Small Business: Fragmentation, Segmentation, and Beyond Banking

Cheryl Brown

The Purposeful Banker welcomes Matt Ross from Accenture to talk about how small businesses’ banking needs have changed and how financial institutions are responding.

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Transcript

Jim Young

Hi, and welcome to The Purposeful Banker, the leading commercial banking podcast brought to you by Q2, where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young, senior content strategist at Q2. Welcome to the show.

Today we're talking to Matt Ross. Matt is banking strategy managing director—that's a little bit of a mouthful—at Accenture, where he focuses on helping financial institutions tackle industry challenges, especially around their small business banking strategy.

Matt will be joining our own Dean Jenkins and Hunter Moses for a webinar on December 9th hosted by American Banker. They'll be talking about how FIs can better serve SMBs by understanding their unique needs and aligning solutions to those needs rather than just pushing out traditional banking services. We'll put a registration link to that webinar in the show notes for those who are interested.

OK, after all that long introduction here, Matt, welcome to the show.

Matt Ross

Thanks, Jim. I'm really excited to be here. I appreciate the invite and looking forward to the dialogue today.

Jim Young

Yeah, we wanted to bring Matt on so he could really give us a preview of that webinar, but also so he can share in some of the experiences and insights he's gained from helping banks set and adjust their SMB strategy. So Matt, just to get us started, first, tell us a little bit about yourself. You've been with Accenture for, I guess a little bit over a decade now?

Matt Ross

That's right, Jim. So I'm a managing director at Accenture. I sit in our Banking Strategy practice. I partner very closely with banks on helping build their digital growth strategy, optimizing their cost basis, and thinking about how to continually improve their business. In particular, I wear a hat around leading our SMB growth offering, and I've done that for the last three years, and it's been a fantastic role. It's given me exposure to what banks are doing around the globe in the SMB segment, how they're growing intimacy with their customers, how they're doubling down on digital investment to build new capabilities, and frankly, how do they build a scalable model in this segment that's very tough to serve.

So we've seen a ton of innovation in the space over the last decade, and I think we're just continuing to see that grow, and Generative AI and the advent of that has been something that we're really excited about, as well. And yeah, looking forward to the conversation today and diving in with you.

Jim Young

Well, you just touched on a lot of the themes that are on the questions that I want to ask you today. We actually just recently held our Customer Advisory Board meetings and asked a roomful of commercial banking leaders to give us sort of their top investment priorities for future growth on the digital banking front. And the two top priorities were payments workflows and small business. Can you give us a little bit … and in that small business part, I should add really with that focus of trying to drive core deposits, as well. So it sounds like that sort of jives with what you've been seeing at Accenture. So what are your clients telling you?

Matt Ross

Yeah, we've seen a significant uptick in the conversations around how to build capabilities to better serve the SMB market. I think a lot of that buzz has been coming off of the imperative to short deposits. As you mentioned earlier, the SMB segment is a deposit-rich business. It's a very attractive profile to banks, and, frankly, it's something that banks can use to drive their deposit betas down. It's a sticky customer base and it's a way to boost profitability.

And even broader than deposits, Jim, I think the SMB segment is just in general a very large opportunity for banks. Just in the U.S. alone, it's an $80 billion market. It's very fragmented across large banks, regionals, and fintechs. Everyone's trying to take their share of the market, but it's clear there's not a single winner. We can go look at every bank and there's bright spots in all of them, but there's not one that's doing everything right and crushing the market.

So that's unique. That fragmentation creates opportunity, and I think banks are continuing to double down and figure out how to serve the whole customer wallet, looking at the adjacency to retail and wealth and serving customers across that ecosystem. And so the value case is really clear, and what the clients are telling us is just what you heard. This matters. And there's some real obstacles to overcome around being a leader in the market with the limited investment that's been in this segment historically. We often see SMB as a segment that either gets the retail and commercial offerings and they don't have their own technology or strategy. And that's evolving because the fragmentation that exists, the limited digital capabilities exists, and this high variance and experience is something that banks are paying attention to now.

Jim Young

Yeah, I wonder, it's a phrase we've used around here a bit, is that it's a bit of a Goldilocks problem. On the consumer side, you've got the capabilities and SMB says, "Well, I need more than that." And then you've got the commercial guys come in and it's like, "Whoa, whoa, that's a bit more than what I need." So you mentioned the fragmentation, but how do you see FIs right now trying to tackle that issue while also trying to better segment their SMBs and also try to give them that better experience, but in a way that fits what the SMB needs and also what they have the ability to deliver?

Matt Ross

It's a good question, Jim. When we're speaking with our clients and customers and working with banks as partners, a lot of times the starting place is what's the mindset of the customer? What are they thinking for? And let's solve those challenges. So to start with that, I mean, I'll share some anecdotes from the industry that we've collected in our research. So we pooled a significant amount of small business owners and operators, spoke to global banks, and we asked both of these parties, what is your thought around the trust of your relationship? Do you feel like your bank understands you and vice versa? Do you understand your customer, if we're asking the question of a bank? What do you think your relationship strength is? And the data was really clear that there is a disconnect of the perception of the services that banks are providing their customers and what customers are feeling.

So customers don't believe that they're getting what they need from their bank yet, and there's data around that that shows it. If you go ask small businesses, “Does your current bank meet all your needs?”, only 9% responded with yes. So there's an opportunity. That's how I look at that. I mean, obviously it's a staggering number for banks to be faced with, but we are sitting at the table together with our clients. At the end of the day, that's opportunity and solving this is a billion-dollar answer. It's not simple. There's a roadmap of a lot of investments that are required, but it's very manageable to do it. And I think we're seeing some banks get a really good head start there.

Jim Young

So I guess it's the whole thing of a crisis is another word for opportunities, I guess. Nine percent sounds a bit like a crisis, but on the other hand, yeah, there's 91% out there, minds to be changed. I am a little curious though about how you can do that still on a scalable way. I think any bank could go in and try to solve these sort of things one at a time and do that, but obviously that's going to kill your profitability, etc., if you can't do this in a way that gives them that experience but also has to be scalable, and how are you seeing some FIs try to tackle that?

Matt Ross

Yeah, and Jim, maybe even before we go there, I could share a little bit around how we're seeing clients and banks invest in the market to change that paradigm of customer satisfaction. And so, I mean, there's three things I'll hit on, and scalability can be part of these. The first is building an integrated digital experience. Second is thinking about their segmentation strategy a little and evolving those thoughts. And the third is changing that value proposition. How do you differentiate your value proposition to market? And it might go beyond banking, and so happy to unpack those a little bit if you think that would be helpful to the listener group.

Jim Young

Yeah, why don't you?

Matt Ross

So if we think about the digital experience to start off with, if you go to pick 10 bank websites and you try to open up a new account or open a new loan to fund your business, very few today are going to actually offer you true end-to-end digital experience where you can apply for your loan and you can get that loan decision and funded all through a digital experience. And so you compare that to retail and it's significantly behind. And so I think we're seeing a big investment on building that front door, that digital front door to allow customers to come to the bank and digitally get a product and it's solving for their solutions. It's more solution-oriented, not product-oriented. It's saying, what do you need as a customer? How can we help you? And then providing a banking product that meets that need.

The same poll I mentioned earlier around reaching out to the customers and the surveys that we did on SMB owners and operators when they're looking at new banking providers, almost 70% said that robust digital capabilities is a key consideration. And so if you can't even start it off on the right foot of being able to open that account in a digital manner, I think it's difficult to be able to win in the market. And so we'll see that move further and further.

That said, there is a paradox to that statement because SMBs still use branches today. Many of them are still walking into the branches. And so a lot of banks that we're working with, we had the conversation of how do we balance that? How do we provide this fantastic branch experience, this fantastic digital experience, how do we keep those integrated? And I do think technology can be an enabler and accelerator to that by thinking about how do you enable your bankers.

Bankers in the branch, 80% of their day, if not more, is managing the bank's retail customers. So they're very comfortable with that. But managing a business customer is very different, and banks have come up with all different strategies of how to put the right people and their right bankers in front of clients, but it becomes difficult and technology can be a way to help level up some of the resources that might not be as comfortable dealing with your business products.

Jim Young

Yeah, it's interesting because it feels like when I've seen the messaging from SMBs, it is a, “I give you the capabilities so I can handle this myself digitally until I want to be able to go.” It's different from the big commercial ones, which you're like, "I need a one-on-one relationship with my guy, and I need to be able to see them when I want to see them." And you'll understand that, but at SMB it's like, "No, no, no, I need digital except there are going to be some times that I do need to be treated and that sort of thing."

And like you said, you walk into a branch and then you're talking to a banker who a lot of times has been all day talking to retail customers. When you're talking about the technology, is it a matter of being able to essentially give that person in the branch kind of that information at that moment so that they can get up to speed very quickly on what that SMB needs? Or is it something else?

Matt Ross

I think that's right, Jim. There's two things that we're seeing. One is that customer 360. Giving the view to the banker of that customer's business insights, what products do they have with the bank? What products would they likely need based off of maybe some intelligent insights from the day-to-day product usage? So take transaction banking, how are they moving their money around? What else might this customer need? The flip side of that is just helping that customer get to the right product is also a challenge sometimes. And so providing a digital experience that is that single pane of glass that both a bank employee and a customer would be looking at if they were applying through their mobile phone or through their computer, is something that can enhance that experience in the branch.

Jim Young

So talking about the, and obviously underlying that sort of thing, we talked about it just the beginning, the importance, those core deposits, the sticky core deposits you can get with an SMB. I want to sort of factor it a little bit. When you're talking to financial institutions, are they still feeling that pressure or need for the core deposits that they were obviously about a year and a half ago they were? But are you sensing at all that they're still like, yes, this is a priority and SMBs are in particular a priority for getting these core deposits?

Matt Ross

I don't think banks have shied away from their overall enterprise strategy of continuing to drive deposit growth, and SMBs are continuing to be an important part of that. That said, I do think a lot of banks are looking ahead with potentially a favorable rate environment and seeing an opportunity for some expansion in their net interest margins. There is this balancing act now of continuing to drive deposits, but also create offerings that allow them to drive net interest margin through their lending solutions and their lending suite. And so I think there's a real balance of building of investment of how to grow both of those products.

And I believe banks can do that at the same time because really it's not about building a better product. The product's not changing, but it's building a better experience for the customer around digital and trying to actually integrate that experience across these different products because, at the end of the day, the customer is just looking to run and fund their business. And so I think that's very critical for banks to be thinking about.

Jim Young

I want to make sure I go back to a couple of things you mentioned earlier about segmentation, and I think the phrase you used is going beyond banking, and I wonder if you could touch on those.

Matt Ross

Yeah, absolutely, Jim. So I think we're seeing banks starting to explore the idea of moving away from traditional segmentation models just off of revenue bands and how to serve customers. And a lot of times, banks are starting to look at this of what life cycle is the business in? What industry do they operate in? What are their needs? And in doing so, banks have been able to be more effective in reaching the customer and marketing to those customers. And just an example to bring forward, I mean, I think with the advent of GenAI, marketing and building personalized marketing strategies is one of those key growth drivers. SMBs like to buy from businesses that look like them. That's not an FS thing, that's just how small businesses operate.

And so being able to provide very tailored offerings and marketing experiences to those customers will allow them to win more customers. And we talked about bankers. I won't go too deep on this, but how to actually better serve the market and serve the customer. Banks are also thinking about how do I actually reorganize my bankers to be aligned to these different segments? Who should get dedicated support? Who should get support from the branch? Who gets support from maybe a virtual relationship management pool of resources?

Jim Young

So you're segmenting, again, like you said, to some extent, industry vertical, that sort of thing. You mentioned the original sort of, here's the sort of by asset sort of thing, and now you're talking about it by industry vertical, but now you're also talking about it in terms of resource allocation, I would suppose. Is that's what you're saying from the bank side of it essentially?

Matt Ross

You can take this segmentation and bring it all the way across the value chain. How do we more effectively market? How do we more effectively sell with better bankers? How do we actually build fit-for-purpose products for these individuals? So you can actually pull that segmentation strategy all the way through. To my third point, if I build on that, you can even pull it through of what else do these customers need?

An interesting research nugget from some of the client work we've done recently is, and speaking with small business owners personally on what their challenges are, is banking's not at the top of their list. That's not what's keeping them up at night. What's keeping them up at night is how do they grow their business? How do I find and hire new talent and retain the talent I have? If I have supply chain challenges, how do I solve for those things? And so I think there is something special about looking beyond the actual banking product of how as a bank am I helping my customers solve these problems that are keeping them up at night? And so I don't think product innovation is going to evolve significantly around the actual banking product, but the things around it of how I deliver that product and what else I'm doing for that customer can.

Just to give you an example, we hosted a roundtable with a lot of banking clients and we invited a co-founder and owner of a new professional sports team to come speak to these individual banks and share his perspective on his banking experience and what he likes and what he doesn't like. And I thought it was really interesting because his biggest feedback was he looks at his VC partners and they're helping him network and grow his business and connecting him to peers that have gone through similar challenges. He looks at his bank and the bank has the same network of clients, but they're not playing that role. And he was sharing how that's a huge missed opportunity. I think that's just a small nugget of how banks can go beyond offering just deposit and lending products and really focus on that customer experience and solving customer problems.

Jim Young

Yeah, it's a little bit of the Clayton Christensen sort of jobs to be done sort of thing, which is a whole thing. Nobody wants a quarter inch bit, they want the quarter inch hole sort of thing. So in this case, it's funny saying like, "Wow, I really want this particular banking financial product." It's like you said, "I want to do this. I want to invest in my company. I want to go into this market, and then how can you help me do that?" And that may be a banking product, but to your point, it may be other services that the bank can provide for them.

Matt Ross

Absolutely.

Jim Young

Well, listen, yeah, I think I'm really excited to hear you talk more about this, SMBs on that American Banker webinar on December 9th, and really appreciate you coming on the show, Matt.

Matt Ross

Thanks, Jim. I appreciate you keeping us on track, and I know I took us down a windy road, but looking forward to the dialogues to come.

Jim Young

This podcast is all about winding conversations and going where they take us, so no worries at all on that Matt.

Matt Ross

Love it.

Jim Young

And thanks again to our listeners for tuning in on this episode. If you want to catch more of them, remember to please subscribe to the show wherever you listen to podcasts: Apple Podcasts, Spotify, Stitcher, iHeartRadio. As always, we'd love to hear what you think, leave us a comment and a reminder that you can learn more about the company behind the content by visiting q2.com. Until next time, this is Jim Young. You've been listening to The Purposeful Banker.