Banks lose small business lending edge to merchant platforms
Historically, small business lending was dominated by banks due to their control over financial ledgers, which provided them with unparalleled visibility into cash flow and risk. However, this dynamic has shifted, with merchant platforms now possessing more full and up-to-date transaction data than traditional bank statements. As a result, the underwriting advantage has migrated from banks to these platforms, which can access real-time revenue data, whereas banks typically receive reconciled statements 30 days later. This transformation has occurred without any regulatory intervention, driven solely by advancements in data quality and availability.
Evolution of visibility
The change in data visibility is only one aspect of a broader transformation, with the other being the impact of agents, tokenization, and programmable money on small businesses’ cash management. Programmable money enables businesses to attach logic to payments, allowing for instant payment upon delivery confirmation, rather than waiting for a 30 or 60-day payment cycle. Additionally, business owners can now hold funds until the last permissible moment before a payment is due, earning yield on their money and releasing it automatically and precisely on time. This level of control is no longer a luxury exclusive to large corporations but a vital necessity for small businesses, which have long struggled with cash flow timing.
Cash flow timing is a matter of survival for small businesses, where the difference between receiving payment on day one versus day 45 can be the difference between meeting payroll obligations or not. Founders often had to forgo their own salaries or dip into personal funds to ensure staff were paid. Banks have traditionally offered overdrafts and invoice financing as a solution, but these products come with fees and interest, whereas what businesses truly need is better control over the timing of their money. Programmable money addresses this need by providing native control over payment timing, facilitated by tokenization infrastructure rather than bank products.
Nature of the loss
This erosion of advantages represents a competency loss for banks, rather than merely a revenue loss. Banks have built risk functions and product teams around their historical monopoly on transaction data and working capital management. However, with merchant platforms now capable of seeing real-time revenue and providing programmable cash control, these bank competencies are being replicated. Merchant platforms did not initially aim to become lenders or treasury providers but are now expanding into these areas due to their existing data and payment flow advantages, further diminishing banks’ unique value proposition.
A partnership model
Rather than attempting to outcompete merchant platforms, banks may find a more viable strategy in partnership. By providing regulated balance sheets and compliance infrastructure to support merchant platforms’ real-time data and payment logic, banks can carve out a durable, albeit less glamorous, role for themselves. This approach acknowledges that competing directly with merchant platforms for real-time revenue visibility may not be feasible, as banks will always be a step behind in terms of data access. Instead, focusing on what banks can uniquely offer—regulated infrastructure—may prove a more sustainable path forward.
