sme banking...of small business banking, notes that digital banking for smes has lagged. smes are...

DIGEST

SME bankingCracking the small business ecosystem

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SME ecosystems: a global trend

STATE OF PLAY

Providing seamless, integrated solutions to meet SMEs’ needs is essential for success in the highly competitive SME banking market.

Small and medium-sized enterprises (SMEs) need help in areas outside their core business, such as payroll or accounting. They may also need advice on business development and their approach to customers. A 2018 report by Bain, Small Business Ecosystems: Banks’ Next Challenge, found that SMEs contending with the complexity of different systems for payments, accounting, human resources and bank transactions would value a simple, one-stop shop through an integrated system.

Banks that provide that system, either by developing an easy-to-use ecosystem or integrating with an existing one, stand to create new opportunities for enhanced customer relationships and competitive edge. Indeed, providing a broader integrated offering with relevant value-added services across multiple channels is now a necessity for banks in the face of constant competition in the SME banking market, according to a 2018 report by EY, The future of SME banking.

By providing services beyond the traditional core banking proposition, banks can gain access to new revenue pools that may not have been accessible to them before. As well as deepening the customer relationship and helping to deter SME customers from switching, a broader integrated offering will provide access to more data, which the bank can use to refine its offerings and improve operational efficiency. EY notes an opportunity for banks to tailor current services and gain further insights into the SME banking sector. At the same time, says Bain, experience gained from new partnerships or go-to-market models could help to speed up time to market and reduce the need for upfront investment.

But to ensure success in the SME banking market, banks need to focus on credibility and find the right partners to develop value-added services. Bain says banks must build their credibility for non-bank services, as well as improving performance in core bank services such as payments acceptance and cross-border transactions, which have become basic needs for modern SMEs. Service design must also be raised to satisfy SME customers who have made it clear that they want an integrated platform.

While established banks have worked hard to extend their products and services to retail customers across digital touchpoints, Forrester, in its report The Digital Disruption of Small Business Banking, notes that digital banking for SMEs has lagged. SMEs are demanding an omni-channel experience that provides consistent customer interactions through multiple touchpoints. And where banks aren’t providing the services to meet SMEs’ needs, disruptors are filling the gaps. To overcome the risk of disintermediation, digital banking teams need to shift from product-focused approaches to strategies and services designed around SME customer outcomes.

Avoiding broad, catch-all solutions is likely to be the best approach for banks. Bain identifies three emerging approaches to a service ecosystem: segment-focused value propositions focused on a specific industry; life-event ecosystems that capture broad needs during a lifecycle event such as starting a business or international expansion; and a complete solution to a recurring pain point, often using some form of payments ecosystem. Each of these approaches builds on strong existing platforms and uses partnerships to minimize complexity when entering adjacent services, and uses a focused theme, such as a narrow set of industries or stages in the small business lifecycle.

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Single providerSMEs are increasingly looking for an easier way to meet all of their needs to run their business. This provides an opportunity for providers that are willing to address wider business needs to deepen their relationship with their SME customers.

The full content of this report is exclusively reserved for Efma member institutions. If you wish to know more about gaining full access

to exclusive content, as well as other benefits, go to www.efma.com/joinefma

or contact [email protected]

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CHALLENGES

Addressing the main difficultiesBanks need to find ways to compete with new entrants, build consistency and credibility in the SME market, and identify the right partners to help them meet SMEs’ needs.

New entrants are disrupting the marketIn 2018 an Accenture banking report, Star Shifting: Rapid Evolution Required, revealed that new competitors have already grabbed 14% of the UK’s banking revenue. It predicted continued growth in challenger banks as an additional £775 million is provided under the Alternative Remedies Package to promote competition in the SME market. In fact, 63% of financial services players in 2018 didn’t exist a decade before. In addition, EY notes in its report, The future of SME banking, that several of the 50+ institutions that have been granted a banking license in the UK since 2008 are focusing specifically on the SME banking market. These figures are hard to ignore.

The UK illustrates just how quickly the SME banking market is moving. According to AltFi, in March 2019 CYBG was the clear leader among the UK’s six largest digital and

high street SME challenger banks with around 190,000 SME business accounts. But Tide’s rapid growth – more than doubling its user base in 2018 amid claims that its market share is growing at 0.1% every month – suggests a rapid pace of change, prompting AltFi to suggest that it could overtake the incumbent TSB by the end of 2019.

In China, too, fintechs are moving quickly to fill the gaps left by traditional banks. In an interview with Finextra TV, Money20/20 global content director Pat Patel said, “if you look at Asia in particular, we’re starting to see not only fintech challenger banks… we’re also seeing some of the tech giants, or internet giants, launching challenger banks themselves.”

Companies such as Alibaba-backed online lender MYbank and Tencent-backed WeBank are stepping

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up their activities to provide bank credit for SMEs. As China lacks a standardized credit system, WeBank says, roughly 80% of its nearly 90 million micro and small-sized enterprises (MSEs) currently don’t have credit with a bank. “Platforms like MYbank, Su’ning Finance, and other internet finance providers may push one step closer

to close the finance gap for MSEs in China,” Felix Yang, analyst at financial services consulting and research firm Kapronasia, told CNBC.

The full content of this report is exclusively reserved for Efma member institutions. If you wish to know more about gaining full access

to exclusive content, as well as other benefits, go to www.efma.com/joinefma

or contact [email protected]

sme banking...of small business banking, notes that digital banking for smes has lagged. smes are...

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