people at meeting

Codat report details SMB software trends

Current economic challenges are driving many American SMBs to change their tech stacks, a new report from Codat shows. The findings from The New State of US SMB Software promise to make an evolving sector even more interesting.

The report is based on YouGov research conducted this May. More than 500 executives at micro-, small-, and mid-sized businesses were surveyed.

Whatever their relationship with technology, business owners will operate in an environment where permissioned data will produce insights and value. By 2030, it is expected to add $100 trillion to the global economy. The World Economic Forum expects embedded finance to deliver $7.2 trillion during the same period.

Finance dominates the areas where businesses expect technology to help out. Three in four use accounting and ERP systems; 49% have incoming payments software, and 38% have outgoing payments tech. The most critical software areas cited were ERP (52%), payroll platforms (51%), bookkeeping (49%), and expense management (45%).

The most common pain points are closely related. Bookkeeping and reconciliation (34%), expense management (33%) and invoicing (32%) are related to accuracy issues, with Codat citing an Accountancy Age estimate that 88% of manual spreadsheets contain errors. That fallibility alone is an essential purchase driver.

Business size determines software priorities

No surprise, but the larger your business is, the more likely you deploy specialized software. Companies with more than five employees are three times as likely to use specialized software.

Purchase drivers vary depending on business size. Micro-businesses value ease of setup more than larger ones, likely due to using generalists for implementation. Software providers must communicate their setup requirements to customers.

Education crucial for Integrated Systems Adoption

SMB consumer demand for integrated systems will grow soon, but providers face an education problem, Codat head of communications Gabriel Macsweeney explained. They must clearly explain the benefits of their system, its availability, and how easy it is to implement.

Gabriel Macsweeney headshot
Gabriel Macsweeney

While 30% cited integrations as a top-three purchase driver, the percentage nearly doubles when the importance of integrations is explained.

“There’s important learning for providers,” Macsweeney said. “Not only are integrations important, something that can be an important feature for them, but they need to explain how businesses can benefit from those to use to attract and retain customers.”

The software providers are mainly responsible for stressing the importance of integrations, but others can help, she added. The UK government provides incentives for small businesses to digitally submit their taxes. Accountants and other business advisors can also stress the benefits.

How the economy affects software purchases

The economy often dictates a business’ approach to technology, Macsweeney noted. The survey was conducted in May; the economy was beginning to turn. Already, 40% had made some changes as a reaction.

“What you probably expect when costs rise, things are getting worse… you probably get rid of tools to save costs,” Macsweeney said. “But actually what we found is the opposite, more of the small businesses who had adapted their approach, many more had bought new tools or become more reliant on their financial technology than had just removed tools altogether.”

Beware of sector fragmentation when purchasing software

SMB purchasers must consider the fragmented software ecosystem when evaluating new technology, Macsweeney said. Can new software integrate with your other systems and bring you a portion of that trillion in dollars of value they will create in the next decade?

While Quickbooks gobbles up 49% of the accounting, ERP, and bookkeeping software market, only two providers (PayPal and Square) have a double-digit market share in incoming payments software. The majority have at most 3%.


Make sure your software can integrate because if it can’t, there are serious consequences.

“There’s such a long tail, and so many small businesses are using lesser-known software packages that when it comes to efficiency, you’re left behind if you’re using one of those smaller systems,” Macsweeney said. “No one will have the energy or the resources to build those smaller packages. What you end up with (by) using one of those longtail packages is not having the same benefits of digitization as people using the leading packages.”

She said that the absence of consolidation means entrepreneurs are less likely to build a digital tool that links to systems. Creating a consistent product with the responsiveness customers expect is a significant task.

Will that consolidation occur? Perhaps a little, Macsweeney said. What is dominant are specific solutions for verticals like restaurants. They are built by entrepreneurs who know the sector and can tailor technology for its needs.

Opportunities exist in expense management, embedded finance

Macsweeney sees an opportunity in expense management, the second biggest small business pain point. But while many businesses use bookkeeping software, far fewer use expense management technology.

“That suggests that managing expenses are a huge opportunity for new software providers to get into,” Macsweeney said. “You’re seeing a huge amount of venture capital flowing into that space right now.”

She added that embedded finance providers are in a race that will define the sector moving forward. Every player wants to be the center operating system b hailing. They select a payment provider. The dominant restaurant software provider can embed lending products and earn extra revenue.

“We see many of these companies trying to be that central operating system for business, and they want to be the ones to refer those products and build out their offering in that way,” Macsweeney said.

“And then similarly, you get the finance providers looking for distribution. They’re looking to become a system for small businesses, to get a slice of that pie, and be there at the right time in the right format.”

  • Tony Zerucha

    Tony is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.