Rob Straathof, CEO, Liberis
In the face of tough competition, cutting costs often seems like the quickest and easiest option for standing out in the market and winning customers. However, while slashing prices may make sense in the short term it is a huge risk to a business’s long term health as it ignores the need for sustainability. Add to this the high likelihood that competitors will start to catch on and cut their prices to keep up and soon any competitive advantage is lost. The race to the bottom is an age-old problem that we, as financial professionals are all too familiar with. Yet time and again we all fall into the trap, particularly when it comes to dealing with our small business customers.
With this cost-cutting mindset, it is no wonder that in sectors that compete almost exclusively on price end up with a high churn rate. One such area is the provisioning of payment solutions for small business customers. Over time, this can seriously threaten the profitability of a payment provider as the cost of acquiring and replacing small business customers is expensive. With price often being the only differentiating factor though between payment providers, customers have little reason to remain loyal as long as the service works. Ultimately what happens behind the scenes of a transaction is of little interest to a small business owner. To counteract this, payment providers must ingrain themselves more into the operations of a small business and act as a critical component to its success.
Easier said than done
Nonetheless, the reason that we all too often fall into a race to the bottom is that becoming ingrained into small business operations is far easier said than done. Yet, it can be made easier via the help of partnerships. The growth and innovation in the alternative financing sector coupled with open banking legislation have opened the door for fintech partners to use existing data from payment providers to pull valuable customer insights. Data is often an underused resource for many businesses as it can be hard to sort through and even know where to start! This is particularly the case for payment providers as they often hold so much data, it can be a real challenge. This is where fintech partners can help. For example, technology platforms can now identify how much a small business customer generates and when their busiest times are. Identifying and using these data points can be the start of developing a powerful value-added service.
So, once a payment provider has selected and been fully set up with the right fintech partner, they can begin to tap into specific pain points facing small businesses and look to address these issues. One issue, in particular, that is often the biggest pain points for small businesses is the access to funding. In fact, recent research has shown that less than a quarter of small businesses feel credit was readily available in 2018. With the pressure of increased business rates, rising wages and late payments, the need for extra funding has never been greater for nearly 6 million businesses in the UK. Couple this with the fact that traditional banks are reluctant to offer smaller loans due to their unprofitability and the struggle to keep afloat is very much an everyday fight for many small businesses.
Realising the potential
Payment providers can therefore not only help small businesses keep afloat but also reduce their own customer churn by offering funding products that meet and fit the needs of small businesses. In doing so, payment providers will no longer be competing over price and can instead differentiate themselves in the marketplace.
Furthermore, by reviewing historic customer data, fintech partnerships can even enable payment providers to offer small businesses pre-approved funding. This not only makes it more likely that a small business will take up funding, but also helps position payment providers as being more of a partner and less of a line on a bank statement.
Thanks to the introduction of open banking and the rise of fintechs and data analytics technologies, payments providers have a huge opportunity to end their price war. Partnering with innovative fintechs that understand the needs of small businesses, how to use payment data while also being quick and easy to connect to existing systems providers is a powerful market differentiator. It’s time for the price war to end and better products and services to be offered to our small business community.
