embedded finance wins: It’s not an abrupt transition. It happens gradually, until one day, the business owner realizes they don’t need their bank anymore.

The Rise of Small Business Operating Systems

At the core of this transformation are small business operating systems—software platforms that integrate various business functions into a single interface.

These platforms start by solving one specific need, such as:

• Payment processing (Square)
• Accounting (QuickBooks)
• Inventory management (Shopify)
• Payroll (Gusto)

Over time, they expand their offerings, adding financial services like loans, credit lines, and business bank accounts. Because business owners are already using these platforms to manage daily operations, the transition to using their financial products is seamless.

This trend isn’t just happening with general platforms. Industry-specific fintech solutions are becoming even more powerful competitors. Examples include:

• Toast for restaurants
• ServiceTitan for home services (plumbing, HVAC, electricians)
• MindBody for health and wellness businesses
• Brightwheel for daycare centers

Each of these platforms knows their customers inside and out, customizing financial services to meet the unique needs of their industry. That’s an advantage traditional banks simply can’t match.

What Banks Are Getting Wrong

Banks have long believed they could hold onto small business clients by providing strong customer relationships. But that belief is becoming outdated for several reasons:

1. Banks Are Failing at Digital User Experience

For many small business owners, banking is just another administrative task—something they want to complete as quickly and easily as possible.

Most banks have digital experiences designed for individual consumers, with business banking simply layered on top. This leads to frustrating experiences where business owners have to jump through unnecessary hurdles just to access their accounts.

By contrast, fintech platforms make financial tasks effortless, seamlessly integrating payments, lending, and deposits into a business’s daily workflow.

2. Banks Don’t Meet Business Owners Where They Are

Banks assume that if they build digital banking services, business owners will come. But today’s entrepreneurs aren’t looking for financial services—they’re looking for solutions that make running their business easier.

For example, a restaurant owner doesn’t wake up thinking about banking. They’re thinking about food costs, staffing issues, and supplier payments. If Toast offers embedded lending within the same system they already use for payroll and inventory, why would they go out of their way to seek financing from a bank?

Fintech providers meet business owners where they are—inside the platforms they already use.

3. Banks Ignore the Data Hiding in Plain Sight

Banks already have the data that could help them identify at-risk customers. If they looked at transaction statements, they’d see payments going to RAMP, Square, Shopify, or other fintech providers.

That data is a clear signal that a business is shifting financial activity away from the bank.

But most banks aren’t using that data. Instead of proactively reaching out to retain those relationships, they only react once a business has already moved on.

How Banks Can Compete

Despite these challenges, banks still have opportunities to win. But it will require them to rethink their approach.

1. Embrace Embedded Finance Instead of Fighting It

Rather than trying to force business owners back into traditional banking, banks should look for ways to integrate their services into small business operating systems.

For example, instead of requiring a business to use a standalone banking portal, a bank could partner with software providers to offer their financial products inside existing platforms. This could include:

• Loans directly accessible from accounting software
• Payment processing services within an inventory management system
• Payroll funding that integrates into HR software

By embedding their services where business owners already operate, banks can regain relevance.

2. Improve Digital Banking for Business Owners

If banks want to compete, they need to provide digital banking experiences that match the seamless functionality of fintech platforms.

This means:

• Customizing user experiences for business banking (not just adapting personal banking apps)
• Simplifying onboarding processes for small business loans and credit lines
• Providing real-time insights into cash flow and spending trends

Banks that prioritize digital innovation will have a better chance of retaining customers.

3. Use Data to Prevent Customer Attrition

Banks must take a more proactive approach to analyzing transaction data. If a small business is sending increasing payments to fintech platforms, that’s a warning sign that the relationship is eroding.

Instead of waiting for businesses to leave, banks should use this data to offer personalized solutions. For example:

• If a restaurant is frequently using Square Capital, the bank could proactively offer a competitive loan.
• If a law firm is using an industry-specific platform for payments, the bank could create tailored solutions for legal services.

Understanding customer behavior before they switch can help banks prevent silent attrition.

Final Thoughts: The Future of Business Banking

The shift toward embedded finance isn’t slowing down. If anything, it’s accelerating.

Banks that adapt and integrate will survive. Those that continue relying on traditional relationship banking will watch their best customers gradually disappear.

The question is no longer if fintech will disrupt business banking—it already has. The real question is: Will banks fight back or fade into irrelevance?

Would you like to explore partnership opportunities with fintechs? Or are you looking to refine your digital banking strategy? Share your thoughts in the comments!