Banking on Small-Business Needs Sponsored by:

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1 Banking on Small-Business Needs Sponsored by: 2014 Yodlee. All rights reserved. Reproduction of this white paper by any means is strictly prohibited.

2 EXECUTIVE SUMMARY Banking on Small-Business Needs, commissioned by Yodlee and produced by Aite Group, analyzes the need for banks to invest in digital channels and broaden their product portfolios to see greater success within the potentially lucrative small-business space. Key takeaways from the study include the following: Small businesses need tools to address key pain points such as tracking incoming and outgoing cash, forecasting future funds to make better investment decisions, and more quickly collecting money owed to them. Gaps in bank product portfolios over the last few years have created opportunities for nonbank competitors that are happy to accommodate new market needs with their offerings. The products for which small businesses often go elsewhere include online payments and mobile payment collection, electronic invoicing, cash flow forecasting, and account aggregation. Most banks don't have the deep pockets to identify gaps, perform due diligence on potential partners, and integrate new solutions. Seeking a partner to handle those tasks is a possible option. Creating a "hub" would broaden banks' portfolios to keep customers on their sites longer, better position banks for new customer acquisition/ becoming the depository institution of choice, and create a new potential revenue stream for banks Company Name. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 2

3 INTRODUCTION Continued investment in digital channels is critical to success in the small-business banking space. Offering advanced online and mobile capabilities not only improves customer retention but also plays an important role in new customer acquisition. Approximately 71% of U.S.-based businesses generating less than US$20 million in annual revenue prefer to perform banking transactions through either online or mobile channels. Additionally, 67% consider the sophistication of a bank's online banking capabilities to be important when selecting a new banking partner, while 51% consider mobile capabilities to be important. With more than 15% of small businesses likely to switch financial institutions over the next two years, banks must invest or risk losing business to their more technologically endowed competitors. In addition to investing in digital channels, banks must also broaden their small-business product portfolios. Gaps continue to exist between what banks offer and what their customers need, and most bank product portfolios fail to address common customer pain points. New nonbank competitors have emerged as a result, and small businesses are increasingly likely to look beyond their banks to satisfy many of their financial needs. This white paper identifies key bank portfolio gaps and highlights those products for which small businesses are most likely to go elsewhere. It is based primarily on an Aite Group online survey of 1,003 U.S.-based businesses generating less than US$20 million in annual revenue. The margin of error is 3 points for a survey of this size at a 95% level of confidence. While this revenue range goes beyond the small-business definition used by many institutions, it represents a largely underserved segment and thus untapped revenue potential. Further, many of the points made within this white paper apply as much to companies generating US$20 million in annual revenue as they do to those generating less than US$5 million, so the information will be pertinent regardless of a bank's small-business segmentation. BANK PRODUCT GAPS The needs of small businesses are beginning to more closely mirror those of commercial customers than consumers. Even those businesses generating less than US$1 million in annual revenue are increasingly interested in sending wires and making international payments while sharing the same fraud concerns as their larger counterparts and therefore express interest in positive pay. Unfortunately, many banks continue to serve them in the same way they serve consumers, thereby limiting their exposure to business products and services and lowering small-business customer satisfaction rates. Also, gaps in bank product portfolios over the last few years have created opportunities for nonbank competitors that are happy to accommodate new market needs with their offerings. The products for which small businesses often go elsewhere include online payments and mobile payment collection, electronic invoicing, cash flow forecasting, and account aggregation (Figure 1) Company Name. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 3

4 Figure 1: Lost Opportunities for Financial Institutions Q. Does your business get each of the following from a company other than your financial institution? (Percentages represent those that do, by revenue size in US$) 37% 35% 37% 32% 35% 20% 20% 20% 15% 10% 11% 10% 7% 2% 2% 45% 49% 43% 45% 42% 36% 36% 34% 38% 26% 26% 23% 16% 18% Total (N=1,003) Less than $100,000 (n=322) $100,000 to $1 million to $4.99 $5 million to $9.99 $10 million to $20 $999,999 (n=226) million (n=182) million (n=121) million (n=152) Make payments using a payment service like PayPal Collect payments using a mobile payment service like Square E-invoicing and receivables Cash management and forecasting tool Account aggregationfrom a company like Yodlee Source: Aite Group's survey of 1,003 U.S.-based small businesses, September 2013 Small businesses need tools to address key pain points such as tracking incoming and outgoing cash, forecasting future funds to make better investment decisions, and more quickly collecting money owed to them challenges banks are typically not addressing with their existing smallbusiness products and services. Approximately one-third of small businesses go elsewhere either because their bank isn't offering needed solutions fast enough or, if it does, its solutions are less user-friendly than those offered by nonbank providers. Additionally, small businesses need more integrated and consolidated tools to manage their finances. While a bank's online banking and cash management site seems like the most logical place for small businesses to manage their finances, only 20% use it. Those seeking out other options do so because their bank's site fails to integrate with their accounting solutions, provide a complete picture of their forecasted cash flows, or enable a consolidated view of account information across multiple accounts and financial institutions. These challenges grow in intensity as businesses increase in size (Figure 2) Company Name. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 4

5 Figure 2: Key Shortfalls of Bank Offerings It doesn't integrate with my accounting software It doesn't provide a complete/accurate picture of my forecasted cash flows It doesn t enable a consolidated view of account information across multiple accounts Top 3 Reasons Why Small Businesses Don't Manage Their Cash on Their Bank's Site (By revenue size in US$) 7% 16% 20% 24% 17% 11% 10% 22% 27% 9% 4% 3% 14% 15% 13% 36% Total (N=510) Less than $100,000 (n=121) $100,000 to $999,999 (n=147) $1 million to $4.99 million (n=105) $5 million to $9.99 million (n=62) $10 million to $20 million (n=75) Source: Aite Group's survey of 1,003 U.S.-based small businesses, September 2013 Some businesses are so desperate for these capabilities that they would be willing to switch primary institutions for them a move that is often no easy task. For example, when asked if they would be willing to switch institutions if a bank offered a premium package of online services, including accounts payable and receivable tools, direct integration with accounting software, and cash flow forecasting capabilities, 36% responded that they would. Among businesses generating between US$10 million and US$20 million in annual revenue, the percentage stating "yes" was 59%. Figure 3: Making the Case for Broader Portfolios Q. If a bank offered a premium package of online services, including accounts payable and receivable tools, direct integration with accounting software, and cash flow forecasting capabilities, would you be willing to switch banks for it? (By revenue size) $10 million to $20 million (n=152) 59% 26% $5 million to $9.99 million (n=121) 47% 35% $1 million to $4.99 million (n=182) 45% 34% $100,000 to $999,999 (n=226) Less than $100,000 (n=322) 21% 30% 21% 29% I would switch banks for these services Total (N=1,003) 36% Source: Aite Group's survey of 1,003 U.S.-based small businesses, September Company Name. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 5

6 AN INDUSTRY RIPE FOR CH ANG E Banks realize that they must evolve their small-business strategies and broaden their product portfolios or they risk disintermediation and could end up with customers that use their online offerings solely to check balances, transfer funds, and export information. Two key areas banks are likely to focus on include accounts receivable (invoicing and payments) and payroll. In fact, a polling question asked during a May 2014 Aite Group webinar sponsored by Yodlee found that 62% of bank respondents (primarily comprising large U.S.-based banks) are planning to invest in accounts receivable capabilities for their small-business customers over the next six to 12 months, while 48% plan to invest in payroll capabilities. Unfortunately, most banks don't have the deep pockets available to identify all the gaps in their portfolios and go into the market to fill them. It would be costly, not to mention timeconsuming, to perform the necessary due diligence for vendor selection. The costs of integration and vendor management pose another barrier to moving forward. One option for banks to overcome these challenges and more effectively serve small businesses is to create a partner hub. In such a relationship, a technology partner would be responsible not only for bringing together best-of-breed providers but also handling the integration and single sign-on capabilities across solutions. Creating a "hub" would broaden banks' portfolios to keep customers on their sites longer, better position banks for new customer acquisition, and create a new potential revenue stream for banks. Further, hubs represents a model type that small businesses prefer: Aite Group research has found that, if given the choice, small businesses would prefer to have all or most of their financial needs met by their financial institution as opposed to a nonbank provider. They prefer the convenience of accessing all of their banking products in a single location (59%), trust their data is secure and that the bank has done the necessary due diligence when selecting partners (58%), and believe that they may receive relationship-based pricing if they go to a single source (37%). CONCLUSION Banks must leverage their strengths and protect themselves against the growing threat of disintermediation and non bank providers. Further, they must evolve their strategies and broaden their product portfolios to re-establish their role as the trusted advisor to small businesses. Having all of the necessary functions/tools small businesses need accessible though their online banking platform in a partner hub structure will maximize relationships with small businesses. It will also position them to become the depository institution of choice, thus creating opportunities and new streams of revenue that will grow in time as businesses become more sophisticated. A broader product portfolio coupled with a better use of analytics will also bring banks new insights into the day-to-day activities and full financial picture of their customers. These insights can be utilized to create new product bundles, better pricing models, and an improved ability to predict future product needs. While banks have just begun to scratch the surface of recognizing and meeting small-business needs, Aite Group is confident that those banks willing to make the necessary investment can win the battle for dominance in the lucrative small-business banking space Company Name. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 6

7 ABOUT AITE GROUP Aite Group is an independent research and advisory firm focused on business, technology, and regulatory issues and their impact on the financial services industry. With expertise in banking, payments, securities & investments, and insurance, Aite Group's analysts deliver comprehensive, actionable advice to key market participants in financial services. Headquartered in Boston with a presence in Chicago, New York, San Francisco, London, and Milan, Aite Group works with its clients as a partner, advisor, and catalyst, challenging their basic assumptions and ensuring they remain at the forefront of industry trends. AUTH OR INFORMATION Christine Barry cbarry@aitegroup.com CONTACT For more information on research and consulting services, please contact: Aite Group Sales sales@aitegroup.com For all press and conference inquiries, please contact: Aite Group PR +44.(0) pr@aitegroup.com For all other inquiries, please contact: info@aitegroup.com 2014 Company Name. All rights reserved. Reproduction of this white paper by any means is strictly prohibited. 7