Small Businesses Want Electronic Financial Services

cu360
September 5, 2006

Financial institutions of all types and sizes regard the small business market as a potential source of lucrative new payments revenue. But few have made inroads into creating the products and services that truly meet the needs of this business services segment, according to a report Small Business Payments in 2006 from the Banking Administration Institute, in partnership with Oracle and Unisys.

Like their larger compatriots, small- and mid-size businesses have an appetite to harness electronic technology to meet the demands of a business world that increasingly transacts in real-time. The more electronic they are, the more receptive they are to new approaches, such as check imaging and ACH. This represents an opportunity for financial institutions to extend these and other new payment services to these businesses.

But the research also shows most financial institutions are surprised by this level of need, and appear ill-suited to address it. Small businesses' interest in automated payments processing far exceeds that of most financial institution executive's perception, and often these executives are uncomfortable in determining how to deploy technology to this service segment—one that they have always considered too unsophisticated for complex payment technology.

The upper end of the small business market (more than $10 million but less than $50 million in annual sales) shows the greatest interest in new payment services. This market is typically more profitable for a financial institution because it uses more services, has higher account balances, is more loyal, and is willing to pay for service like checks. These businesses also have more faith that their financial institution can and will provide them with the payment services they need.

This confidence and service focus, however, doesn't extend to smaller businesses (less than $10 million in annual sales), of which there are approximately 24 million and which produce more than half of the nearly 20 billion annual business-to-business payments.

Financial institutions have a big opportunity to capture new customers in this small range by offering the right package of pricing and payment technology options. And these businesses are relatively less loyal to their financial institution, plus are more open to changing institutions.

In fact, more than half of small businesses under $10 million in sales would switch financial institutions if the other institution offered the appropriate payment services.

The following payment services were rated as valuable by more than two-thirds of small businesses:

• An identity-management platform to protect their businesses' identity.
• A system to provide straight-through processing of payments to their financial institution.
• An integrated payments package linking payables, receivables, and expense tracking.
• Anything that would offer workflow and compliance tools to meet Sarbanes-Oxley requirements.

This article was published by CU360 at http://cu360.cuna.org and is reprinted with permission.