Karen Mills of Harvard introduced us to the term “small business utopia” when she released her book earlier this year. She gives the example of the coffee shop owner who had all the information she needed to run her business at her fingertips. There would be an intuitive dashboard that not only helps her run her coffee shop but makes financial decisions and takes the pain out of managing business finances.
Some recent conversations and articles I have read have convinced me that we are well on the way to that rosy picture of the future. And it mainly comes down to data. Fintech is getting better at gathering and analyzing data then presenting it in useful ways. Lenders are approving loans more quickly and many now have such a rich history of their own data as well as hundreds of connections to other data sources that a much more complete picture of the financial health of a business is possible. Not only that but many of these lenders are real platforms with deep insight into their small business customers.
According to deBanked the five largest online small business lenders in 2018 were (in order) PayPal, OnDeck, Kabbage, Square Capital and Amazon. For three of these companies lending is just a side business, something they offer as part of their broader platform. Many small businesses use PayPal, Square or Amazon as the platform on which they operate their business. So, these big tech companies have insight into the day to day revenue fluctuations of their small business customers.
The Accounting Software Companies Lead the Way
Who are not on this list (yet) are the accounting software companies like Intuit, Xero, Netsuite and Freshbooks. I would argue that these companies have even better insight into small business than the likes of PayPal, Square or Amazon. They see everything both on the revenue and expense side as well as the cash flow and balance sheet. Not only that, when you have large market share you see the connections between companies and you can notice problems in real time.
Intuit launched Quickbooks Capital just a couple of years ago so they really haven’t scaled their lending business yet. But this is a company I am keeping a very close eye on. Because Quickbooks has such a large market share of the small business accounting market they have data on most small businesses and are therefore uniquely positioned to not just make accurate credit decisions but to provide real intelligence to the small business owner.
I was speaking recently to a former executive at Xero, the New Zealand-based accounting software provider and Quickbooks competitor that is starting to ramp up business in this country. She said that in Australia Xero had insight into 90% of small businesses there. When you have data on the vast majority of the small business population you can make very accurate predictions on things like cash flow. Xero would see 75% more data than the largest Australian banks meaning they were best positioned to provide the all-encompassing financial dashboard for small businesses.
Where are the banks? It is true that large banks also have great network effects and therefore vast troves of data. They could also be the financial hub for small business owners but as yet we have seen few moves by banks into creating the kind of financial tools that others are creating. They have regulatory considerations and also have their hands full trying to innovate on their existing products.
Embedded Financial Services is the Future
Another group of companies to watch are those that focus on one particular vertical. They can build out capabilities unique to a particular industry and while they won’t have broad data sets they can go very deep within a vertical. Shopify is a good example of this as they become the go to platform for ecommerce companies. They have functionality they call Shopify Manage which is billed as “the mission control for your business, wherever you go” available on desktop or mobile. They also have Shopify Capital for lending and Shopify Payments.
There are many other verticals where one company is building out the ecosystem for the industry. Toast is doing it for restaurants, MindBody is doing it for the wellness sector, Housecall Pro for home service companies. These companies have the potential to embed financial services in their offerings and become the hub of the ecosystem for their vertical.
Speaking of embedding financial services Square added something really interesting last year. They launched Square Installments allowing their small business customers to offer financing to their customers. Suddenly any small business can offer financing and it is all embedded in the software they are using to process customer transactions. Any small business can become, in essence, a lender.
I have not mentioned Stripe yet. What Square has done for the physical world Stripe has done for the online world, enabling any small business to accept payments online. In doing so they have become the most valuable Silicon Valley startup in history. They have recently announced moves into lending and credit cards so they are a company to watch in this space.
We shouldn’t count out the Kabbages and OnDecks of the world. They have been leaders in technology innovation for the past decade and are well positioned to create deeper relationships with their customers. Kabbage, for one, has already announced a movement into payments and they have their Kabbage Greenhouse, a custom-built resource for small business owners.
We are Just Getting Started
It an exciting time to be involved in fintech as new ecosystems are being built before our eyes. But we are not there yet. On the journey towards small business utopia we are probably only in the second or possibly the third inning. But all the pieces are being put into place. All the companies mention here offer API connections that enable real time data that can provide deep insights into the health of a business.
Over the long term the world’s biggest lenders should be those that have access to the most data and can analyze it most intelligently. Banks may end up providing the bulk of the capital here but it is the new tech companies that I am watching most closely. They are the ones most likely to fulfill Mills’ vision of small business utopia.
