Why big banks are finally making moves in business banking

In today’s economic climate, banks are prioritizing business deposits. But what specific measures must they implement to ensure the success of this strategy? 

It’s not surprising that most banks have been hesitant to invest heavily in small and medium-sized businesses historically. They’re considered inherently risky propositions. Approximately 20% of businesses fail within their first year of operation, and many others have thin or inaccurate credit files. Many banks, in turn, lack the infrastructure needed to look beyond simplistic indicators and dive deeper into a business’s unique financial position. 

But with the current favorable interest rate environment and increased digital adoption among businesses, the situation is evolving. This shift provides banks with a great opportunity to expand their market and maximize their revenue. Read on to learn how banks can take action now to capitalize on this moment. 

The business banking opportunity

Businesses offer banks an unparalleled source of sticky, low-cost deposits, as well as a diverse mix of revenue streams. In fact, most banks are now making small business deposits a top target, with 72% considering them a “high priority” in 2023, compared to just 41% in 2022.

Deposits from businesses are particularly attractive because they’re unlikely to change deposit accounts across rate cycles in search of a better deal. In most cases, the balances businesses hold in non-interest-bearing checking accounts are seen as ‘funds in motion’, meaning they are crucial for carrying out their day-to-day operations, as they provide the necessary funds for company-wide operations.

In today’s high-interest environment, cheap deposits enable banks to keep lending on competitive terms and extend their net interest margins—a crucial group-level bank metric when it comes to driving growth. From 2021 to 2022, for example, global margins rose from 252 to 262 basis points, accounting for 60% of all revenue gains.

More data means less risk

In addition, with digital adoption among businesses soaring in the wake of the COVID-19 pandemic, banks are increasingly able to overcome the challenge of assessing businesses with thin or inaccurate credit files, mitigating the perceived risk of serving the sector as a whole. 

Research suggests that businesses are now pursuing innovative digital tools above all else, with over half (63%) citing technology as their largest planned investment this year. This is also an area where they report relatively low levels of satisfaction with their current financial institution—so they’re open to switching FIs if it means a smoother online experience. In other words, this is what banks really need to prioritize if they want to stay competitive.

Why banks need to act now

It’s clear that the current economic climate presents a major opportunity for big banks in the US, but success is far from guaranteed. It’s contingent on them being willing and able to meet (or surpass) the expectations of an increasingly digitized business market and to compete with tech-native fintechs on key criteria like customer experience.

There are some recent events that should reassure incumbent banks while also spurring them to action:

1. Due to market volatility, larger banks are becoming increasingly popular among businesses

Recent volatility in the business banking sector has caused many companies to diversify their accounts across multiple financial institutions to minimize their counterparty risk. Among other things, this led to a $120 billion increase in deposits at the top 25 US banks

While this presents a clear growth opportunity, banks must keep in mind that many of these new customers (especially startups) are accustomed to frictionless digital experiences, and they’re looking for tech-enabled alternatives that can operate at a similar level. Banks looking to win their business will need to have smooth onboarding processes in place—the kind that can only be achieved through real-time data solutions like Codat.

2. The Small Business Administration (SBA) has opened its popular lending program to fintechs, heightening competition for a dependable revenue stream

The SBA recently lifted a 40-year moratorium on allowing non-depository lenders to participate in its flagship 7(a) loan program, which issues north of $36 billion in loans each year. This opens the door to fintechs and puts them on the same footing as legacy banks when it comes to securing a Small Business Lending Company (SBLC) license.

While this has many banks concerned about heightened competition, it’s worth noting that legacy banks still win on trust (with 70% of US consumers having trust in traditional banks) when compared to other financial institutions like fintechs (44%) and credit unions (69%). If banks partner with Codat, it will allow them to compete with fintechs on the other points that matter—like fast, frictionless applications and low-risk, affordable loans—so they can remain the top choice among businesses looking for funding.

How to increase margins in the business sector

With all that in mind, how can banks seize the moment and reliably expand their margins in the business space? The best way is to enhance access to customers’ business data.

The advantages of upgraded data access aren’t limited to a specific business line, department, product, or KPI. Rather, better business data has the potential to improve outcomes at every stage of the customer lifecycle—by increasing efficiency, reducing operational costs, producing sharper financial insights, optimizing user experience, and lowering overall risk while amplifying a bank’s potential market and revenue.

The case for investing in data integrations—as it plays out across different banking areas—goes something like this:

🔎 Application and onboarding

Traditional application processes are highly manual, complex, and time-consuming, involving endless back-and-forth via phone, email, and even snail mail. Because these tasks are so work-intensive, they incur substantial labor expenses and cut significantly into margins, making it difficult for banks to serve businesses profitably. 

The supplier enablement process for most commercial card programs is a case in point. Customers and potential customers are typically required to provide all supplier and payment information in a template provided by the bank, which can take up to several weeks to complete. Unfortunately, this template is often returned with crucial details missing, causing a time-consuming back and forth between the customer and their banker. This can lead to a far-from-ideal customer experience and wasted time for both parties involved.

In the worst-case scenario, some customers don’t provide a list of suppliers at all. This ultimately limits the potential spend transition to the card program, resulting in lost rebate revenue for the customer and lost interchange revenue for the bank.

By using integrations to connect to business customers’ financial software, banks can automate the data collection process and reduce the time and resources that go into critical onboarding flows.

How Codat helps

Codat connects bankers to all the financial systems their business customers use to run their businesses, unlocking instant access to verified financial data. This can be used to auto-fill application forms and streamline processing and underwriting steps, decreasing onboarding time and costs by 25% or more. 

More specifically, Codat can be used to streamline the supplier enablement process for commercial card programs, making it easy for Relationship Managers to pull a customers’ B2B payments data, run through an assessment, and determine where they could be using their card for greater efficiency—and greater rewards by identifying suppliers who could benefit from virtual card payments.

📈 Monitoring and servicing

Bank Relationship Managers (RMs) are often tasked with manually reviewing the status of their entire book, maintaining individual account records, and reaching out to (and chasing down) customers to collect updated documentation.

Many low-value loans or lines of credit—like those issued to businesses—ultimately go unmonitored due to the time, cost, and exceedingly thin margins associated with regular maintenance, and this lack of scrutiny can directly contribute to elevated loss rates.

Unlike the status quo of compiling spreadsheets and juggling PDFs, direct integrations yield open and ongoing connections between banks and their business customers’ accounting, ERP, and other software. That means RMs have real-time access to the financial data they need, when they need it—no extra paperwork required.

How Codat helps

Codat offers a complete solution to automate data retrieval for credit reviews. This not only helps banks prevent potential losses, but also saves time and money on administrative tasks while improving customer experience. Relationship Managers benefit from fewer back-and-forth emails, fewer missed renewals, and less data processing work, allowing them to concentrate on higher-value activities and growth strategies. In turn, analysts and auditors benefit from faster access to more precise, up-to-date data that can be refreshed whenever needed.

All told, Codat can reduce banks’ servicing time and costs by up to 10%—which, combined with the onboarding savings above, results in a 1.95x total increase in return on equity.

🪜 Scaling and growth

Banks are often slow to respond to changes in a business’s performance, like a period of significant growth that warrants a credit limit increase. Other times, they overlook such milestones altogether due to limited visibility into their customers’ finances.

That can lead to missed opportunities to cross or upsell products and services that truly resonate with their customers and generate additional revenue.

Having continuous access to the latest, most up-to-date business data means Relationship Managers can stay attuned to customers’ needs and immediately spot cross-selling opportunities like working capital requirements or bill payments that can maximize their engagement and boost their lifetime value.

How Codat helps

Codat makes it simple to tap into a variety of comprehensive data sources with granular levels of detail, including attributes like trade payable and receivable days, inventory turnover rates, and current asset ratios. These details not only facilitate smarter, faster decisions but also provide unparalleled insights for banks looking to build stickier customer relationships.

The bottom line

Leading US and UK banks are working with Codat to empower business bankers by bringing them closer than ever to their customers. With direct connections to rich and real-time financial data that lives in ERP systems, accounting software, other bank accounts and more, Relationship Managers are becoming even more trusted advisors and are always first to flag new opportunities to meet customer needs with the full-range of business banking products and services.

To learn more about our banking solutions (and get your questions answered), head here or reach out to a member of our team.