Here are a few of the biggest stories from the financial world of small business that happened this past month and how they affect you. Did you catch them?
1. Small businesses face a big retirement challenge
Not enough Americans are saving for retirements and some of that responsibility falls on the shoulders of their employers. In fact, 55 million workers do not have a retirement savings plan at their jobs.
“Unfortunately, retirement plans are often too expensive or too difficult for small employers to provide, so these firms need options that are easy to administer and also make sense for small businesses’ bottom lines,” said John Arensmeyer, founder and CEO of Small Business Majority, an advocacy organization for small businesses and freelancers. (Source: Investment News)
With all due respect, I couldn’t disagree more. Setting up a simple 401(K) plan is very inexpensive – in fact some banks waive setup fees or only charge a few hundred bucks. Once established your employees can contribute pre-tax dollars for their retirement and you can match if you want to. And you should! The more your employees save for their retirement the more you can save for yours. Also, if you’re competing for workers in this very low unemployment economy, it helps to offer a retirement plan as a benefit.
Chart source: American Banker
2. Fintech vendors keep reinventing themselves, and banks struggle to keep up
The banking industry is in a state of flux. According to recent report by KPMG, there were 70 mergers and acquisitions among fintechs in the U.S., Canada and South America in the first quarter with deals worth a combined $3.4 billion. The value of deals in the second quarter, though less in number, approached $6 billion.
All of this is making it challenging for suppliers of financial technology in the industry. But this turmoil is creating opportunities for smaller banks, who are now better able than ever to access technology that in the past was only available for larger institutions.
“It could be augmented reality, virtual reality”; it could be a need for “analytics-driven tools or an internet of things,” said Mark Ranta, head of digital banking solutions at the payments vendor ACI Worldwide. “The breadth of what banks are looking at has opened up pretty wide compared to where the traditional lines were.” (Source: American Banker).
I’m seeing a rise in our SMB clients who choose to work with smaller, independent and community banks over the larger, multinational financial institutions.
Up until now the choice has been made based on their perception of a better and more personal level of service. Because these banks are smaller their technology offerings (like mobile banking) were not as sophisticated and to many of my clients that was a hurdle. Going forward, though, it looks like those smaller banks will soon be offering more enhanced tech and this should only improve their competitive advantage with SMBs.
3. Silicon Valley’s invasion of banking just got a key U.S. go-ahead
The U.S. government is officially sanctioning online lenders and other fintech lenders with the introduction of a special national charter now being issued by The Office of the Comptroller of the Currency. Traditional banks are not happy because now these upstarts can operate like an official financial institution, as long as they’re prepared to abide by a set of federal regulations. But the new rule gives these lenders much more credibility in the eyes of investors and borrowers.
“Providing a path for fintech companies to become national banks can make the federal banking system stronger by promoting economic growth and opportunity, modernization and innovation and competition,” said Comptroller Joseph Otting. The applications will certainly face “heightened supervision” and will need to prove their creditworthiness by showing adequate capital, liquidity and the ability to honor other financial commitments. (Source: Bloomberg)
Online lenders have kind of operated on the fringe of the financing world, even though the industry has rapidly grown over the past few years. Now these lenders – many of them who provide needed capital to startups and other small companies that have difficulty getting financing from a traditional bank – are finally getting the credibility they deserve…as long as they earn it during the charter process of course.
Chart Source: Pew Research Center, pewresearch.org
4. For most U.S. workers, real wages have barely budged in decades
Unemployment is down and the competition for labor is fierce. Yet, wages are still low—and they have been for a long time. Recent research shows that today’s real average wages (after taking inflation into account) has about the same purchasing power as it did 40 years ago and that only the highest paid tier of workers have benefitted from significant wage gains.
Also, according to the Paychex IHS Markit Small Business Employment Watch, job growth among small business is declining and so are wages as of this July. The report suggest that tax reform may not be boosting the economy as much as hoped. (Sources: Pew Research; Paychex; Accounting Today)
There are lots of theories about this phenomenon that certainly make sense. For example, many employers are substituting benefits like health, retirement and paid time off for increased wages. The decline of unions and the lag of skills may also be contributing. But I think there’s one big thing going on here: employers, particularly smaller employers who represent more than 50 percent of the employers in this country, are simply not paying enough. Minimum wages are historically low and hourly employees are barely keeping up. Some of my clients say that they can’t afford to pay more.
That may or may not be true. But they’re losing good people to larger employers who pay more. With the unemployment rate so low, many workers are moving to larger corporations or companies offering better benefits. The solution to the problem isn’t attractive to many of the small business owners I know: to get the workers, we’re all going to have to start paying more and that’s just a fact. Once that sinks in, I’m betting we’ll see not only employment at small businesses grow but wages as well.
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