Customers don’t want a bank. They want services that minimize their time on financial management so they can maximize their time running their business.
11:FS

The Problem

The average micro business spends 15 hours a week on financial admin, time better spent running their business or enjoying time with friends and family. If the tools are available to automate 90% of this work, why haven’t the traditional banks improved their UX?

Inertia reigns because larger businesses have finance teams and accountants to handle this admin. So the pain is felt by small businesses, the least profitable segment for the big banks. SMEs with small deposit and loan balances aren’t worth the hassle to invest in R&D to improve the customer experience.

Which is why the NPS scores on the Big Four Australian banks look like this:

The Opportunity

What if a startup reinvented the financial experience for business, with banking and accounting seamlessly integrated online to make tax season simple?

The information wouldn’t just be backwards-looking. A business could forecast future cash flows and the startup could even pre-approve credit by understanding the business’s integrated financial position.

I’m not the first person to think of this, six new startups will launch business banking alternatives in Australia in the next year.

Across those six startups, there are four real Jobs To Be Done, and each comes with its own set of risks.

JTBD #1: “Take care of my taxes”

Hnry, a startup that launched in New Zealand in 2018 is expanding to Australia in the next few months. They’re targeting freelancers/sole traders who want the headache of taxes taken away.

Rather than positioning themselves as a bank, Hnry wants to replace your accountant and accounting software.

Every customer gets their own bank account and can create invoices, receive payments, and log expenses in-app. Hnry will:

• Automatically calculate your tax rate
• Put aside and pay the right amount of tax each month
• Prepare and file your tax returns whenever they’re due.

They’re not expanding into the world of credit themselves and instead make it simple to export ‘bank-friendly’ reports to share with lenders. By ignoring credit, Hnry doesn’t suffer the regulatory burden many other neobanks face.

Instead, they monetise by taking 1% of income paid into the account. By charging only when a solopreneur is paid, they remove friction for someone who doesn’t know how often they’ll use the account. It’s also more palatable than having to see the expense paid out each month.

While this charge intuitively feels quite high, there is a cap at A$1500 per year, and when you factor in replacing both accounting software and accountants or handing off to outsourced contractor payroll providers who charge 3–5%, the price seems cheap.

What I like about Hnry is that while many overseas startups are trying to solve all the problems up to the tax return — making it easy for users to categorise, reconcile and integrate with accounting software — Hnry takes care of that final step of lodging the returns too, making it slightly more operationally complex and probably slightly lower margin, but significantly more valuable to their target customer.

The big question here is, are there enough people in Australia and New Zealand with this use-case to build a large business, and can you scale without needing to hire dozens of accountants to help with edge cases?

JTBD #2: “Help me understand my financial position”

These startups are targeting all businesses with fewer than 20 employees, split into two segments — merchants that primarily transact in-person and want to accept payments, and those who transact online or through invoices.

Both offer:

• Quick online sign-up: No more taking paper documents into your local branch, sign up in 10 minutes online.
• Analytics to understand your financial position: Budgeting tools to categorise expenses and forecast future cash flows.
• Quicker access to credit: Use machine learning to score credit better than traditional banks and pre-approve credit so taking out a loan is a one-click process for businesses that qualify (most aren’t starting with this, but I imagine will look to add later on).

In-Person

Zeller is targeting merchants with an integrated terminal and bank account offering that acts as a business-in-a-box, including paying vendors, lending, and accounting software integrations.

The team previously launched and scaled Square in Australia, so they know the market well and understand the localisation required for a card-present payments offering in Australia.

The biggest risks here are:

1) The complexity of POS integrations — Tyro has >300 integrations and while there is middleware that can help, there will likely be custom integrations required to scale.

2) Switching costs — The customer experience feels incrementally better vs fundamentally different from their competitors. They’re up against Square for new businesses/smaller customers, and Tyro in their target market (as well as the traditional banks), so they will need feature parity to attract early adopters.

Digital-First

The core value propositions for these startups are:

1) Integrating banking & bookkeeping: create invoices in-app and auto-reconcile payments, photograph receipts and add them to expenses, and automatically categorise those expenses.

2) Budgeting and forecasting tools: to help businesses understand their spend and anticipate future cash flows.

Thrive will launch next year with both debit and credit cards in partnership with an ADI, while Parpera is starting with a digital wallet and pre-paid debit card.

The best overseas comparisons for this business model include Tide in the UK, Qonto in France and NorthOne in the US.

The biggest risk here is unit economics:

ARPU: Interchange in Australia is minimal vs the rest of the world, so you can’t build a business solely on interchange revenue the way US competitors do. Also, lending to brand new businesses (the early adopters) is difficult, so it will take a while to build a base of customers with enough financial history to accurately model credit risk and either start earning NIM or partner with other lenders.

Instead, SMEs will have to pay for the product — through subscriptions or partnerships with company incorporation and insurance partners.

Businesses already pay subscriptions for their quoting and invoicing tools, their accounting software, as well as bank fees, so its realistic they’d be willing to pay $20+/mo if you can replace one of those tools.

Gross Margin: This depends on who your partner is for card issuing, payments and accounts but assume reasonable transaction costs from debit/credit/NPP/BPAY spend.

Churn: 10% of SMEs go out of business every year, so there will be high organic customer churn.

CAC Payback: These startups will need to find a strong organic customer acquisition channel to help bring down blended CAC, shorten CAC paybacks and help with capital efficiency. That could include virality, community or partnerships.

Square has shown what you can achieve if you get the unit economics to work with a differentiated value proposition — in Q419 their Payback period was <12 months, with net gross profit retention >100% across every cohort since 2012, >5x LTV after five years, and a 16% EBIT margin.

JTBD #3: “Give me access to credit”

Archa is targeting a broad set of customers, from sole trader to 50+ employees, and launching with a credit card.

Their belief is that SMEs, whether it’s a plumber or a law firm, want access to credit and a simple way to understand and manage their spend.

Customers will not only be able to capture receipts and categorise expenses, but also issue virtual corporate cards to employees, set budgets by card, and have a holistic view of their company expenses. They will launch with subscription pricing that includes credit interest, making it simple for businesses to both access credit and understand their monthly spend.

Their overseas equivalent would be Brex or Ramp.

It’s difficult to become a credit card issuer, and the team has done a lot of work upfront to access the preferable unit economics of credit — higher interchange and interest.

The risk here is around training a new credit model for SMEs, and ensuring your subscription price is both palatable for the customer and sufficiently profitable to ensure short CAC paybacks.

JTBD #4: “Help me understand and control employee spending”

This is targeting businesses with 10+ employees where the key use-case is reducing admin for the finance team and having more control over employee spending.

Divipay is already in market with a product — every employee gets a virtual corporate card with team-specific spending rules based on pre-approved budgets. Divipay makes receipt capture seamless, and each transaction is coded to your chart of accounts.

Most companies that switch to Divipay are either sharing the one company corporate card or make employees use their personal cards + Receipt Bank/Expensify and the whole process is painful.

While Divipay is still a debit card for the moment, I imagine this is just an entry point, and over time they’ll expand to cover more of a business’s banking needs, from payroll to lending in the same way Square expanded beyond payments into payroll, lending and marketing.

Overseas equivalents include Soldo, and Divvy.

Divipay’s risk is inertia — switching requires a change of internal processes and change management with employees, not to mention the loss of much-loved credit card points.

Who are they up against?

The Big Four wising up: CBA recently launched a $0 fee business account with online sign-up and accounting integrations. NAB QuickBiz loans, which integrates with accounting software to approve loans to SMEs in <20 minutes, now represents 45% of NAB’s small business lending.

They may be slow-moving, but they have resources, and the better they become the less likely a business is to switch.

The Tech Giants: This includes the accounting software players (Xero, Intuit), the payments companies (Stripe, Square, Paypal, AirWallex), e-commerce (Shopify), and lenders (Afterpay, Zip).

It wouldn’t be a stretch to imagine Xero buying one of the capital-constrained neobanks like Volt for their ADI and launching a full-service bank at some stage, or partnering with one of the new Banking-as-a-Service providers like Rails Bank or Synapse who provide the back-end infrastructure to enable an existing brand to offer banking products.

The Overseas Neobanks: Revolut and Monzo both have large war chests and recently launched business bank accounts. Between their existing markets and long-awaited US expansion, they have plenty to focus on, but there’s always the risk they expand to ANZ.

Who will win?

I’d love to hear your thoughts on who you think will win and why, hit reply and let me know.

What we’re looking for…

• A team that fundamentally reimagines how businesses interact with their finances, from spending to budgeting and accounting, by deeply understanding the needs of their target customer.
• A beautiful product experience that sparks word-of-mouth growth.
• A thriving community — freelancers and SMEs are desperate for connection. A community here would help your customers with benchmarking, marketing, and peer support.
• An innovative approach to unit economics — how can you price your product in a way that feels like a no-brainer to your customer but also ensures sensible CAC paybacks and the potential for expansion over time?