586 The Invisible Heist How Software Companies Are Quietly Stealing Your Commercial Relationships

Welcome to Breaking Banks, the number one global fintech radio show and podcast. I’m Brett King. And I’m Jason Henricks.

Every week since 2013, we explore the personalities, startups, innovators, and industry players driving disruption in financial services. From incumbents to unicorns, and from cutting edge technology to the people using it to help create a more innovative, inclusive, and healthy financial future. I’m J.P. Nichols, and this is Breaking Banks.

This week, as part of our Unbreak the Bank series, we confront an uncomfortable truth, and that is that traditional banks are becoming increasingly irrelevant to businesses. Business fintech platforms are moving upmarket, and research shows that community banks are losing 12 to 18 percent of operational deposits annually to these competitors. We’re going to look at why relationship banking is no longer enough, and we learn three strategic imperatives that banks must embrace to avoid extinction in the embedded finance revolution.

This isn’t just another fintech conversation. It’s about survival in an age where your best commercial clients are being targeted right now. At Alloy Labs, we just completed an executive briefing on rewriting the commercial banking playbook, and we found what we call a silent switching trend.

This includes data from the 2024 Federal Reserve Small Business Credit Survey that showed that 68 percent of small businesses now use at least one non-bank financial service alongside their primary bank relationship, with 23 percent reporting that they plan to shift more of their financial activity to these providers over the next 12 months. Today, regular guest and fintech takes founder Alex Johnson joins me, along with Barb McClain, who will be a recurring guest host with us here on Breaking Banks. You may know Barb from her popular fintech playlist newsletter.

She’s the founder of Velocita, a fintech advisor and implementation expert with decades of experience in data, AI, and technology, most recently as SVP and head of technology operations and implementation at Coastal Community Bank, a leading bank in embedded banking and banking as a service. So together, we’re going to look at how embedded lending is systematically dismantling banking relationships as QuickBooks, Square, Shopify, Toast, and others integrate financial services directly into business workflows, along with some options for how banks can respond to this growing threat. Well, Alex, we cited in our research your recent piece called Future of Small Business Lending is Embedded.

Can you give listeners a summary of what you found and what you mean by that? Yeah, absolutely. So the basic idea is that small business owners, maybe more than any other financial services customer segment, is hyper-focused on convenience and efficiency, right? And the reason for that is that small business owners, and anyone listening would know this if you’ve been a small business owner or if you’ve worked closely with them, they’re very stressed and they’re very, very busy, right? They have a million different things to do. Owning a small business is incredibly hard.

It’s incredibly stressful because there’s always some catastrophe that you have to be solving for. So they’re just running around with their hair on constantly. And as a result of which, they A, don’t tend to make the most sort of slow, careful, considered decisions.

B, they tend to really prioritize working with platforms or providers that can make their jobs that they need to do as efficient as possible. And C, they want to try to lump all of the jobs that aren’t actually the thing that drew them to entrepreneurship in the first place together into one big lump, right? And so if you’re someone who loves making pizzas and you have a restaurant, you want to spend most of your time on the art and craft of making a pizza. All the other things that you have to do, accounting, invoicing, buying supplies, managing employees, all of that stuff is the stuff that you did not get into this to do.

And you want to lump it all together and do as much of it as quickly and conveniently as possible. Well, the cool thing now for small business owners is there are all of these software platforms that exist to essentially help them conduct all of those transactions and all of those tasks that they didn’t really want to spend a lot of time doing and to do it efficiently and all in one place as possible. I and the piece that you referenced called these small business command centers or small business operating systems, right? And the idea with a small business operating system is it’s everything that a small business owner needs in one place.

Well, naturally, one of the questions we should be asking is, well, wouldn’t that include financial services? And I think if you work at a bank or a credit union, you might say, no, no, no, financial services is different. We’re different. People will come to me for that.

Yeah, like they’ll obviously want to take the time to come into a branch and have a consultative conversation. But that is applying a level of sort of exceptionalism to yourself. That’s probably not an accurate reflection of reality.

So the reality is that financial services products are like any other product that a small business owner needs to acquire, but doesn’t necessarily want to spend a lot of time on it. So what we’re seeing, JP, is the embedding of financial services, products, payments, deposits, lending, insurance being put in those small business operating systems so that small business owners can get them in the context of the jobs they’re trying to get done rather than having to go out of their way to get them. And that’s proving to be enormously disruptive, as you already said, to the incumbent businesses that are used to having small business owners attention.

Yeah. And, Barb, I’m dying to get your take on this, but I want to drill down on two things very quickly, Alex, with you. And the one is you say small business.

Did you have any kind of definition around this? You talk to banks and we say, anytime we bring up small business, that’s the first question is, what do we mean by small business? Yeah, no, it’s a great question. I think there are segments and then segments within segments, right? And so, you know, less than a million dollars in annual revenue is kind of a very classic cutoff for small business. I almost tend to think of it more in terms of employee size, because I think that’s more reflective of this dynamic we’re talking about, which is what is small business owner and the employees doing? And at what stage does a company have enough size where they can take a different approach to dealing with financial services? So I would say, for the purposes of embedded finance, you are looking at businesses that are small enough that they don’t likely have a chief financial officer.

Or if they do, that chief financial officer is like Bugs Bunny playing all the positions on the field at the same time and doesn’t have enough time to really do a lot of things efficiently. So figure anywhere from like one to 50 employees, I would say, is kind of the sweet spot. Certainly up to 100 is still very relevant for small business, but the smaller, the more stressed and time constrained they are and the more appealing embedded finances.

Yeah. And part of the reason I asked that, besides the fact that any banker listening is asking that question silently as it is, but what we found in our research is that number is increasing. And what I mean is that the number for whom what we’re talking about is highly relevant.

And we’ve seen from the banks who kind of take this view that, oh, that’s not our customer. Oh, you’re talking a solopreneur, sure. But, you know, we have these long embedded relationships with, you know, the machine shop in town and, you know, everything comes through the commercial banking relationship manager.

And we’re actually seeing not just the technology, but just the very business model is changing around that. So I’m sure we’ll get into that a little bit more. I’ll leave it there for now.

And Barb, you know, your take in general, but specifically, what does this mean for banks? Well, I think there’s a few truisms that are in the bank’s way. One is they’re very bad at creating a digital user experience. So some of them are passably acceptable.

You know, I think we can give throw them that bone. But for entrepreneurs, you know, as Alec is saying, who are very busy, this is like an administrative task, they want to get it done as quickly as possible. They’re not going to go to the place that’s making it hard on them.

Second, I think a lot of the banks that are trying to serve this sort of segment or segment within segments better tend to be slapping on a business veneer on top of their personal digital banking experience. And so even right from the login and credentialing on who are you and what permissions should you have, it’s a totally different experience when you’re a small business person versus, you know, your personal persona. So I think that’s been a detriment to banks as well.

And, you know, thirdly, I think it’s what you both said in the opening. It’s that banks are assuming that the customers are going to come to them in the way that they’re prescribing. They have totally forgotten that they need to go and meet the customers where they are.

I think it’s this fallacy of, I need to own the customer relationship. Relationship banking, as you’re saying, is the saving grace, you know, especially if you’re a smaller institution, community bank or credit union or the like, right? We knew our customers. We, you know, win on relationships.

Therefore, we have to own them in this digital experience. They have to come to us to get it. And then you add all of those things together and it just adds up into why they’re not being served well.

It’s because the digital experience is terrible in most cases or non-existent and you’re forgetting the fundamental of meet the customers where they are. And that’s a huge problem for banks. Well, and I think that uncovers another irony to this is if you do believe that the way we win as a bank is because of our relationships and it’s centered around our relationship manager, the reality is these platforms that Alex is talking about, they already have their nose under your tent.

And I’ll give you just one quick example. I interviewed a controller of a small business that I knew. I knew their employees used the RAMP card specifically for processing employee expenses and reimbursements.

And I knew who their bank was and I knew that their bank actually offered something very similar, if not identical. But I was just curious why they decided to take that up. So she gave me a few minutes of her time and I just asked, well, how did you think of this? And I said, well, our bank doesn’t offer this.

And I bit my tongue saying, well, actually, I think they do. And, you know, I asked about the jobs to be done. Alex, you knew you were talking my language as soon as you said those words.

And it really was taking the friction out of employee payments and reimbursements while adding more controls for the business. And so they looked at a couple of different ones, ended up with RAMP. But the upshot of this is there are several thousand dollars a month going out of their bank account and it’s there on the statements, right? If the bank bothers to look, they will see thousands of dollars in debits going to RAMP.

And guess what? RAMP is talking to them about lots of other services, including now their new personal banking offerings and all of that. So, you know, this threat is here. It’s now and it’s only growing.

I think that totally exposes another problem that is prevailing in banks is that they don’t have their data state in order. They don’t even see or have the ability to see that problem. Maybe they suspect they have that problem, but they don’t have an ability to confirm it with data.

Well, that’s a good point. That is something that the small business operating systems, as Alex calls them, have in spate. So, Alex, let’s walk through some of these.

Who are we talking about here and what are some examples? Yeah, so there’s kind of two different flavors of this, right? One are what I would consider to be sort of horizontal small business operating systems. And normally they start in one specific job to be done and then kind of broaden over time, right? And so that can be payment acceptance. So, like a square would be a good example where it starts with just helping small businesses accept cards.

To your point earlier about the that’s solo entrepreneurs, that’s a totally different thing. Yes, that is where it started, like micro merchants, solopreneurs, people who are just doing a little bit of hustle side. But Square has grown into a platform that larger small businesses use and not just to accept payments, but to manage inventory, to manage scheduling, to facilitate loyalty programs, like all of the jobs to be done for that small business owner besides the craft that they want to spend all their time doing.

All of that can now happen in Square, and that works across lots of different types of industries. Another classic example obviously is Intuit and QuickBooks and starting with accounting, but then expanding into just a whole suite of other adjacent areas that are all these administrative tasks that small business owners don’t want to do. The nice thing for those horizontal platforms is, and this is the thing that’s really difficult to compete against, they have tremendous brand awareness.

Every small business owner or new small business owner, even if it’s a Gen Z consumer who’s never really done any of this before, they’re going to know who Intuit is. Everyone knows who Intuit is. They’ve all heard of QuickBooks, they’ve all heard of Square, they’ve all heard of Shopify.

So those platforms are well known and they sort of draw new small business owners to them, and that’s where that relationship starts. The other model, which is one that I would be even more concerned about if I was a bank or a credit union, is the vertically specific small business operating systems. These are the ones that are not built to work across industries, but are worked to be the best possible answer for one industry.

So you have Toast in the restaurant space, which I’m sure we’ve all probably interacted with personally, when they bring a little point of sale system to your table to check out. That’s the part that’s visible to the end customer, but they handle all of the back office operations for running a restaurant as well. They do a lot of lending.

In fact, lending is one of their biggest forms of revenue now, is loaning money to restaurants. MindBody is the same exact type of operating system, but for health and wellness businesses. ServiceTitan is one that just went public.

They do the same operating system for field services businesses, like electricians and HVAC installers. My personal favorite, because I have young kids, is Brightwheel, which is an operating system for daycares. In all of these cases, they don’t necessarily have broad brand awareness, but because they built the best possible, very well-tuned set of software to handle every single job for a business owner in that specific vertical, and the workflows are tuned to that vertical, it’s kind of this thing called product-led growth, where if you’re a daycare, you will find Brightwheel, because once you hear about it, there’s nothing that even comes close to being as useful to it as you.

And then once you’re using Brightwheel for everything, again, the temptation is to go, well, why shouldn’t I get a loan for my daycare business through Brightwheel? Why shouldn’t I store my operating account and my operating deposits with Brightwheel? Why shouldn’t I process payments through Brightwheel? And it just becomes sort of a snowball. I’m super fascinated by the regional differences here, though. So the story of Toast is a great one, right? Because I’ve been very confused every time I come down to the States and I give you all my credit card and somebody runs away with it.

And then I still have to sign my name, the whole chip and sig thing. We had pizza delivery drivers bringing us point-of-sale devices in Canada at least 15 years ago. So again, I think it depends on where are you and what kind of assembly of tools and other vendors does a company have to consider when they’re trying to make this easier for the small businesses.

Yeah, yeah, that’s right. It looks a little different in each area, right? Because the jobs to be done are a little bit distinct. But I will say one of the things that’s really interesting, and I’ll just give you an example of the level of specialization that goes into those vertical specific ones, right? I was talking to a small business operating system that focuses on serving small legal clinics, right? And law firms.

And they’ve tuned all of their workflows to really be built to serve law firms well. And they do deposits, right? And so they have an embedded bank account. In fact, they have two different kinds because one of the embedded bank accounts is for the law firm’s operating funds.

And the other embedded bank account is for the law firm’s funds that they are holding in custody on behalf of their customers, right? And they were telling me that like, a thing that you might not realize unless you specialize in serving law firms, is that you are required to treat the custody account and the operating account as completely different pots of money. And in fact, if you take any benefit as a law firm from the money held in custody on behalf of your customers, even if it’s the most indirect benefit, like for example, let’s say someone was going to loan you money as a law firm, and they took into consideration the money you had in the custody account and the operating account to give you a better price, that would be a benefit that you’d be getting illegally. And you would actually get disbarred as a law firm by the State Bar Association, right? And so like, that is the kind of mistake that a financial services company working on behalf of a law firm absolutely cannot make.

And that’s why these specialized small business operating systems that know the ins and outs of how to serve law firms, or construction companies, or restaurants, or spas, that’s why they have such an advantage as they know every single thing about this vertical and can attack that entire vertical across every geographic market. Steve McLaughlin Well, you said so many things I want to drill down on, but I’ll start with the most recent one, what you’re talking about, broadly known as IOLTA, interest on lawyers’ trust accounts, and it speaks to regional differences. In the U.S., pretty much every state has their own rules and how that goes, and that interest often goes to support legal defense for the indigent and those sorts of things.

And it’s very interesting that you mentioned professional services and you mentioned Square. And I want to come back to Square and talk about them in more detail. I have been telling bankers for a while now, if you have not been, please go to the Square website and look at how they are specializing, and they are coming for your bread-and-butter commercial clients.

In fact, I want to read a seemingly innocuous quote from Jack Dorsey from the parent company Block’s fourth quarter earnings. We’re seeing accelerated adoption among larger sellers, right? I mean, that really should put the fright in all bankers, right? They’re not just processing payments, as you said, for food trucks and Etsy sellers anymore, right? Businesses over 500,000 annual revenues are increasing 24% a year. And even more shocking is that the Square banking accounts are now averaging $35,000 in deposits.

That’s money that would typically have sat in their local bank account. And now that’s, yes, it’s still in a bank account, but if you’re not the bank behind Square, you’re not benefiting from that. We recently saw Intuit announce that they’re, you know, working with the acceptance of the tap-to-pay on iPhones.

So they’re going down market to those sort of lower-value, point-of-sale type transactions, and they’re absolutely trying to come for Square’s lunch there. And I would expect they’re going to do the same and go up value as well. And if you’re a bank that has a large merchant services division, you need to understand that.

Well, that’s right. And we’re going to take a break in a few minutes. And Alex, I know you want to talk about merchant cash advance, where it does, where it doesn’t work, how that plays it.

But to your earlier point is these companies have so much data on their customers. And to your point, Barb, banks have it, but they don’t always necessarily know what to do with it. It kind of reminds me when we first started to do a project around personal payments.

We had a bank CEO that said, Venmo, Venmo. I hear about Venmo, but that’s my kids, right? We don’t use that. We have, we already have a peer-to-peer lending provider through our core.

But to her credit, she said, that’s my opinion. Let’s go look at some data. And for every page of transactions that they pulled for their own P2P transactions, they found five pages that said Venmo, Venmo, Venmo, right? All over that.

And I think the same thing is that whether it’s RAMP, whether it’s Square, whether it’s Brex or Mercury or QuickBooks or Toast or any of these that we’re talking about here, it’s already there. And I think the number one thing for the banks is to really understand what that looks like. And maybe last thing I’ll say here is talking about the vertical specialization.

And I want to come back to that too. I’ll give you a personal example on Toast. So I play soccer every Sunday and we often go out to brunch or lunch afterwards.

So recently, we had a really nice day. So we had almost 40 of us went to a local pub. They have a, they’re a sponsor of our league.

So they have a private room in the back. They let us in there and we all got separate checks. And it just hit me that that was no problem, no sweat.

We didn’t even get side eye from the server, let alone, there was no sign that said no separate checks for parties, five or greater or any of that stuff. A few years ago, that just really was a major, major pain point. And Toast has solved that, right? The ability not just to make the payment at the table with their card reader, but the ability for them to break it down and split it all up.

And so one of the other pubs that we went to this past week, I noticed, guess what? They’re on Toast also, different place, same routine. And so I was asking the server, she’s been there for years. And she said, well, at first, I really liked my paper checks and I like knowing exactly the customers, but I’m sold.

I could never go back. And so you think about the loyalty that these customers have. And again, for the banks thinking, well, listen, we don’t bank a lot of pubs and restaurants anyway, but they’re not stopping there.

So let’s take a little break here. And then when we come back, let’s dive into this a little bit deeper and talk about not only what’s happening, but what banks can and are doing to respond to these new opportunities and new threats. This show is brought to you by Alloy Labs.

As much as we love talking on the show, we believe that action is more valuable than talk. Alloy Labs is the industry leader in helping fearless bankers drive exponential growth through collaboration, exclusive partnerships, and powerful network effects that give them an unfair advantage. Learn more at alloylabs.com. Alloy Labs, banking unbound.

All right, welcome back. We’re talking with Alex Johnson and Barb McClain about small business operating systems, aka the QuickBooks, the Squares, the Intuits of the world that are increasingly becoming valuable to small businesses and increasingly threats, but maybe also opportunities for small business. Oh, Alex, in your recent article, one of the other things you talk about is you broke down the idea of merchant cash advances.

And what I really like about, well, first of all, you’re always very good at taking complex topics and breaking them down into simple pieces. And, you know, merchant cash advances on the surface doesn’t seem like, oh, that’s really amazing. It’s kind of like buy now, pay later.

Well, why do we need that? Right. We already have credit cards. We can pay for things.

But you talked about Square Capital launching that kind of idea. First of all, what is a merchant cash advance and how does it fit into this scheme that we’re talking about here? Yeah, absolutely. So, you know, merchant cash advance, as you said, is not like a new product or a really new idea, right? It’s been around.

It’s been around for a long time. And essentially, it’s just a form of receivables financing, right? So it’s the idea that if you have money coming in as a business, someone should be willing to lend you money against those future inflows of money to advance you money, essentially. And so merchant cash advance is literally just advancing cash to merchants they’re going to get.

The challenge historically has always been more from a product and underwriting perspective. How do you structure a merchant cash advance product in a way that is beneficial for the merchant, meaning it’s convenient, it provides them with needed access to capital, it sort of allows them some level of flexibility as they sort of pay off the loan that they’re getting, and it’s not like overly predatory. And then from a lending perspective, you know, how do you ensure that you’re going to get paid back? How do you ensure that you’re not underwriting cash flows that are coming in that actually don’t exist or that are at risk in some fashion? And so you mentioned Square, you know, Square Capital, which was Square’s lending arm was launched back in 2014, right? So more than 10 years ago.

And again, it’s not like a new concept, but they put a really interesting new spin on it, which is they did what I call embedded MCA or embedded merchant cash advance. And the idea is basically that you can only get a loan from Square if you process payments with Square, right? So the first question of, hey, how do you know that this merchant is likely to get paid and thus the money that you’re advancing them is money that you’re going to eventually be paid back? Well, Square knows because they require you to process payments on Square before they will give you a loan. And they use your history, not general history, but your history on Square specifically of processing payments and collecting payments over time to predict the volume of future payments that you’re likely to get.

And as you guys know, you know, small business, it’s actually pretty predictable from a cashflow perspective, especially if you can specialize in certain verticals or certain areas. And so Square can model out, hey, this business tends to have a cashflow pattern that looks like this. We can expect payment processing coming in to look like this, and therefore we can advance a portion of that to the end customer.

And then the other benefit for Square is again, because they’re the ones processing the payments, they can take repayment for those merchant cash advances directly out of the payment stream before it ever gets to the small business’s bank account. And so they literally, it’s kind of like payroll-attached lending in the consumer space, they literally dock your paycheck as you are getting money in as a business. And that, I’m not going to say it reduces their risk down to zero, but it significantly reduces their risk of non-payment because as soon as the small business makes money, a portion of money goes back to Square.

And so it’s this very efficient, very low-risk, very capital-efficient approach to lending, and it’s been enormously successful. Square Capital in the last 10 years has loaned out more than $9 billion to more than 460,000 individual Square merchants, which is kind of mind-blowing, and I’m guessing would probably catch at least some listeners by surprise. Absolutely, $9 billion.

And I don’t know the averages you cite a range of $100 to $350,000. Do you know what an average or median number is? Yeah, I would say it’s probably on the lower end, the 350 is probably more of an aspirational number, but I would say it’s probably more in the order of anywhere from like 3,000 to 10,000 would be my guess. Would be my guess, too.

Yeah, it tends to be kind of on that smaller side. And receivables financing is a form of like short-term, just getting you a little bit of money to do certain things, right? So you’re not necessarily going to finance buying a brand new set of ovens for your bakery or something using merchant cash advance, but for sort of smaller… Probably bridging some timing differences on your cash flow. Exactly, just kind of bridging cash flow gaps, and so that’s what they’re using it for.

Yeah. Well, Barb, these sound like pretty big moats around the business. If you’re a bank, you would love to be able to make that kind of capital efficient, highly… What do I want to say? Very low credit risk, right? Because of the knowledge that you have, banks aren’t really positioned for that.

What do you think the defensive play is here? Well, I think for a lot of bank, it’s probably just getting started. I think there’s probably two large camps, if I look at it. Those that are actually prepared to do something a little larger scale to attack this, they’re potentially ready for some kind of partnership with some of these other large providers, whether it’s a Shopify or a Xero or something.

And I think then there’s the everybody else. And the everybody else tend to trip over themselves and not know how to get started on almost anything. I’m not trying to knock that constituency.

It just is sort of my observation of how they tend to work. And in Alex’s piece, he does such a good job of even visually breaking this down. If you’re a bank that doesn’t know how to get started, I want to draw your attention to one of his last diagrams, where he literally calls out two things that are bread and butter for financial institutions.

One is payment processing. A lot of banks, especially those that have dipped their toes in sort of more of these partnership models, but moving money around is sort of the nature of banking. So that would be one.

The other one is literally labeled banking. Hey, we can do that. Right, exactly.

Isn’t that kind of what the banks are there to do? So some of this is technical constraint, I think, on getting started. Do you even make it easy for your small business users that are using Xero or QuickBooks or whichever other of these small business operating systems to even draw in their information about where they have an account with you? Have you even gone that far? Don’t treat these as adversarial things. I know you really want that pizza shop owner to log into your online banking portal.

But as I said before, they don’t want to do that. They’re already living over there in QuickBooks and just want to run their payroll. And so you need to make it easy for them to draw in the information about their activities with you into this other experience.

You just need to make peace with that. And that would be some of the quick getting started advice that I would give to some of the organizations that don’t know how to do that. Well, that’s really good.

And I think taking the broader view, Alex, you break it down very simply. Look, every business has money coming in, receivables, money on hand, working capital, and money going out, that’s payables. And then you break down what are the opportunities or products that are available to help those small businesses for that.

And as Barb said, in the middle, working capital, we’re pretty used to that as bankers. We can make unsecured installment loans, secured installment loans, lines of credit operating, lines of credit, that sort of thing. We’re pretty good there.

Maybe not so much traditionally on the front end, doing receivables or invoicing, lending, factoring, that sort of thing that traditionally has been non-bank providers. And increasingly, these more sophisticated non-bank providers are really eating into that payment processing you mentioned. And then on the back end, on the payable side, sure, we probably offer some sort of credit card and maybe we even include an employee reimbursement module or something on a corporate card.

But payroll finance and payables finance, there’s a lot of opportunities there. So where do you think it goes from here, Alex? Yeah, I mean, I think you’re right. I think that none of this is a reason for despair, right? Because in the same way that if you’re a bank and you look at this graphic that you’re kind of talking about where we sort of break it down by money coming in, money on hand, and money going out, the money coming in and money going out, that is where non-finance providers have tended to play more receivables financing, payables financing.

It’s where a lot of fintech and these sort of small business operating systems are starting to plug in. But I can tell you by the same token, I’ve talked to a lot of fintech companies and small business operating systems who have no idea how to fill that middle bucket of working capital because working capital is really hard. And I would say that from a small business perspective, the thing that’s really hard about working capital is working capital is not so much an assessment of someone’s existing cash flow or business today.

It is an assessment on the likelihood of a business to succeed when they jump up from where they are to the next level that they want to get to, right? And so, I mean, we all know small business owners, they’re very optimistic and they’re sort of risk-taking, right? And so they have this view of, if I could just get this and I could just acquire this thing or hire this person or get this piece of equipment, my business could be so much more than it is today. And it really, it’s that bet that you’re underwriting if you’re a bank, right? It’s trying to help them jump up to that next level of success. That’s a much more difficult type of financing to attack in the context of a small business operating system.

That’s really something that’s done better, as Barb was saying, when it brings in a holistic look at your cash flow, information about your business, information from your accounting system, like as many different sources of information to drive that as possible. I think that is incredibly important. And so I think there is a spot for banks to win there.

I also think you mentioned some of the specific examples. I think it’s really important for banks to continue to ask themselves, are the products that they offer to small business owners tuned to the needs that the small business owners have, right? Sometimes we force customers to understand our product structures rather than bending our product structures to their use case. Right.

We’re like, here’s our menu of four things, pick the one that you think might work the best for you. And if you’re lucky, there’ll be a relationship manager who can kind of translate bank ease to you so that you can understand where the fit is. That’s not an ideal experience.

An ideal experience would be to say, all right, you have a specific problem making payroll. And so we have a specific form of unsecured lending product that is designed to help you bridge payroll expenses. And maybe you tie it to a payroll system.

So Barb, there’s a little bit of your technical integration and trying to build like integrations into different payroll systems. So you can verify that the money is actually going towards paying the employees, but design a product specifically to finance payroll, design a product specifically to finance or to assist with travel and travel reimbursements and corporate card things. To me, the product structures that banks offer small business owners need to evolve to match the way that small business owners think, which is not, oh, I need a loan because I have this other thing I need to do.

It’s, I have this thing I need to do, what products are available to help me do that? Yeah. And, you know, you’re getting into some of the things we’re going to talk about in the next installation of the series around the centricity of the relationship manager. And this may be absolute heresy for some bankers listening.

But one of the things that we’re finding in our research is that everybody knows that’s important. And there are a lot of really loyal customers to the relationship manager. That loyalty isn’t always translating into enterprise value.

And in fact, bankers know this because they talk about, oh, we’re looking at hiring somebody from X, Y, Z bank across the street, and we’re hoping they bring a book of business with them or, you know, our lender just left and we hope they don’t take a big book of business with them. JP was talking about, you know, the importance of then relationship banking. We’ve come full circle in this discussion a little bit and how some of that can then turn into, you know, this perceived loyalty to potentially the bank brand or even the relationship manager themselves.

And I do want to challenge that one for a second, because I think there’s this mistaken view of customer loyalty when it’s actually customer inertia, right? Because moving your banking relationship is so difficult, you know, maybe it looks like loyalty to the bank because the person doesn’t leave, but it’s so hard to leave that they’re forced to stay. And I’ll just then add back in what you were talking about, Alex, right? I’m going to borrow Simon Taylor’s phrase. I think, you know, the banks, again, need to focus on the data perspective of what they can see is happening with the customer.

And is this becoming a zombie account, really, right? The paycheck motel kind of idea that Ron Shevlin talks about as well, right? I stopped, you know, but I’m here for a good time, not a long time, I guess, would be the way to phrase that. So, you know, as we wrap up this episode, I want to ask you the question, you know, can we give some hope to the bankers out there? Where should they be thinking about taking their business models from here? Yeah, I think it’s a really great question, Barb. I mean, I think that there is definitely hope.

I think the key is, as you were saying, to just not assume that you have that inertia anymore, right? I mean, that’s the core point we’re trying to make, is that there is this sort of silent attrition happening. You might not notice it, but it is happening. Volumes are shifting.

These other small business operating systems and fintechs and non-bank players are growing and picking up market share. And I think the secret is just really trying to figure out where you can win, right? And a lot of times what that requires you to do is narrow your focus and then kind of build from a strong base. And so that narrow focus can be geographic, that narrow focus can be vertically specific, that narrow focus can be, as we’ve talked about, partnering with fintech companies or with some of these small business operating systems.

It can be trying to compete directly with them, either by building technology or by integrating with it. So I think there are numerous ways forward, but they require, first, an acknowledgement that this is happening, and second, a focus and a doubling down on the area where you think you have a competitive advantage. Because I do think there are still pockets of loyalty, right? We talked about loyalty, we talked about inertia.

I do think that banks still do have very loyal customers, but if you assume that your sort of traditional distribution model, product structure, relationship banking approach is going to continue to work for those customers, you don’t have to adapt. That, I think, is where the danger is. What do you think? No, I’m super glad you brought that up, that ability to then perceive that you can’t be everything to everyone.

You know, your strategy needs to drive which fields of play that you’re even going to be on, but maybe more importantly, which ones you’re not going to play on, and then help your teams focus in on that. I love that advice. Yeah, I think that’s exactly right.

I think that wraps up this particular episode of Breaking Banks. Thank you so much, Alex. I encourage everyone to go out and read this particular very enlightening article.

Maybe you can just tell our listeners more about where to find you. Yeah, absolutely. You can find everything I write at fintechtakes.com. It’s a twice-weekly newsletter as well as a podcast.

Barb, thanks so much. This was really great. Thanks to JP.

Thanks, Alex. And thanks to everyone. We’ll see you next time.

That’s it for another week of the world’s number one fintech podcast and radio show, Breaking Banks. This episode was produced by a U.S.-based production team, including producer Lisbeth Severins, audio engineer Kevin Hirsham, with social media support from Sylvie Johnson. If you liked this episode, don’t forget to tweet it out or post it on your favorite social media, or leave us a five-star review on iTunes, Google Podcasts, Facebook, or wherever it is that you listen to our show.

Those actions help other people find our podcast, and in return, that helps us build an audience that can be supported by sponsorship so we can continue to provide you with our award-winning content every week. Thanks again for joining us. We’ll see you on Breaking Banks next week.