Hard Tomatoes for Small Business

The tale of hard tomatoes is probably not something you expect to read in a FinTech blog, but hard tomatoes and hybrid corn stories are important for understanding innovation processes, their implications, and becoming socially responsible innovators. How so, you may wonder? — Well, for that, we’ll need to make a quick detour and talk about the history of innovation diffusion research.

Diffusion of Innovations

The very notion of innovation adoption and disruption nowadays is strongly associated with Silicon Valley and tech companies. However, five decades ago this was not the case. In fact, the very theory of innovation diffusion takes its roots in rural sociology in the midwestern United States, where researchers started to examine how farmers were adopting hybrid seeds, new equipment, and techniques. 

One study of the adoption of hybrid corn seed in Iowa by Bryce Ryan and Neal C. Gross was arguably one of the most important works in the diffusion of innovation research. It solidified prior work on the diffusion of innovations into a distinct paradigm that would be cited consistently in the future. That study, and over five hundred other studies across multiple disciplines such as early sociology and anthropology, synthesized the Theory of Diffusion of Innovations. 

In other words, fifty years ago, a phrase like “early adopters of a new technology” had a higher chance of referring to corn seeds and pesticides than to mobile phones and blockchain.

Now that we’ve established the importance of hybrid corn, it’s time to move on to another vegetable that is actually a highly controversial plant — “tomayto” vs “tomahto,” vegetable vs. fruit (the notion of also being a berry doesn’t make the situation any better). To make things even more complicated, I’m going to introduce another epistemological dichotomy — soft tomatoes vs hard tomatoes. One is a tender softie and an all-around nice guy, while the other is a thick-skinned villain.

Getting To The Punchline

California is not only known for innovations coming out of Silicon Valley, but it’s also the number one agricultural state in the United States. Californian farmers produce and sell fruits, tree nuts, and berries for $17.6 billion, and vegetables, melons, potatoes, and sweet potatoes for $6.3 billion annually. One thing that’s not really clear in this data — did they count tomatoes as berries or vegetables?

Before 1962, tomato berries were soft with thin and tender skin. There were more than 4,000 farms growing tomatoes in California, employing more than 50,000 tomato pickers, who were mostly Mexican men who entered the United States under the Bracero program. While the controversy of the Bracero program is not the topic of this blog post, it's what led to its termination and to the end of cheap manual labour. In anticipation of the termination of the Bracero program, the researchers at the University of California invented a mechanized tomato harvester. To enable machine picking, agricultural scientists bred hard tomatoes that would not bruise so easily. The hard tomatoes tasted the same, contained fewer vitamins, and were cheaper, but American consumers preferred soft tomatoes.

Nine years after adopting the mechanical tomato harvester, out of 4,000 farmers, only 600 were still in business. 50,000 workers were replaced by 1,152 machines (each costing about $65,000), plus about 18,000 workers, who rode the harvesters to sort out the damaged and immature tomatoes. About 80% of these sorters were women, and only a few were Mexican Americans. At this time, tomato growing also moved out of California's San Joaquin County into Yolo and Fresno Counties, where the soil and weather conditions were more ideally suited to mechanized farming.

The Unexpected Social Impact of Innovations

The sad irony of the situation was that the creators of the mechanical harvesters had good intentions to save the California tomato industry when it was threatened by the termination of the Bracero program in 1964. By inspecting the origin of tomatoes in grocery stores in Vancouver, Canada today, and observing that most tomatoes come from California, I can attest that they succeeded as a consumer. However, the direct impact of this success included 85% of tomato farmers going out of business because they could not afford expensive enterprise-grade mechanical equipment — most of them were small businesses. More than 36,000 people lost their jobs. How differently could the diffusion and adoption of this innovation have been had the R&D workers designed a smaller machine; one that more of the 4,000 tomato farmers (as of 1962) could afford and adopt?

Further research into diffusion of innovations showed that early adopters typically have more education, higher social status, more exposure to various communication channels, more social participation, more contact with change agents, and are more cosmopolitan than later adopters.

The lesson was learned the hard way: innovations often create social impact. In some cases, it can lead to the democratization of technology, and in other cases, it can lead to a widening socioeconomic gap between small businesses and corporations, family-run enterprises, and public companies. And as we know, small and micro-businesses are the driver of the economy — more than 25 million micro-businesses (company sizes of less than five people) in the United States alone create an annual economic impact of $5 Trillion.

FISPAN for Small Businesses

I do like distant and random analogies (my most random so far is data is the new botox) and I couldn’t help but notice particular similarities between hard tomatoes and small business banking. We often hear that small and micro-businesses are not profitable for banks because they don’t take big loans, don’t make huge deposits, don’t make many (if any) international payments, and they can’t pay large monthly fees for services. This is why small businesses are rarely qualified for innovation programs at banks.

It’s not because banks are mean to them, it's because banks are huge machines on banking rails (pun intended) that are very regulated, have less flexibility, and higher risk aversion often imposed by regulators. It puts banks in a position where they have to serve small businesses at a high cost while minimizing the risk and improving ROI. As a result, the innovations at banks are first introduced to the less risky and more profitable customers — who happen to be big companies. Unfortunately, as I mentioned, this widens the socioeconomic gap between large and small businesses.

At FISPAN, we’ve recognized the importance of small businesses for the economy. We’ve interviewed multiple small business owners and learned about their lives, struggles, and aspirations. We have also recognized the challenges the banks are facing trying to serve small businesses. This is why a significant portion of our R&D is focused on helping small businesses stay afloat by providing them with the financial tools that increase their productivity and allow them to focus on doing their business — not their accounting and banking.

Democratization of Business Banking

All of us — small businesses, banks, and FISPAN — are in the business of generating revenue. Financial institutions tend to focus on building better financial tools and innovations for larger corporations rather than small businesses because that is where their revenue comes from. Yet, there is a huge opportunity for small businesses to be more profitable for banks if they are offered the right tools with the right business models.

We recognize small and micro businesses as a different segment within a vague and wide spectrum of SMBs, who have the same jobs to get done like midmarket and enterprise customers do but with different needs. These needs require different products, not in terms of banking products, but in terms of how these products are integrated into business owners and their accountants' lives and workflows. This is why FISPAN brings a patent-pending, contextual banking solution and a suite of simple tools like Remittance Linker (you can also read our blog on remittance advice here) that have a very low cost of servicing but a very high perceived value. Democratization of business banking can make small businesses profitable and create interesting customers for banks.

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To learn more about FISPAN and how we can help your bank better serve your business clients, book a demo today.