Neobanks for SMEs: focused on freelancers and small businesses

How neobanks are providing real time bookkeeping for freelancers and micro businesses.

This is a 2-part series on neobanks focused on SMEs. In this first part I will talk about neobanks that cater for freelancers, solo-preneurs and micro businesses (up to 10 employees).

I already wrote in one of my previous articles how neobanks for SMEs are competing with mainstream banks and bringing value to small businesses offering a better pricing structure. 

Most SME digital banks already offer basic bookkeeping and payment features, therefore becoming very attractive to solo-preneurs, freelancers and micro businesses (companies with less than 10 employees). 

In addition to offering a seamless and quick process of opening an account, neobanks also offer  integration of the clients bookkeeping and payments softwares (like Xero or iZettle).  This is one of the main selling points for a freelancer and micro businesses to choose a neobank.

The UK startup Coconut focuses on serving freelancers. They’ve developed specific accounting features, including VAT and invoicing that cater to the day-to-day needs of the self-employed. For example, a freelancer who needs to request payment from a client can use Coconut to send invoices directly from the app. 

And things are going well for Coconut - they’ve just raised over £2.4m in its latest crowdfunding campaign, beating its target by 350%. To date, Coconut onboarded 1,500 accountants since its launch and continuously partnering with more accounting practices on the bid to offer a highly innovative accounting service.

Talking about their crowdfunding campaign, Sam O’Connor, Co-founder and CEO of Coconut said, “We’ve seen first-hand just how limited the financial services offering is for the UK’s 5.3m self-employed and micro-SMEs in the UK [...] 73% of small business owners say they only use their bank for transactions. In my view that has to shift.”

Indeed, the shift is already happening and fast. Earlier this year, Tide, another UK neobank for freelancers and micro businesses launched a new expense management tool which users can upload an image of a receipt and automatically have the expense matched to a transaction made through their Tide account in real time. Using machine learning (ML), the receipts are matched to the transactions and the system gets more accurate each time the client uses it. The feature is being rolled out free of charge to all of Tide's 140,000 clients.

But, why is real time bookkeeping so important for freelancers/solo entrepreneurs and micro businesses?

Real time bookkeeping provides better cash flow management and a broader view if you are making profit or loss. Also, faster identification of any tax liabilities as well as the ability to reduce or eliminate penalties from paying late or underestimating taxes due.

And most importantly, better control of expense and lower accounting costs.

“If you are running a business then bookkeeping is a chore, wastes your time and is boring,” Tim Fouracre, CEO of UK SME neobank CountingUp, told TechCrunch. Countingup has a feature called Accountant Hub,  a web-based accounting system that helps accountants manage and collaborate with their SME clients.

The feature could be a game-changer for UK’s SME neobanks because the UK’s. tax authority will require businesses to keep digital records and submit quarterly tax filings, which is exactly the type of task the FinTech has been designed to automate.

However, neobanks offering bookkeeping services come with a lot of challenges. “The biggest obstacle is that a neobank is not allowed to offer tax advice. In Germany, access to the profession of tax advisor is strictly regulated. Tax advisors are also part of a strong lobby in Germany, and they do not like the scenario that banks start offering tax advice themselves.” , said Christopher Plantener, CEO of German neobank Kontist, focused on freelancers and self-employed people. 

There is a lot of work behind the scenes for a neobank to provide those services. To support activities, which are usually carried out by accounting offices and not by a bank, they  founded another company, Kontist Service GmbH.

Plantener added, “This complexity is not visible to the user. He receives an overarching financial service uniting banking, accounting and tax advice through communication with the revenue office in one user-friendly front end.”

When asked if freelancers and micro businesses see the real value of real time bookkeeping, Plantener explained, “taxes are a challenge for any company but a medium-sized company hires a professional tax accountant.  Many freelancers are afraid of making mistakes that could be expensive for their business. They find their finances not only time consuming but increasingly a burden. Through real-time bookkeeping and tax advice they not only get massive time savings but also stress relief, as they can see at a glance whether their finances are in good shape.”

So, do you think that challengers and neobanks are going in the right direction with bookkeeping features? 

Which bookkeeping features would you like to see in a banking app?