The war for fintech dominance in the consumer market is still waging, but a new battle line is forming as they set their sights on small businesses.
And for good reason. There are 27.9 million small businesses in the U.S., accounting for nearly half of the nation’s Gross Domestic Product.
As it stands now, the fintech startups are putting most of their energy in the consumer market, changing the way people bank, borrow, invest and pay for purchases. But they are also eyeing the small business market at an increasing rate. It’s a natural progression for the fintechs, now that some barriers have been eliminated.
“For seven years Internet marketing has been the prime way to reach consumers. In the last three to four years its been the prime way to reach small businesses,” said Chris Sugden, managing partner at Edison Partners, the Princeton, New Jersey growth equity investment firm. “From an economic perspective, the ability to acquire customers now makes small businesses a much more attractive target.”
Much of the activity is focused on helping small businesses manage their cash flow. A huge opportunity for the fintechs since many big banks are reticent to lend to these small and often risky enterprises. At last blush, the failure rate among small businesses stood at around 50% for those businesses in operations for less than five years. That presents an opportunity for fintechs to fill an unmet need and do it at a lower cost of customer acquisition.
“Banks have underserved small businesses in need of $250,000 or less for decades. And it’s not that banks don’t want to or it’s difficult and costly. It costs them the same amount of money to underwrite a $5,000 loan or a $5,000,000 loan,” said Rob Frohwein, CEO of Kabbage, the Atlanta online business lender. “They prefer the latter, and as a result, deserving small businesses have been left without the opportunity to access the capital required to grow their company.” Kabbage is an early player in the small business market realizing an opportunity in 2011. Since then it has helped more than 170,000 small businesses gain access to over $6 billion in working capital.
While the small business fintech market will undoubtedly get crowded, industry watchers don’t expect it to be a winner takes all game. Because this business group has been so underserved by the traditional financial services companies, there’s pent up demand for a cadre of different fintech services. “As millennials make up larger portions of the small business class they are demanding companies rethink financial products,” said Mark Ruddock, CEO of BFS Capital, the Coral Springs, Fla. business lending fintech. He sees a marketplace emerging in which fintechs are focused on different areas whether its payments, cash flow management or lending, providing the opportunities for business owners to knit together the solutions they need most. “It's more than just cash flow. Small businesses want access to a broad cross-section of products,” said Ruddock. “It’s not a world where you need to buy the whole album. It's a world where you can buy a single song.”
Bento for Business, the Chicago/San Francisco-based startup is an example of a fintech that started out going after a particular pain point in the small business market and is now offering a suite of services. Five years ago it bet the small business market would be the next frontier for fintechs but instead of getting into the loan market it is helping them manage corporate expenses. As it stands, at most small businesses either one or two people are tasked with making all the company purchases or each employee has their own credit card with little control over the costs.
With small businesses at a higher risk of failure and with employee theft a real problem, Bento set out to give businesses more control. With its corporate debit card and digital platform, business owners can set limits on where, when and how employees can use the expense card. The company is gearing up to launch a credit card later this year and is aiming to offer fintech solutions that small businesses can pick and choose from. “Small businesses often get lost in the middle. Most fintechs haven't run a small business,” said Farhan Ahmad, chief executive at Bento for Business. “The general view is small businesses are hard to market to, hard to get as customers and are hard to make money from. The truth is many of these things are realities but the upside is also massive.”
