Banks Need To Embrace SMBs Or Lose Them To A FinTech That Does

According to PYMNTS’ Making Loyalty Work For Small Businesses produced in collaboration with Pollinate, nearly half of consumers said they think it is critical to shop locally in order to invest in their local economies, 44 percent said it is important because it helps keep money in their local community and 43 percent said that purchasing from local retailers is important because it expands local job opportunities.

Whatever the incentive may be, the bottom line is consumers want to shop locally — and, as Pollinate Founder and CEO Al Lukies told Karen Webster — they would like to be rewarded for it. Fifty-seven percent of those surveyed worldwide affirmed that they would like an easy-to-use loyalty option when shopping with their local small- to medium-sized businesses (SMBs).

“That adds up to 277 million people who, if they were enabled to support their local community and participate in a loyalty scheme for those small businesses, would do it,” Lukies told Webster.

But, as the study also demonstrates, there is a significant gap worldwide between the number of consumers who say they want to use loyalty programs and those who actually use them, although the reasons vary by locale, from lack of access to the friction of having to do something like carry a paper card.

And it makes sense, Lukies noted. Consumers want to support their local SMBs, and loyalty and rewards would be a nice perk, but not if they have to download and manage apps from their butcher, baker and candlestick-maker.

Banks are ideally positioned to help deliver local loyalty programs that “stitch together the spaghetti” and allow local merchants to roll out a single loyalty offering that offers relevant rewards and benefits, without requiring them to do a lot of work to access and leverage the program, Lukies said. But to do that, banks will have to rethink their relationships with SMBs.

Re-evaluating The SMB Relationship

SMBs have historically had a hard time getting banks’ attention, Lukies said, as SMB customers generally don’t buy as many banking products and have thus been relegated to an afterthought.

Twenty years ago, many banks shed their merchant acquisition operations in what was seen as a rising wave of disinterest in SMB-linked businesses, he noted. And while it may have made sense at the time to bow out of the space in pursuit of green pastures, it’s an idea that banks need to rethink immediately.

“The banks have to get back into merchant acquiring — and fast — because the umbilical cord between the bank and the small business is so valuable,” said Lukies.

For every dollar spent on merchant acquiring, studies have shown that an additional $6 flow into the bank, he said. As banks have cut off those flows, they’ve quickly seen their SMB revenue drop as those customers find that they can get service from a player like Square that is better tailored to their needs — and at a better price — than what the banks are offering.

What every financial institution (FI) must now recognize, Lukies told Webster, is that SMB customers are valuable, and they must recreate their method of serving this very large segment if they have any hope of staying relevant.

The Ticking Clock

As FinTech competitors are rushing the field to offer specialty acquiring services to SMBs, banks don’t have an infinite amount of time to delay this upgrade. They have a tremendous advantage in the amount of consumer trust they command, and that’s a powerful advantage, but it’s simply not enough.

As things stand, many banks still don’t get it, Lukies said, pointing to the fact that some 60 percent of them aren’t really taking this problem seriously, meaning they’re not adapting their organizations to be better suited to offer a full suite of SMB products and tools, including the ability to participate in a loyalty and rewards program.

There must be a full-scale rethinking of this relationship to enable those offerings, and thus far, banks aren’t seeing the severity of the situation. They’ve been warned about “end-of-the-world” scenarios before — from Y2K to mobile destroying the bank — and they’ve survived them all, but this time around it’s different.

“A lot of them are still very, very complacent, and they haven’t seen the sophistication of this perfect storm that’s coming in now,” Lukies said. “And so, I think a lot of them are going to struggle. I can’t imagine what the business model is for a major bank that still doesn’t have that direct relationship with its small business customers in five years’ time.”