Fintechs can help SMBs deal with recession

The fintech industry was built on aspirations for a better financial system. From targeting customers with limited access to fixing deeply broken processes, a lot of good work has been done to improve the day-to-day experience of interacting with money. Now, with rising odds of a recession, we need to prepare for a shift in the way people and businesses shop for financial products.

Small businesses are the engine that propels the American economy, but they’re also the most susceptible to negative financial pressures. A recession will, in many ways, dictate which financial tools and technologies they consume. Facing the prospect of difficult economics, small businesses’ buying criteria adjust accordingly and primary consideration is given to tools that enable cost reduction over those that promise a better experience. While these aren’t mutually exclusive, when small-business owners’ backs are against the wall, it’s all about reducing costs, saving time and ultimately keeping the doors open.

To continue meeting the needs of small-business customers, fintech leaders will need to refocus their efforts on building tools that will carry them through an economic downturn. Having talked with business owners and entrepreneurs from across the country over the past few years, I believe the greatest sources of value will be:

Instant money movement: Cash flow mismanagement is one of the leading causes of business failure—even without the added pressure of a financial crisis. With rising interest rates and declining revenues, small businesses need even more control over their payments and deposits. Fintechs that offer instant transfer methods, like real-time payments, will unlock a transformative amount of value for businesses with low margins and lumpy cash flows.

With real time payments, these businesses will be able to keep money in their accounts until the very day—if not the very hour—that a bill needs to be paid, eliminating any disconnect between when money comes into the business and when it goes out. The customers we’ve talked to are asking for access to these payment rails. It’s become their single biggest request over the past 6 months.

Real-time financial data: Small-business owners have a patchwork of tools and services that they use for each of their financial operations—accounting, receivables, payables, lending, payroll—and scotch-tape-and-paper-clip-level solutions to bring them all together. That’s why our customers say one of the biggest threats they face is delays in their financial data.

If they don’t know what they can spend and when, most owners’ instincts will be to not spend at all—especially in a recessionary environment. This becomes a problem when real sales opportunities are left on the table that could have been used to build a cash reserve.

By offering rich integrations and secure APIs, fintechs can give customers access to real-time data. When their financial tools talk to each other seamlessly, small-business owners can more easily see how money moves through their business and make informed decisions in an especially challenging financial environment.

Financial management tools: When a small business is running on very low margins with shrinking balances, the opportunity to create unforced errors rises dramatically—like making an elective purchase that results in them not being able to pay the next month’s rent. Normally, the business’s operating balance would be enough to cover everything, but in a recession, when money is tight, the chances of slipping up are higher.

By helping these customers better structure their money, fintechs can create clearer visibility into their bank balances. One way to do this is through sub-accounts. That way small business owners can organize their funds according to their expenses and easily see what cash they have available.

Just a few years after the worst of the pandemic, a looming economic downturn poses a particular threat to the small businesses on main streets across America. And when their backs are against the wall, many of these customers will turn to fintech for a lifeline. Our ability to tap into innovations that solve our customers’ needs faster and with more care puts fintech in a unique position to support these vulnerable businesses through financial crises. The key will be in refocusing our efforts on solving their most pressing survival needs. The fintechs that do so successfully will emerge in a stronger position.

Justin Adler is co-founder and chief operating officer at NorthOne.