To retain their dominance, banks need to be at the heart of the SME business, using technology to better understand the needs and context of the business, which in turn, will enable banks to better serve their customers. Banks have responded to the innovation challenge in three ways: by starting neo-banks focused on serving SMEs, partnering with FinTechs and big techs, and building their own technology in-house.
These developments coincide with a move away from the traditional product-push approach to one focused on partnership, to enable SMEs to succeed. A first key step has been to integrate additional services, such as accounting and human resources software, into their core value propositions—as part of customers’ monthly fees.
Given the magnitude of the need, size of the opportunity, and growing competition from FinTechs, banks should move quickly to retain current SME customers and attract new ones.
Clearly, with increased competition, banks must get the basics right. At the most fundamental level, SMEs need access to working capital. Financing their operations can be a time-consuming chore. In developed markets, the gap between the capital SMEs need and the amount they actually received is equivalent to about 3% of GDP, according to Allianz. In developing markets, the gulf is 18% of GDP, which adds up to US$4.8t in underfunding, according to the International Finance Corporation. Meeting this need could generate significant potential revenues—as large as US$25b by 2024 across the 12 countries in three regions analyzed by EY research.
In addition, banks need to provide SMEs with a positive customer experience and focus on enabling their needs — starting with fast, digitized online customer onboarding, leveraging new technologies that enable them to conduct know-your-customer (KYC) and anti-money-laundering (AML) reviews more efficiently. Banks can also take advantage of tools that make effective, automated credit decisioning possible during the critical early stages of the SME lifecycle. In response, banks can share this information with SMEs to deliver greater transparency in their working capital needs and business performance, enabling them to make more informed decisions.
Drawing on existing and new sources of data, banks can provide technology-enabled services, such as all-in-one electronic payment platforms that allow merchants to use a single device to accept payments by credit cards, e-checks and quick response (QR) codes. These types of solutions enable SMEs to digitize invoices, speed up payments, accelerate the cash conversion cycle and automatically associate orders, invoices and payments with one another.
As they serve their clients, banks can use artificial intelligence (AI) to provide round-the-clock assistance through virtual relationship managers and chatbots — and help their human relationship managers better understand and respond to the needs of the business. Such augmentation could also be provided to SMEs through AI-driven business advisors.
To be successful in this market and develop long-term customer loyalty, banks need to develop a clear value proposition and strategy to partner with their SME customers, and offer them a broad range of solutions to run, control and grow their businesses, including:
- Helping SMEs connect with an ecosystem of suppliers, distributors and other SMEs
- Using their expertise across industries, channels and regions, to offer growth opportunities and insights
- Supporting business productivity by offering solutions, such as cash flow management, HR, talent and tax; and keeping their businesses safe through education on regulatory compliance
By enhancing traditional relationship banking with the latest advances in technology and data management, banks can more effectively offer SMEs with the support and capital they need to thrive and achieve higher survival rates. This gives them a better chance for small businesses to grow—and for their banks to prosper alongside them.
When SMEs worry less about funding and finance, they can devote more of their time and energy to running and growing their businesses. And that will be good news for us all.