Roxanne Voidonicolas, Content Marketing Manager, Sensibill
The number of micro-businesses and self-employed people continues to climb steadily – despite a strong labour market and many full-time opportunities – as people embrace more flexible schedules and make use of better technologies for remote work collaboration. According to HMRC, SMEs make up 99.3 per cent of private sector businesses, and 75 per cent of those SMEs are non-employing.
However, most traditional retail banks have been slow to target this group, which is generally less interested in a large branch network and dissatisfied with digital. As Jacob Jegher, SVP, Banking and Head of Strategy at Javelin Strategy & Research, puts it, one of the biggest opportunities for digital financial services in 2019 is, “without question, the freelance and entrepreneurial segments.” Indeed, catering to this segment might be more than just an opportunity. It may be fundamental to a bank’s future success.
Entrepreneurs “hide” in personal banking
Many of these potential customers are hiding in plain sight. According to a recent survey from Sensibill, a receipt management and data provider to major banks around the world, 58 per cent of self-employed people in the UK don’t have a business account, and instead use a personal account for work-related banking, and the same goes for 32 per cent of microbusinesses (of one to five employees).
Many don’t bother with a business account, yet they could benefit from a stronger business banking relationship. Bookkeeping is a major source of confusion and frustration, complicated by the fact that even those that do have business accounts often commingle personal and business accounts.
According to the Sensibill survey, 27 per cent of micro-businesses and 14 per cent of the self-employed in the UK commingle accounts. And Javelin found that 20 per cent of micro-businesses with revenues of $100,000 to $1million conduct their small business banking activities on a retail platform. Untangling these business and personal transactions can take significant time, between 40 to 80 hours a year. According to Sensibill’s research, 56 per cent cite administrative burdens as prohibitive to growth, and 30 per cent forfeit tax claims due to lost receipts.
Corey Gross, co-founder and CEO of Sensibill, says retail banks have an opportunity to make new profit and solve these pain points by migrating entrepreneurs to more suitable products and services. Given the myriad of one-off business apps, traditional retail banks could launch powerful “self-employed” solutions with many features in one place. Coupled with insights and advice, banks have the opportunity to build trust that will allow them to grow with these businesses.
Struggling to design a profitable, attractive solution
Traditional banks have always struggled to cater correctly to small businesses, often leaving them in a no-man’s land between corporate and personal banking. The self-employed could suffer a similar fate. “Banks need to step up to meet their needs,” Gross says. “That means developing new products and services for a segment that doesn’t fit into any one category.” Mobile first will be critical, since these entrepreneurs, many of them younger, prefer on-the-go, digital offerings.
Concern about ROI is one reason banks have held back from offering products and services for these accounts. But, Gross says, there are ways to approach this problem. For starters, even when there are no hard ROI numbers upfront, other qualitative measures, such as customer churn, provide valuable insight into the long-term value of a product or service.
Further, Gross points out that many of these “small” accounts are actually already large enough to afford and benefit from premium business banking features. Of the self-employed and micro-businesses in the UK that use personal banking for their business transactions, 12 per cent are making more than $75,000.
Simply identifying and migrating these to a business account would yield a positive ROI, Gross says. Consider a hypothetical bank with one million personal banking customers. The average small business banking customer pays £345 in account fees per year – that is, not including other more lucrative business banking products. If even 5 per cent of the personal banking base would be willing to upgrade for more tailored solutions, banks could generate millions in new revenue through cross-selling self-employed personal customers.
The fintechs, or “neo banks”, rush in
Perhaps the most definitive proof of this segment’s potential is that non-traditional banks and fintechs, or “neo banks”, are rushing in to offer banking products and services. As Jegher explains in his report Small Business Neobanks: Filling the Digital Gap for Entrepreneurs and Freelancers, neo banks offer a range of services – all with a mobile-first and digital-only approach – however, they aren’t actually banks. “They partner with banks to hold money and process transactions,” says Jegher. “By intermediating the small business banking relationship, they herald the next evolution of financial services: a complicated mix of bank and non-bank providers battling for the customer relationship.”
The banking industry got a big wake-up call in late 2018 when American Express and Amazon announced a partnership designed to alleviate some of the cash-flow problems small business owners face. The Amex/Amazon announcement came amid a flurry of activity involving neo and challenger banks, spurred on by the Alternative Remedies Package in the UK, which is offering £425million to help challengers build out their SME offerings. To date, Metro Bank, Clear Bank, and Starling Bank have all been granted funds under the scheme.
High stakes for traditional retail banks
Ultimately, Jegher predicts, few of these neo banks will survive long-term on their own; however, they will be an important catalyst for change. Some may be acquired or spur traditional banks to take action by developing their own solutions in-house. That said, “if banks don’t solve for the self-employed and small businesses, someone else will,” Jegher says.
Gross emphasises the high stakes for banks when it comes to capturing this emerging small business segment. He notes that incumbent banks enjoy an enviable position of trust with customers, which they should leverage by designing a package of attractive digital, mobile solutions. “Those who win the self-employed and micro-business segment will drive the future of financial services,” Gross says.
To find out more about digital banking solutions for the self-employed, please visit www.getsensibill.com