The Big Picture on Small Business Banking

It makes perfect sense to celebrate small business. Backbone of the economy, hallmark of innovation, true entrepreneurship, the face of free market capitalism—the clichés come tumbling out with speed and ease, at least in part because they’re completely true. As the reams of statistics compiled and maintained by the Small Business Administration (SBA) make clear, the praise is entirely justified. This entire demographic is always dynamic and vital.

Each year since 1963 the SBA has marshaled resources to observe National Small Business Week, billed as an “opportunity to highlight the impact of outstanding entrepreneurs, small business owners, and others” as they “grow small businesses, create 21st century jobs, drive innovation, and increase America’s global competitiveness.” That was in early May—now, a few weeks past that, can we take a minute to look a little deeper?

Let’s acknowledge first that ‘small business’ is a generic term that covers a vast field, everything from mom-and-pop delis to the latest disruptive force from Silicon Valley. Still, we can ask: Within this diverse market, what’s banking’s role?

Try this: According to “2016 State of Digital Sales In Banking,” a new report from digital platform provider Avoka, most small enterprises seeking business checking, business credit cards or an operating loan will be asked to come into the branch. The study, which encapsulates the findings of a research initiative analyzing the digital sales capabilities of the largest banks in the US, UK and Australia, found that only 17% of 218 business banking products in the 10 largest retail banks in the U.S. can be applied for online. It gets worse: Only 4% of these products are delivered in a mobile-friendly format.

As the report makes clear, some potential problems are obvious: Entrepreneurs would prefer not to waste time waiting for a banker to meet with then, banking hours clash with customer priorities, etc. But there’s a broader issue at stake.

Common sense indicates that many small business startups are now fueled by technological innovation. They use social media for marketing, mobile apps for outreach, and cloud services for routine operations, even if they can’t exactly articulate what the ‘cloud’ is. Yet one of the most fundamental aspects of business, financial services enabled by massive corporations, requires a face-to-face meeting? How is it that we hear constantly about ongoing innovation and massive resources allocated to application development and other technology issues, then read about mandated in-person visits?

Digging a little deeper into one of those fundamental areas, investment, there’s another disconcerting but no less interesting issue that emerges. Do startups looking for finances have to rely on financial services providers, be they banks or VC firms?

The reality is that there are alternatives emerging. Just as guest rooms within apartments compete with hotels courtesy of Airbnb, taxis and limos lose market share to Uber, startups are finding alternative sources for investment support. And of course, a wealth of technology tools and channels makes those options readily available.

Kickstarter is already renowned for serving as a prime support network for fledgling musicians and filmmakers, but it also brings in seed money for a staggering variety of new businesses. And inevitably, there are more specific options like SeedInvest, an equity crowdfunding platform that leads startups to investors, and vice versa. Expect these options to multiply rapidly in the near future.

Of course, besides the conglomerates and crowdfunding, there’s the old standby: the community bank. Research from Harvard’s Kennedy School indicates that more than half of all small business loans come from this sector, making it more vital than ever. But they’re also being squeezed—large corporations are increasingly willing to make smaller loans, non-traditional vendors are making larger loans, and credit unions are, despite some restrictions, becoming more aggressive.

All in all, banking and small business make for a strange and complex picture. The market is vibrant and vital, and that’s good. We all celebrate this sector of the economy, and that’s great. It offers endless opportunities for growth, and that’s the best. Yet almost every corner of the market shows room for improvement, and the sooner those changes are made, the better it will be for everyone.

Written by Jack Dougal

Jack Dougal

Jack Dougal is's resident news reporter. He writes regular blogs covering the latest stories and key developments in the global financial services industry.

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