SME Banking: Time for Digital Transformation
Across the EU, SMEs account for 99.8% of all businesses and generate 67% of non-financial employment. And despite the fact that the UK’s major banks have all identified the country’s 4.7million SMEs as a key market segment, this economically important sector remains underserved.
While surveys show SMEs to be generally satisfied with their existing banks, the issues that the SMEs raise in those surveys also indicate that banks should not be complacent. Especially in the context of Open Banking & PSD2.
Chief among the SMEs complaints are high fees, a lack of understanding of their business and restrictive access to credit. Digital user experiences also lag far behind expectations.
Of greatest concern to the banks should be the fact that, while most SMEs do not have plans to switch banks in significant numbers, they are considering taking services from third party providers. But this openness by SMEs also presents a significant opportunity for any bank willing to improve their SME offering and to meet the requirements of an audience who are hungry for value-added solutions.
Below, we’ve outlined in more detail the key risks and key opportunities for banks in the SME market in 2018:
Customers become less profitable due to multi-sourcing.
While most SMEs are planning to retain their day-to-day account with their existing bank, many are willing to consider third party providers for other services such as payments and financing.
EXAMPLE: Paypal Working Capital is filling the gap left by banks unwilling to fund their SME customers. Importantly, Paypal evaluates creditworthiness on the basis of incoming payments to the Paypal account, and don’t rely on physical collateral. Many SMEs also indicated that they would look to crowd-funding as an option.
Fintechs have attained a high level of visibility over the past two years, and under PSD2, their numbers and exposure are sure to grow. This carries significant risks for banks: it has the potential to leave them providing SME customers with only the basic account services while more profitable services are provided by others.
Eventual erosion of customer base by challenger banks
Challenger banks are a long way from being a significant threat to traditional banks. But a new wave of SME-focused “neo-banks” are beginning to emerge.
EXAMPLE: Coconut is a ‘current account for freelancers and self employed people’, which integrates a traditional Mastercard debit card with slick, mobile business-friendly features such as client invoicing, tax management and expense logging.
As providers such as Coconut, with a low cost base, improve and broaden their service offering to deliver the right combination of digital and light relationship management services, what starts as customer multi-sourcing could end up as a broader customer base erosion.
Increase loyalty & revenue with an improved digital offering
Existing SME customers are beginning to look to fintechs in part because their banks aren’t offering the features that they need. SMEs are entrepreneurs, dynamic small businesses seeking out digital solutions to many problems. And banks have a significant advantage: SMEs trust them. It’s not an unconditional trust, but in many surveys, when contrasted with other providers such as tech companies, banks win out as the most trustworthy to hold SMEs’ data and their money.
By building on this trust, banks are in pole position to increase revenue from their existing SME customers, if they can deliver the same rich, mobile user experience & functionality as the FinTech services - either by choosing to develop their own services, or by using the products created by Fintech partners.
Win new customers with an Open Banking strategy
In parallel, banks can win new customers by exploiting SMEs' willingness to adopt a multi-sourcing approach.
Banks who embrace Open Banking and ‘fintegrate’ with specialist providers, stand to reap the greatest reward. The most dynamic banks are now developing platforms to offer both proprietary and third-party services to customers and non-customers alike. This Amazon Marketplace style approach has the potential to change the face of banking, Not needing to develop all of their own services, they can offer the solutions of the most innovative FinTechs, paradoxically increasing customer loyalty and boosting the bottom line.
This digital transformation has already begun. SMEs will be beneficiaries. But which banks will come out on top?
Vipera is a provider of cutting-edge digital banking and customer engagement solutions for banks and retailers. Its SME 360 app, developed in cooperation with Mastercard, offers a modern and fully customisable user interface, proven technology and rapid & low-impact implementation.
Vipera is a founder member of Fabrick, a rapidly growing financial ecosystem that enables and fosters collaboration between its members to create innovative solutions for end-customers through the access and use of standardised APIs on a specialist platform.