Even within an industry, disruption occurs in fits and starts. In some areas of finance, tech quickly took root. Tech leaders like Amazon embraced e-commerce before the new millennium. Payment systems went digital before many banks even had a website.
But until recently, tech companies have largely stayed out of a seemingly profitable space: cash-flow management. In recent years, Intuit, Kabbage, Square, and PayPal have all migrated from spaces like lending and payments into the broader category of cash management.
Why are they jumping in now, and what does that mean for small business borrowers?
The Big Business of Small Business Cash-Flow Management
It’s not news that small businesses dominate the American economy. Small businesses account for 50% of all domestic jobs, 99% of all companies, and roughly half of America’s non-farming GDP. There’s a lot of money and people in small business. In that light, it’s not surprising that tech companies see small businesses as a valuable audience.
The question is, why were they hesitant to touch it before? The answer lies in the shadow of the Great Recession. Small businesses experienced the economic downturn far more severely than their larger peers. A study by the Federal Reserve Bank of New York found that while tightening credit conditions constrained small companies to some degree, the larger problem was weak consumer demand. This strategy reduced revenues and leaders’ willingness to make new investments.
New Opportunities For Small Businesses
Only in the last couple of years have small companies really recovered. For the first time since the recession, nearly two-thirds of small business owners rated business conditions as “good” or “excellent.” Small business loan approvals by large banks hit an all-time high last year, signaling that they’re financially healthy and willing to invest in growth.
As is true of any area of opportunity, tech companies are making different bets on what small business leaders want. What new tools and features are they using to draw business away from traditional banks?
Tech Firms Strategies
Traditionally, cash-flow management work happened either internally or in a banker’s office. If small business leaders were not brainstorming ways to cut expenses or collect on accounts receivable, they were trying to talk their way into a loan.
Tech companies have taken cash-flow management a step further. All use data streams and algorithmic approval methods when evaluating business clients, so they’ve built out other tools in order to compete.
Kabbage’s strategy is all about saving a business owner time: Its technology gives business owners funding decisions in minutes, and it recently launched Kabbage Payments to help SMBs get paid faster.
By using a platform that marries all types of cash-flow data, a business owner has the insight to know when a cash short-fall may happen and the products to resolve it quickly.
Intuit’s play centers around its other software offerings. Its QuickBooks Capital service pre-fills data small business users have inputted into other QuickBooks tools to determine whether or not to issue a loan.
While the strategy may boost the lifetime value of existing QuickBooks customers, it does risk limiting Intuit’s customer base.
PayPal and Square
PayPal is also leveraging its more mature offerings to support cash-flow management. For loan repayment, for example, PayPal takes a percentage of each PayPal sale. As with Intuit, the strategy may entice existing PayPal users, but it may struggle to attract new users.
Square Capital also offers automatic repayments, but there’s more to the story: Borrowers must pay back the loan in 18 months and meet bi-monthly minimums. Square’s expedited funds transfers and debit services remain its primary cash-flow tools.
What does the future hold for tech firms in the cash-flow space? Understandably, they aren’t publicly sharing their strategies, but there are still some safe bets.
The Future of Cash Flow
Expect tech companies to further differentiate themselves in two ways: technology and personalization.
Cryptocurrency, for example, isn’t mature enough for everyday transactions, but it may continue to develop. Although accepting another type of currency would likely bring more revenue in the door, blockchain still isn’t ready for broad commercial use.
Financial personalization is almost certain to improve in the coming years. Machine learning algorithms are already automating the work of cash-flow forecasting. In the future, they’ll suggest specific investments and focus areas for the finance team. Looking at things like interest rate trends and local economic conditions, they’ll predict the right time to take and pay back a loan.
What’s clear is that tech companies will continue to pave the way forward. And looking at the other areas of finance they’ve already reconfigured, it’s about time.