Dive Brief:

• ZenBusiness, an Austin, Texas-based small-business servicer, has acquired Joust, a digital banking startup that caters to freelancers and sole proprietors, the companies said in a press release Thursday. Terms of the deal were not disclosed.
• ZenBusiness offers a digital plug-and-play model to help small businesses get up and running, including state filing and legal paperwork; operating agreements; accounting assessments and tax filing support; websites and email domain names; and other services. With Joust, ZenBusiness can offer merchant accounts, invoice financing, invoice builders and customer relationship management, which will be integrated into a bundle of financial offerings called ZenBusiness Money that will launch in the fall.
• The tie-up will let ZenBusiness manage business setup processes, banking, accounting, email and website services, and over time, e-commerce. Both companies are betting a comprehensive toolkit will help scale the platform more quickly. 

Dive Insight:

A comprehensive business platform that includes financial services will help ZenBusiness boost customer numbers — which the company estimates to be in the tens of thousands —and deepen client relationships.

The acquisition evolved out of a discussion on partnering, and both companies quickly realized that one platform with a complete set of offerings was more compelling than a partnership, Lamine Zarrad, co-founder and CEO of Austin-based Joust, told Banking Dive. Zarrad will head up financial services at ZenBusiness, including ZenBusiness Money.

"[ZenBusiness has] really cracked the nut on acquisition, which is admittedly the hardest thing to do in this space," Zarrad said. "What really motivated me personally as a CEO was to bring that kind of value to customers, and together we could do so much better than separately."

Large banks have struggled to reach freelancers and sole proprietors. A multitude of financial needs and low revenue makes them less attractive customers for bigger financial institutions.

"Historically, it's been tough for banks, because basically you've got the complexity of a business owner, but with the banking revenue of a [retail] consumer," said Vivian Merker, a partner at Oliver Wyman.

About 57 million Americans freelanced for a living last year, according to a report from the Freelancers Union and freelancer platform Upwork. Challenger banks catering to freelancers often tout low fees, easy onboarding and simple digital interfaces. 

Joust, which has raised $4.6 million, was founded in 2017 and rolled out to the public this year. It is one of a number of challenger banks that have focused specifically on small businesses in recent years, including BBVA-backed Azlo, Novo, Lili and NorthOne.

Joust offered services through a tiered subscription model and made most of its revenue from payment processing and other fees. Its key selling points included an invoice financing product called PayArmour that guaranteed client cash flow, along with a risk engine that pulled in a live feed of disparate data sources. 

"There's a lot a lot of businesses that sort of build a product based on convenience, but what Joust set out to do is to provide protection, and that's why PayArmour is so important and that’s the differentiator," Zarrad said. 

Joust's client base grew more than 600% from January through March, Zarrad said. Through ZenBusiness, Joust gains instant access to a similar type of customer, typically freelancers and sole proprietors who generate less than $100,000 in revenue.

"We always envisioned a platform play that addresses the needs of these sole proprietors, self-employed [workers], micro businesses, and so forth," Zarrad said. "Business documentation plays very nicely with banking and reduces the friction of onboarding. It reduces reliance on third-party tools for know-your-customer and know-your-business."

ZenBusiness already offered financial products through partnerships with providers, including direct deposit accounts through Radius Bank; credit cards through Divvy; and insurance with Bold Penguin. With Joust, ZenBusiness adds merchant accounts (a way to accept payments), invoice financing, an invoice builder and customer relationship management to its suite of financial services. Joust offered an account through a partnership with nbkc Bank, but the product was discontinued.

ZenBusiness, which launched three years ago, has raised $19.5 million. With a comprehensive toolkit, which includes financial offerings, along with onboarding, accounting, email and web services, ZenBusiness can play in a similar field to platforms like Amazon, Shopify or Square Online Store. The company plans to add e-commerce capabilities for clients next year.

"Ultimately, [the goal] is to build the marketplace," said Ross Buhrdorf, CEO and co-founder of ZenBusiness. "It's a perfect fit in that Joust has a product that's very tailored for our customers and represents all of the features and functionality that our customers need in the fintech space."

ZenBusiness isn’t exactly taking on Shopify or Amazon, though. What distinguishes it from large marketplace players is its focus on small, service-oriented businesses instead of product vendors who are usually served by large e-commerce platforms, Buhrdorf said.

The small-business banking startup field is ripe for some degree of consolidation, said Peter Wannemacher, principal analyst at Forrester Research. The pandemic, he said, may be accelerating the trajectory toward deals.

"There is not room for every business-focused neobank to be successful, and the way in which they evolve will vary a lot by individual brand," he told Banking Dive, adding that potential acquirers could include large incumbents or adjacent businesses looking to broaden their offerings. 

Despite the competitiveness of the field, there is room for the continued growth of tailored financial services for freelancers and sole proprietors, Merker said.

"It's a challenging customer to serve," she said. "The future of the gig worker or the future of the freelancer, and the ability to meet their evolving needs, is important for our economy overall, and I hope that's a space that continues to get attention from entrepreneurs and established financial services providers alike."