Centime founder and CEO BC Krishna recently led a panel at McKinsey’s latest Cash Management Forum. Ashley Hayslip, executive vice president and head of community and business banking of Umpqua Bank, and Rick Rodman, executive vice president and head of business banking at Texas Capital Bank, participated, along with Universal Information Services CEO Todd Murphy, who spoke as the voice of the customer. Evan Long of McKinsey introduced the session.
Long described the conversation as an opportunity to explore “the importance of proper cash flow management and access to working capital for SMBs,” as well as “how banks and fintechs are approaching innovative solutions and partnerships for their SMB customers.”
Krishna opened the conversation by saying: “Small businesses are the engine that powers the economy and cash is critical to their survival — yet they struggle to manage cash and cash flow. We're trying to shine a light on this problem and see how we can help.” Citing studies from the JP Morgan Institute and the U.S. Small Business Administration, he outlined why businesses have little cash on hand to begin with, few opportunities to build it up and limited resources to manage it or plan for the future.
“Cash management solutions today from banks, which focus on positive pay, ACH and so forth, really don't address or solve cash flow problems,” Krishna continued, acknowledging that his statement might “raise the hairs on the back of the neck” of the banking-focused audience — but stressed the importance of working together to help clients manage their businesses better.
Given the research, he described how businesses need better forecasting and access to working capital to bridge cash flow gaps due to the delicate balance inherent to small businesses’ cash positions, suggesting that current credit solutions fail to address the tangible needs of such customers. “There are different uses of capital, but we're talking about the credit that's necessary to bridge a gap,” Krishna said. “I believe that banks need to really look at the cash flow forecasting landscape and address the need that businesses have.”
Citing gains made in the accounts receivable and accounts payable space (while noting they have yet to integrate with cash flow forecasting in a meaningful way), he further explored how small businesses do — and should — tap into credit. He suggested that banks reexamine the way they view credit and lending for small businesses. “AP and AR are great things from a fee income or treasury management perspective that banks can provide, but lending is for banks. The irony is that banks can do a much better job of providing lending solutions, particularly working capital solutions to small businesses than they do today,” Krishna said. The addressable market is sizable, and underserved by fintechs that lend at extremely high rates, he said.
“A very large number of businesses apply for credit, and most of the time, they are seeking relatively short-term loans and lines of credit. Sixty percent of the applications are for less than $100,000, right? If you're a business that's looking for credit for less than $100,000, you're not looking to buy a building. You're often just looking for a working capital loan to bridge a gap; the average loan size is just $30,000,” Krishna said. But “these are not loans that are traditionally very profitable,” for banks due to the cost of underwriting and complexity of the application process.
“The simplicity and speed issue is something that we need to address,” he said, referring to both banks and fintech.
Hayslip responded by calling on her mission and that of Umpqua, saying, “As a bank, we're in business to help the economy; that is why I'm in the business of banking,” while acknowledging that banks large and small can struggle to address some of the real needs outlined by Krishna.
Rodman echoed Hayslip’s sentiment, saying “From a CRA (Community Reinvestment Act) perspective, banks are expected to make sure that we're serving this niche and doing our part to serve the small business sector, because obviously it does help turn the wheels of the economy.”
“We know when you bank the small business segment, many of those companies grow and become middle market companies. Ultimately, some of those you can grow to become corporate relationships. So the opportunity from this segment can be huge. And then the question is how do you bank the segment efficiently? How do you decision things quickly? How do you serve these companies?” Rodman asked.
The potential for banks to work with fintech, and complement one another’s strengths, is central to the path forward.
As a customer, Murphy spoke on what he called a “symbiotic relationship where, if banks and fintech can get together, the opportunities can be huge. And the beneficiary is truly going to be me.” As a business leader, he said, “I'm going to get the technology, the innovation, the planning and everything that I need. And I maintain my relationship with my business banker and the institution that I've come to trust.”
McKinsey & Company provides a forum for dynamic exploration of issues around cash management, but participants’ views do not necessarily reflect those of McKinsey.. Learn more about the Cash Management Forum here.
Some quotes have been modified for concision and clarity.