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- The reality is that for most small businesses, the traditional process of organizing and managing their finances is too complex, too difficult, and too time consuming.
- The reality is that for most small businesses, the traditional process of organizing and managing their finances is too complex, too difficult, and too time consuming.
Small business banking and innovation are two words that you rarely hear in the same sentence. Common wisdom points to heavy regulation as the primary cause of banks lagging behind the rest of the business world when it comes to innovation. While regulation certainly bears some of the blame, it is by no means the only reason.
There’s a convenient narrative about small business that we’ve all heard a million times. Small business represents a huge, underserved, and highly lucrative market for financial institutions. The prevailing wisdom is that these businesses run on
Unfortunately, this isn’t the case. At my company, BodeTree, we’ve been on the front lines of small business banking technology for years. One thing we’ve learned the hard way is that financial institutions big and small have struggled to serve the small business market in an efficient and effective manner, and it’s all due to what we call the 90% challenge.
The 90% challenge
My team and I started out as one of those optimistic startups that thought serving the small business segment would be easy. We quickly realized, however that the commonly held wisdom was wrong. Of the 30 million small businesses in the U.S., the vast majority operate in a state of utter chaos, even if they use an accounting system of some kind.
The reality is that for most small businesses, the traditional process of organizing and managing their finances is too complex, too difficult, and too time consuming. Even accounting systems like QuickBooks require either a baseline level of accounting knowledge or a dedicated bookkeeper. Based on our experience and the experiences of our partners, my team and I estimate that only 10% of all small businesses have up-to-date and accurate accounting information. This means that 90% of small businesses are unable to produce dependable financial statements when prompted.
We call this realization the 90% challenge, and it has become the centerpiece of our strategy. This lack of data and financial organization is what makes it so incredibly difficult for banks and their technology providers to serve small businesses effectively and efficiently. As a result, the state of small business lending is abysmal in the U.S.
This is why we can’t have nice things
So why does this matter? The truth is that small businesses have gotten away with the status quo of financial chaos for so long because the industries that serve them adopted bad habits. Banks in particular have shaped their processes around the chaos of small business which resulted in highly time-consuming, generic, and manual systems. Consider the last time you got (or attempted to get) a loan from a bank. The process likely took upwards of sixty days and was plagued by endless requests for more information. Small business owners complain about the outdated processes that they’re constantly subjected to, but the truth is that their lack of data is largely to blame.
For banks, a simple shift in focus from serving the 10% of small businesses with organized financials to solving for the 90% without could open up a world of opportunity for both for them and their small business customers. Unfortunately, the existing industry incumbents tend to find this possibility a challenge to accept.
The times, they are a changin’
Any financial institution or technology provider who doesn’t recognize the significance of the 90% challenge has a long and painful road ahead of them. If they continue on with the narrow view of the small business market, they will likely find it close to impossible to drive adoption of any new technology. New, fast-moving and disruptive companies like Credibly among others will begin to eat away at market share, leaving those who fail to keep up with the times far behind.
The times are indeed changing. Few will dispute the truth behind all of the excuses that used to prevent small businesses from organizing their finances. The only options available to them were expensive, time consuming, and incredibly complex. Today, however, there are no more excuses. Whether you’re a small business, financial institution, or bank technology company, solving 90% challenge is paramount to long-term success.
