Most fintechs that serve small and medium-sized businesses (SMBs) began by doing one thing exceptionally well: catering to an underserved market that big banks and incumbents were failing to serve. However, in order to scale and achieve profitability, they are increasingly discovering the need to expand their offerings and build on their core product. As a result, a new generation of fintechs is expanding their feature sets, and the market is convergent on the idea of becoming a ‘one-stop-shop’ central financial operating system for SMBs.
This trend will worsen in 2023 as economic pressures mount. However, as financial service and technology providers compete for market dominance, their SMB customers will ultimately (and counter-productively) suffer.
In recent years, convergence has dominated SMB fintech.
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Fintechs that serve SMBs quickly discover that acquiring customers is expensive in comparison to what those customers spend. Their prospects go through the same lengthy consideration and assessment process as larger businesses, making the sales process high touch and expensive, but they only spend a small amount. Small businesses, in effect, buy like businesses but spend like consumers. Furthermore, as a fintech expands its market penetration, each new small business customer is more expensive to acquire than the previous one.
As a result, SMB fintech providers must increase their average revenue per user by expanding their products and services. Many have turned to lending, fintech’s most popular revenue generator, to accomplish this. Every SMB platform now offers a lending product, from Intuit to Paypal and even Uber.
Simultaneously, in order to increase engagement, incumbent banks are expanding their services to include cash flow analytics and invoice payment, for example. The additional data generated allows them to make better product recommendations and lend with greater confidence. As a result, customers are more likely to spend more money with them, increasing their own revenue.
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These developments have resulted in a massive convergence in the financial services ecosystem toward the concept of developing a centralized business operating system and providing a comprehensive financial services solution.
This convergence has resulted in a hyper-competitive environment in which financial service providers are encroaching on each other’s territory in order to capture a larger share of SMBs’ attention and wallet.
Convergence will accelerate in 2023.
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In a downturn, the trend of convergence will only intensify. Financial service providers’ revenues will fall as businesses cut back on spending. Churn will become a serious problem as small businesses cut back or close. Simultaneously, small businesses facing economic risks will demand more from their financial service providers for the same price. In a recent interview with Codat, Anish Bhatt, VP of Product at corporate card provider Jeeves, stated that businesses are “consolidating suppliers” and “choosing fintechs that offer banking in a box.”
This cyclical dynamic will exacerbate convergence as SMB platforms seek to diversify their revenue streams by expanding into new markets.
Convergence causes frenetic tension.
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Access to data will come to dominate competitive dynamics as providers continue to offer new features that generate new revenue streams. Platforms will need to strike the right balance between supporting their own product development and enabling partnerships through open API ecosystems.
Shopify, Intuit, and Amazon, for example, are developing their own lending and payment platforms. Despite this, they continue to rely on deep and complex payment, lending, and data partnerships that are built into their integrations and app stores.
These collaborations are critical if fintech providers are to truly become central business operating systems. Integrating, syncing, and extracting data from other systems is critical for any business to ship new features, whether lending, cash flow analytics, or anything else. Accounting platforms, for example, will require close relationships with banks to ensure that their clients can automatically reconcile banking data into their accounting platforms, and banks will expect their SMB clients to integrate their accounting data into their products when necessary, such as when applying for a loan.
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As the market evolves, overlaps will become more common, and platforms will face quandaries as partnerships clash with internal product success metrics.
It creates a catch-22 situation for platforms that serve SMBs. These providers must integrate and pass data to one another in order to create slick digital experiences and be compatible with the vast number of tools used by a typical business while competing.
Providers who choose to restrict access to their API ecosystems and SMB clients’ data in order to protect their most valuable competitive differentiators will only end up limiting the utility of their own features, which will harm SMBs.
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This dynamic has created a slew of ‘frenemies’ in the industry, fueling an uneasy tension between them.
Small businesses will bear the cost.
The uneasy tension between fintech’s ‘frenemies’ will have two outcomes.
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In the first scenario, fintech providers recognize that for a thriving industry, both competition and collaboration are required, and most find productive ways to work together. Integrations significantly increase the value of platforms: an SMB fintech provider with hundreds of apps and integrations is far more valuable than one with a great core product but no connectivity. Although providers may lose a percentage point or two of growth in the short term by enabling competing offerings, in the long run, this is without a doubt the best possible dynamic for small businesses; they will have access to a landscape of secure, reliable, and slick digital services.
The other, less desirable outcome is that a significant number of SMB providers decide to withhold access to their API ecosystems out of a misguided sense of self-preservation. While protecting a perceived competitive differentiator, this action will limit the utility of their own platform, harm SMB services, and eventually lead to reciprocal action from the rest of the market. It will also most likely serve as a catalyst for some form of regulatory intervention.
The potential domino effect will make life difficult for financial service and technology providers, as well as reduce the quality of services and products available to SMBs at a time when they are more needed than ever.
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Fintech platforms must recognize that inter-system data flow is critical to a thriving industry and prioritize partnerships, even if they appear to reduce competitive advantage in the short term. Without cooperation and good faith, fintech convergence will leave small businesses facing a landscape of subpar, unreliable, and unsafe services at a time when financial technology support is more important than ever to their survival.
Nydoz– A Fintech Firm
Nydoz is a premier fintech investment platform that allows individuals and institutions to invest in the future of finance. It is so simple that anyone can invest from anywhere using their mobile phones or computers. It has developed three investment plans to meet a wide range of investment requirements. Investing is completely free for investors. Investors can withdraw their interest on a monthly basis, providing a steady stream of income. The principal, on the other hand, is retained until the term period ends, ensuring that investors get the most out of their investment. Because of its ease of use, reasonable refund policy, safety measures, and transparency, Nydoz is an appealing investment option. A fintech company is laying the groundwork for the future of investing.
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