11 Apr
B2B Partner Collaboration: Fostering Financial Literacy Among SMBs
From Basics to Brilliance - B2B Support for SMB Financial Mastery.
A step-by-step guide on how banks can transform from the old ways of making money into a more sustainable long-term business model.
Many consumers assume that owning or running a bank is a license to print money.
Yet, they don’t realize that banks are similar to any other retail business. They’re selling a brand, products, and services just like everyone else.
It’s not a matter of opening a bank and letting the profits roll in - a fact you know all too well as a key decision-maker at a bank.
To the above point, if the only thing your bank did was allow clients to deposit and withdraw money, how would you profit? How could you pay your employees? And how could you possibly afford overhead?
Therefore, it’s traditionally been crucial to find money-making opportunities outside your standard services, such as charging additional fees.
Those fees apply to loans, checking accounts, savings accounts, overdraft, etc., and have been the lifeblood of almost all banks throughout history.
Below, we’ll take a step-by-step look into how banks can transform from the old ways of making money into a more sustainable long-term business model.
While interest rates aren’t necessarily the fees we referred to in the intro, you can’t talk about how banks make money without delving into this particular topic.
It starts with a bank borrowing money from customers, who deposit their cash into a given account. Then the bank compensates those clients with an interest rate and various securities.
A bank then takes the money they’ve borrowed from depositors, lending those funds at a far higher interest rate. Profits stem from the difference between interest paid and interest received.
In the short-term, central banks set and regulate interest rates as an economic safeguard to control inflation. Big-picture-wise, supply and demand pressures set interest rates.
When demand is high for long-term debt instruments, it drives higher prices and lowers interest rates. Conversely, dwindling demand for those long-term debt products drives interest rates higher and increases pricing.
The ideal situation for banks is paying depositors lower interest rates and charging lenders higher rates. However, there’s then the matter of credit risk management, which entails weighing the chance that lenders default on loans.
Banks also earn revenue from credit card process fees for swiped transactions (1.5% to 2.9%) and online transactions (3.5%).
Credit card interest rates are similar to loans (because buying something on credit is very similar to a loan). So, as long as a cardholder’s balance isn’t paid, interest fees pile up and go to the bank or credit union.
Furthermore, when retailers receive payments from credit cards, a chunk of the sales revenue goes to the card’s issuing bank.
Banks make money on saving accounts because of the difference between interest paid and interest received (the same goes for checking accounts, too, which we’ll discuss below).
There are also fees customers often must pay just for having a savings account. On average, it’s only $4 per month. Still, that number adds up monumentally when your bank has hundreds, thousands, or even millions of customers.
Checking account fees tend to be more expensive than savings account fees. For instance, Wells Fargo charges $10 per month for checking accounts.
Recent studies show that the median amount of money held in a US checking account is $1,250. $10 per month (or $120 per year) is a shockingly large chunk of that dollar amount in the name of safely storing some disposable income.
Customers investing with a bank typically pay a 1% fee based on their invested money. However, that percentage often shrinks when a client invests more funds, seeing as the bank’s bottom line still benefits despite the decreased rate.
Banks charge overdraft fees when customers withdraw more money from an account than they’ve deposited.
These are the fees banks charge most often. In 2020 alone, banks made $30 billion off of overdraft.
Overdraft charges have spawned negative sentiments toward banks, especially given all the other fees customers are saddled with. Due to the pandemic and its related hardships, bank customers don’t look kindly on this type of profiting, as lucrative as it may be.
As such, many banks have decreased their overdraft fees, with the Bank of America leading the charge.
To illustrate a point, we’ve discussed all other fees before delving into loans. Specifically, before facing various loan-related charges (beyond interest), potential borrowers have already drowned in a sea of bank fees.
Now, at LoanSpark, we’re focused on B2B (business-based loans) and not on B2C (consumer-based loans). Still, there remains an internal bias with B2B borrowers because company owners are also everyday consumers. They’re no strangers to standard retail banking and the fees involved.
With the above preamble in mind, put yourself in a business loan applicant’s shoes when they’re faced with the following borrowing fees on top of paying interest:
Origination Fees:
Processing/Service Fees:
Prepayment Penalty:
Other Fees:
Are you a key decision-maker or someone wielding significant clout at a bank? If so, we’ll ask you to put yourself in your B2B client’s shoes.
We’re in an (almost) post-pandemic world, but COVID-19-related challenges continue to linger.
In fact, those lingering obstacles have outlasted emergency aid, putting business owners nationwide in financially precarious positions.
Small businesses that have remained afloat over the past few years can potentially afford a loan. However, when your bank piles on the additional fees, those embattled companies simply don’t have the available funding to foot the bill.
Beyond that, most small businesses aren’t in a position to be approved for a loan from your bank. Stringent regulations have tied your hands behind your back as a loan provider, causing you to reject business loan applicants in droves.
With fees and stringent approval processes scaring away B2B borrowers from traditional banks, it’s created a gap for a different entity to enter the business lending space. Business owners are now finding viable financing alternatives with FinTechs, and it’s transformed the sector entirely.
The digital revolution has vastly impacted all facets of life and transformed society as we know it. Transportation (ridesharing), entertainment (video streaming), and even health (wearable tech) have been digitized.
The financial sector and banking industry are no different.
Increasingly ubiquitous, flexible technologies have spearheaded alternative solutions across the financial landscape, including business lending. Therefore, small business loan applicants are no longer stuck with traditional institutions that have historically let them down.
Instead, through the continued advancement of FinTech, the fee-based model banks have relied upon has grown increasingly irrelevant.
As per the Wall Street Journal, the tools used by FinTechs are far more versatile than what banks utilize.
The above competitive advantage means FinTechs pay far lower overhead costs. Therefore, these innovative companies can afford to provide more low-cost (or even no-fee) services than most banks.
These factors directly appeal to younger customers, who should be on the radar of most banks as B2B customers of today and tomorrow.
For one, nearly 30% of millennials report owning a small business (or at least a side hustle). Moreover, almost 20% of millennials state that their small businesses are their primary source of income.
Beyond those numbers, most of Generation Z dreams of becoming an entrepreneur.
Yes. Your baby boomer customers bring you the most immediate results. All the same, you need to think about the future.
Your bank won’t always have the luxury of wealthy baby boomers who can afford sky-high fees.
Additionally, the “trendy” youngsters using FinTech will be the most affluent generation one day. They’ll remember the FinTechs who helped them when they needed financing and remain loyal to those businesses.
While the previous subsection might’ve painted a different picture, Baby Boomers also embrace FinTech. They’ve experienced the digital revolution in its entirety and welcome disruptions across all industries, including finance.
Studies from late 2021 show baby boomers are by far the quickest growing FinTech consumer segment. FinTech-usage has doubled to almost 80% for users 56-years-old and over.
These numbers speak to your immediate bottom line as a B2B lender. 41% of small business owners are baby boomers, after all.
Even more prophetic is how 78% of total consumers who’ve switched to FinTech cite increased savings as their reason for making the change.
What’s more? 69% of consumers said they’d switch banks if theirs didn’t adopt FinTech.
Your customers are 2x likelier to switch banks if you charge fees in today's landscape.
Given that FinTech is the fore-bearer of affordable banking services, you can assume businesses in the sector will take a significant chunk of those customers.
How can we make the above statement with such confidence? Well–according to App Annie, mobile FinTech applications outperformed banks by 10.8x during the pandemic.
Additionally, FinTech’s besting of traditional financial institutions is projected to continue past COVID-19, shifting toward eCommerce, digital interactions, and online payments.
The message here is clear for traditional banks: It’s time to follow the example of this new market leader and stop relying so heavily on fees.
Fees, traditionally, have been an integral part of your business model as a bank or financial institution.
So, reducing them drastically or getting rid of them altogether begs the question: where can you bridge the gap left by your lost revenue?
Considering that banks earned $114 billion more in fees than they paid in interest in the past decade, we can understand your trepidation.
But we’re no longer in the past decade. We’re in the 2020s, in a post-COVID world, where savings opportunities based on fee reduction are more abundant than ever due to FinTech.
It’s time to grow along with the times and focus more on client-friendliness fee reduction. Embracing this shift will prove vital in keeping your B2B clients from scouring the market for alternatives and leaving your bank in the dust.
If anything, the rapid growth of FinTechs should prove to financial institutions that these shifting tides are inevitable. Charging a long list of service-based fees will leave banks bereft of enough clients to thrive.
Bridging the gap of fee reduction (or removal) will require some creativity. However, it won’t necessitate as much creativity as you think since the solution is there for the taking.
Specifically, we’re talking about your bank adopting the very same FinTech products that have been cutting into your profit margins.
Don’t start sweating over the idea of developing a FinTech lending platform. We’re not talking about a DIY solution that will drain your resources and overwhelm all facets of your bank.
Instead, we’re referring to products you can seamlessly add to your current offerings. Your bank can provide the affordable FinTech borrowing experiences today’s small business owners demand under your banner. All without draining your resources.
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Given that 45% of US-based small business owners are taking out loans, you’re missing out on a crucial growth opportunity by turning applicants away.
Unfortunately, this lost revenue stems from lacking an available loan product that suits today’s small business owner’s needs, financial circumstances, and credit history.
Combine the above problem with your fee reductions (to keep up with FinTechs), and you’re facing a severe competitive disadvantage. Until Loanspark changed the game, that is:
With Loanspark, your bank can add dozens of lending products that appeal to a diverse segment of business owners.
Additionally, Loanspark’s solution is co-branded, meaning it comes to your bank ready-made, with no backend or in-house operational costs.
Loanspark products are offered and approved under your bank’s branding, so your clients’ business-borrowing experiences only involve your organization. There won’t be mixed messaging or other industry competitors muddling up your brand messaging.
This way, you can be everything to your clients.
The small business owner who has a personal checking and savings account with your bank can also rely on you for a B2B lending solution. That type of versatility cultivates brand equity and loyalty, providing a comprehensive experience for captive clients.
Your bank also earns a commission on Loansparks’ co-branded loans. You make money on loans your bank doesn’t fund, broadening your brand appeal without taking a huge gamble.
From there comes cross-selling opportunities.
Offering additional lending products from Loanspark means more time your B2B clients spend immersed in your bank’s products and services. You’ll then have an easier time educating your clients about your bank’s other financial products.
Loanspark’s co-branded business loans are fast and convenient, offering the alternative financing solutions many of your business clients seek. Our solutions keep you relevant in a FinTech-influenced market that calls for giving clients what they want when they want it.
Before now, your bank couldn’t implement such a solution. However, with Loanspark, your customers can enjoy seamless FinTech experiences without the weight of an entire business overhaul on your shoulders.
The tide has shifted. Your business clients expect a FinTech experience while keeping their loyalty to your bank, extending to the quick-approval B2B loans you offer and the fees you no longer charge.
You don’t need to completely uproot your business model, though. For instance, designing a lending platform on your own isn’t required. Nor should it be.
All you need to do is provide exceptional customer service, reduce or remove fees, and partner with Loanspark as your co-branded lending solution.
Contact Loanspark today and learn how we’ll help you take your giant leap into the future, ensuring your bank soars far ahead of the curve for decades to come.
