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Break the Mold and Build the 21st Century Bank for Small Businesses

by internationalbanker

By Alenka Grealish, Principal Analyst, Celent





According to research by the World Economic Forum (WEF), small businesses represent 90 percent of all companies and are responsible for nearly 70 percent of both jobs and gross domestic product (GDP) worldwide. Despite making up a critical sector of the economy, however, they continue to be underserved by financial institutions and face the perennial challenge of financial survival.

Thanks to the confluence of technological advances, bankers can break the mold and reinvent small-business banking, replacing the 20th century’s industrialized approach with the 21st century’s personalized one. The winners over the next decade will not look like today’s banks. Beacons of the 21st-century bank are achieving step changes by delivering digitized, easier financial workflows and simple, smart analytics. A few are exploring game-changing value propositions by applying AI (artificial intelligence) at scale to personalize customer engagement and deliver actionable advice.

To realize this reinvention, bankers need to undertake three initiatives. First, they should rethink small-business banking economics to overcome historical constraints and trade-offs. Second, they need to reframe their value propositions, moving from nouns (products) to verbs (services that support customer workflows and promote financial wellness). Third, they must effectively harness the technologies required to deliver on the new value proposition: digitization, data analytics and artificial intelligence.

  1. Rethink the economics

Economics is always a good starting point when contemplating reinvention. Historically, small-business banking economics has been hard to change. The trade-offs between lowering cost-to-serve and improving the customer experience have appeared to be entrenched. Yes, technological advances have been lowering cost-to-serve by improving self-service, but diminishing returns have been occurring.

Moreover, small businesses have remained underserved in terms of improving their financial-management skills and financial stability. But this no longer needs to be the case. Artificial intelligence can change the equation and reduce these trade-offs. A high-tech-touch balance can be achieved, helping banks provide the small businesses they serve with returns such as interactive multi-channel experiences, personalization and customization.

  1. Reframe the value proposition

Small businesses view banking and financial management differently from banks. Small businesses think about workflows; banks think about products. To reinvent small-business banking, banks must move from their product-centric framework to a customer workflow-centric lens. In addition, they should consider the financial needs of small businesses that extend beyond banking. Put simply, banks’ value propositions must move from nouns to verbs.

When a bank thinks in terms of verbs, it can understand that a small business has much to manage financially. While small businesses typically firmly understand their products as well as marketing and distribution, they typically struggle with financial management. It is often a task done after hours and is a source of stress. Despite the advent of online and mobile banking and accounting software in the cloud, financial management often entails manual work and redundant data entry.

Banks have an opportunity to facilitate the digitization of small businesses’ financial workflows. For example, “payments” and “credit” can become components of “get paid” and “pay my bill” services, either through in-house solutions or partnerships with fintechs (financial-technology firms). Consider that:

  • “Get paid” translates into an e-invoicing and collection service with an invoice-financing option.
  • “Pay my bill” can turn into payments optimization, encompassing a suite of products, including bill pay (“I’m cash rich and can pay now to earn an early pay discount”), credit card (“I’d like to conserve cash and benefit from a grace period”) and a line of credit (“I need more than a month to comfortably pay this bill”).

If banks can deliver these services, they will take back the market-share gains made by accounting-software firms that have extended their reach to payments.

  1. Harness data analytics and AI

Small businesses greatly benefit from data analytics and workflow-efficiency tools. While they understand the top line (revenues), they often face challenges in tracking expenses and overall performance trends, forecasting cash flows and anticipating credit needs. By harnessing traditional analytical tools and AI coupled with internal and external permissioned data (e.g., via APIs [application programming interfaces] to accounting software), banks are in a prime position to deliver descriptive analytics (e.g., key performance indicators [KPIs] and benchmarking data), predictive analytics (e.g., cash-flow forecasts) and prescriptive analytics (e.g., “You’re expected to have a cash shortfall in three days. Here are three options to cover it and their costs”).

Banks’ opportunities to realize game-changing competitive advantages based on data analytics have just ballooned thanks to generative AI (GenAI). GenAI allows users to combine AI with human intelligence to enhance and amplify human abilities. Celent anticipates that inroads will be made across the board, with use cases including:

  • Descriptive: AI assistants enabling small-business customers to access current profit-and-loss data and generate charts,
  • Predictive: improved forecasts, thanks to additional data inputs and
  • Prescriptive: comparative analyses of decisions and outcomes.

GenAI, however, is relatively immature and needs modification (e.g., fine-tuning and retrieval-augmented generation) to mitigate the risks (e.g., bias and hallucinations).

Tying it all together

Celent has developed a framework to assist banks in their reinvention journeys. On the horizontal axis is value proposition, ranging from traditional product-centric to workflow-centric to advisory-centric. On the vertical axis is customer engagement, with the starting point being limited (e.g., self-service) and moving up to strong(e.g., advisory services).

To move from the bottom left to the upper right, a good starting point is to examine one’s digital banking strategy and evaluate whether it will deliver the competitive advantages necessary in today’s environment. Challenger banks and non-banks are increasingly delivering new value propositions centered on operational efficiency. In addition, if a bank partners to deliver digital banking, it should ask its partners if they plan to move away from incremental enhancements to step-changing features (e.g., digitization of the financial supply chain).

After revisiting one’s digital strategy, because resources are typically limited, a bank needs to take inventory of its other internal “assets” and external partners necessary to realize a value-proposition step change. In developing a new workflow-centric service, it is important to consider the entire value chain and assess product development (including build versus buy), marketing and sales, onboarding and ongoing customer engagement. Hence, a diverse team of stakeholders should be involved.

And remember the customer. A successful go-to-market plan requires careful planning regarding initial pricing (e.g., free or freemium) and a customer feedback loop to hone product access (e.g., widgets within online and mobile banking), features and messaging. Maintaining a competitive advantage requires monitoring customer-engagement metrics, testing service enhancements and delivering on the test results.

Moving to strong, advisory-driven customer engagement requires harnessing advanced data analytics and AI. The pillars of success in this endeavor include a collaborative multidisciplinary team (e.g., product, data science/AI, compliance, marketing and potentially a tech partner), strong data and model governance, and a regulatory playbook. Success also draws upon two foundational elements: a modern data infrastructure and a tech stack. A bank can also begin successfully implementing AI-driven services ahead of having the ideal technology and data infrastructure in place. It can partner with a tech vendor that has embedded data analytics and AI into its solutions (e.g., cash-flow forecasting and actionable insights geared towards small businesses). Some banks seed a small AI team with a few segment-specific use cases and then scale it to support the entire enterprise. A regulatory playbook is often developed once an AI initiative has moved from ideation to prioritization to proof-of-concept.

Given the recent acceleration in AI advancements, as exemplified by GenAI, Celent expects that the banks harnessing AI to reinvent small-business banking will gain market share and develop competitive leads that could be hard to close. Bank-customer engagement will be transformed by bona fide personalization and prescriptive analytics. Small-business bankers will increasingly embrace AI as a “partner”, increasing their value-added while making their jobs more interesting. Given that the data analytics-AI race is a marathon, pacesetter banks stand to stay ahead and benefit from a virtuous cycle of steady enhancements and shares of wallet gains.

Tools for reinventing small-business banking

As innovation in banking continues and reliance on AI grows, banks serving small businesses will be well served by understanding recent advancements and how technology adoption is disrupting conventional approaches. Bankers are invited to join Celent for its annual Innovation & Insight Day, which will be held on March 21, 2024. Registration for this virtual event is free.



Alenka Grealish is a Principal Analyst in the banking group at Celent. Alenka has more than 20 years of consulting and research experience in the banking industry, with deep expertise in payments, transaction banking and commercial banking. Her research focus is on innovation in treasury-management services, trade finance and working-capital finance.


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