Why small business payments have big potential

Pastries in a glass case

To their small business customers, community bankers are more than just lenders. They’re advisors, collaborators and cheerleaders. That close relationship puts them in an ideal place to offer these customers the payments options that will help them grow.

By Colleen Morrison

Picture a black-and-white television showing The Andy Griffith Show. Opie Taylor walks down Mayberry’s Main Street to visit Walker’s Drugstore, a small brick building on the corner that represents the quintessential mom-and-pop business of the era.

Today’s small business doesn’t look like that brick-and-mortar shop. With the expansion of the gig economy, the term “small business” can encompass every enterprise from dog walking to the neighborhood bakery.

The U.S. Small Business Administration (SBA) estimates that firms with fewer than 500 employees make up 99.9% of all businesses in the U.S., representing 30.7 million organizations. Of those organizations, 81%—nearly 25 million—have no employees, and 86.6% are sole proprietorships, of which only 15% have employees.

“When you think about single-member LLCs, that’s my wife’s [Charel Kennedy] business,” says Preston Kennedy, president and CEO of Zachary Bancshares, Inc. in Zachary, La., and ICBA’s immediate past chairman. “She buys and sells antique jewelry.”

As she grew her customer base and digital presence, the transactional need behind retailing—the payment itself—became a financial services barrier.

Quick stat

16.6 billion

The number of ACH debit transfers in 2018, exceeding check payments for the first time

Source: Federal Reserve

“Customers are demanding the ability from these small businesses to pay electronically,” Kennedy says. “When Charel started in 2011, she mainly had to take cash or checks. But then she was a fairly early adopter of card technology, and less than one-tenth of the sales she made this year were cash and checks.”

Her experience mirrors the trends revealed in the 2019 Federal Reserve Payments Study. It showed that check usage has continued to decline in the U.S., and for the first time, the number of ACH debit transfers (16.6 billion) exceeded the number of check payments (14.5 billion). Other signs point to a rise in digital small business payments: In one study, 86% of gig workers and freelancers indicated they wished to receive electronic payments. In fact, 41% require them.

“We have seen a utilization of all things online through our internet banking service,” says Brad Bolton, president and CEO of $150 million-asset Community Spirit Bank in Red Bay, Ala., and ICBA vice chairman. “More and more, customers use online bill pay, and small business owners pay their bills through online bill pay. They’re not having to issue checks, and it’s all automated, which cements that relationship with that small business owner to the bank.”

“More and more, customers use online bill pay, and small business owners pay their bills through online bill pay.”
—Brad Bolton, Community Spirit Bank

Payments opportunities

But not all small businesses are cut from the same cloth. While some organizations look for novel ways to manage payments, others have unique needs for enabling payments on the go.

Bolton points to one of his customers, who runs a logging company and was facing challenges in getting payments into the hands of drivers consistently and efficiently. “Our loggers have trucks out on the road, and they’re paying for fuel and repairs,” he adds.

So, Community Spirit Bank issued the company with business credit cards to support their employees. Being creative with that solution hit the mark for all parties. “Now, the loggers get paid on a Friday, they’ll pay that card back to zero, and then they have cash flow for the next week,” Bolton says. “And it’s our card they’re pulling out of their wallet.”

Certainly, debit and credit card programs provide significant opportunities for banks. Already, card solutions make up the lion’s share of the nation’s noncash payments. In fact, the most recent Federal Reserve Payments Study reported that cards accounted for roughly three in four noncash payments in 2018. But Bolton is quick to point out that one solution on its own doesn’t work for the diverse array of today’s small business customers.

“Every customer is unique. That’s the relationship banking model,” he says. “But, if you don’t keep looking forward to the future of the instant-accessibility, technology-driven [model], you’re going to get left behind. Our challenge is to keep moving that bar higher and higher internally.”

To that point, in addition to traditional card options, new bank-centric digital solutions, including those that started as person-to-person (P2P) products, are emerging to simplify the small business payment infrastructure.

“We are seeing more small businesses leverage Zelle to run more efficiently,” says Meghan Fintland, a spokesperson for Early Warning Services, LLC, the network operator of Zelle. “Currently, there are five financial institutions that offer Zelle for Small Business, and there are several others that are in the pipeline.”

Fintland says the Zelle for Small Business solution supports consumers paying small businesses (such as landscapers and homecare services), small businesses paying consumers (such as refunds, promotions and payroll) and small businesses paying other small businesses, or B2B payments.

Expand customer relationships

In all instances, relationship banking holds the key for community banks to identify ways to expand opportunities for small business customers.

New technology provides a depth of client knowledge as advancements in artificial intelligence (AI) help bankers individualize customer solutions. From chatbots to tailored offerings in apps, by the end of 2020, forecasts suggest that the use of AI in the banking industry will generate around $78 billion in value globally.

But, despite community bankers having a deep understanding of their customers, not every small business banking relationship turns out rosy. Small businesses can be risky customers. Almost 400,000 small businesses closed in 2016, nearly the same number that launched, according to the most recent SBA data. But for community banks, that established relationship offers the potential to minimize losses—both to the bank and to the business itself.

“When you bank a small business customer, if they’ve got a problem, you’ve got a problem,” Bolton says. “Having that relationship allows you to assist them in overcoming their challenges as they come up.”

In addition to addressing issues, the connection a community banker has with their customer can lead to new banking relationships.

“We had a business banking customer who was a single member LLC with two or three employees,” Bolton says. “He ran a fabrication business making repairs to log trailers. He wanted to start making his own type of trailer, and he needed a specialized line of credit to bridge the cash flow gap. We’re not big asset-based lenders, but we were able to work with him from knowing his other business and looking at his financial picture from a global perspective. He was able to triple his business output just from that line of credit.”

And that’s what community bankers strive to do: identify opportunities to help the communities they serve.

“Sometimes it’s the young family that we did their home loan or they had their checking account with us since they were in high school,” Kennedy says. “So, when they come up with a business idea, we’re the natural first choice. When we have a relationship, that covers a lot of the spectrum. We can handle just about every need that a person who lives in our community might have.”

Table of cafe items

How to maximize the potential of payments

“Community banks are small businesses’ most important source of capital,” according to the U.S. Small Business Administration (SBA). As the financial institutions that provide more than 60% of all small business loans, community banks fuel entrepreneurship.

Preston Kennedy
Preston Kennedy

But the opportunity exists for community banks to expand their small business relationships by offering payments solutions. Statistics reveal that only 3.3% of small businesses currently look to business credit cards from banks to support their expansion, highlighting growth opportunities. Small businesses seek payments solutions. Businesses rank financial software, including bill payment solutions, as a top priority for their technology budgets.

Small businesses are already looking to their banks for these solutions. More than two-thirds (70%) report they receive merchant services from their primary bank, and 59% report that they are most likely to get advice from their bankers.

“Community bankers are in a great position to get in the conversation and guide the small business to grow, expand or improve,” says Preston Kennedy, president and CEO of Zachary Bancshares, Inc. in Zachary, La. “The thing to remember is community banks are small businesses, so we have practical experience, as well as advice, to give.”

Colleen Morrison is a writer in Virginia.