Signals: Business financial management intensifies

Hey fintech friends,

When times are good, you can profitably offer a variety of financial services to businesses as standalone solutions, like payroll or pseudo-AI bookkeeping. A lot of B2B fintech startups have been really successful in doing so!

Now, times are Less Good™– soaring interest rates and high inflation dampening consumer demand for goods, stock market volatility weakening retail investors’ appetite for trading, once-in-a-generation dollar strength impairing businesses outside the US, crypto doing this and whatnot– causing a shift in businesses' financial needs.

Price movement of stock futures on the S&P 500 (dark blue), Dow Jones (light blue), and Nasdaq 100 (purple) YTD paint a bearish outlook in public markets. Source: Yahoo Finance

This new set of financial needs is putting pressure on a number of B2B fintech concepts, and fintechs who've historically offered a niche set of products are having to adapt by diversifying out of their swim lanes. We're already seeing equity fundraising platforms start to expand out– Party Round, a fundraising tool for startups, rebranded to "Capital" and launched business banking in a move to let founders manage the funds they've raised directly from the platform.

As businesses fintechs batten down the hatches for Less Good Times, an interesting convergence is happening across B2B fintech products. It's no longer enough to serve a niche set of businesses' needs; the race is on to offer businesses all the financial features.

If your B2B fintech platform touches businesses' cash flows, it follows that you'd want to hold customers' deposits. Housing deposits puts you at the center of businesses' financial lives, making it easier to upsell all of the other products you have to offer. And in the face of an economic downturn, businesses will naturally want to hold their cash in a place where that cash can easily be managed.

Business banking & card providers are stepping up to the plate. Over the last quarter, Starling, a UK-based digital bank, released bill management for SMBs; Rho, a US digital banking platform for startups launched expense management; Tribal Credit, a corporate charge card provider, unveiled an expense management tool. Non-fintech platforms are also throwing their hats into the ring– Rippling, an HR solutions provider, just launched its own financial suite.

Holding businesses' deposits also puts these platforms in a prime position to provide for another growing need: Access to cost-effective capital.

Debt and equity get more expensive when interest rates rise, so businesses will increasingly look towards alternative capital sources to fund operations. Non-dilutive funding sources, like debt financing and revenue-based financing, may become particularly appealing here. Cue spend management platform Ramp launching extended terms on bill payments, banking platform Mercury releasing a charge card, and payment acceptance platform Mollie rolling out cash advances.

Coming full circle, many non-dilutive financing platforms are also making a bid to capture deposits with financial management products à la Arc Treasury. Arc's flagship solution offers advances to recurring revenue-based SaaS startups, a model which profits on the spread between the cost of capital and interest charged to borrowers (or net interest income). Higher interest rates tend to squeeze net interest income for lenders, pushing these platforms to diversify into fee-based revenue streams (side note: Chartered banks can lend their deposits at a low cost of capital and actually increase net interest income when rates rise, but as we’ve talked about, getting a bank charter can be a huge pain in the ass for fintechs).

The ecosystem of solutions that platforms can embed to offer these products also continues to grow. In Q3, Monneo launched its banking-as-a-service API in the UK; in the US, Unit* and Bond support for commercial charge cards, and Power announced coverage for credit cards.

Admittedly, one of the hardest parts of this playbook (still) is finding cost-effective capital to fund a business credit program. Capital raised via debt financing will carry a hefty APR for platforms who don't have an underwriting track record to show. Funding these programs with venture equity costs even more (think 30%-40% APR, depending on how you calculate).

It intuitively makes sense for these categories to overlap; with a full picture of businesses' cash inflows & outflows, B2B fintechs can better underwrite their customers for credit. For platforms already offering credit, capturing deposits deepens the customers relationship beyond one-off financing deals. In any of these camps, existing infrastructure solutions reduce the up-front investment required to expand, and additional revenue streams create greater resiliency against downturns.

There's so much variety in how these solutions could be tailored to serve businesses in the new economic cycle– keep an eye out for more crossover between B2B fintech platforms over the coming months.

* My current employer 👋🏽