Small business owner of a food market stocking shelves

The five-step journey to SME banking transformation

To help SMEs succeed, banks must first understand their challenges. Here’s where to start.

In brief

  • SMEs are going through a sustained period of significant change and need their banks’ support.
  • To have the most impact, banks need to focus on the real needs of SMEs, get the basics right, transform their credit operations, and become more flexible.
  • Banks also have an opportunity to revolutionize their relationship with SMEs by leveraging and developing the SME ecosystem via new platform models.

Small and medium-sized enterprises (SMEs) are often the hardest hit when crises emerge, and the COVID-19 pandemic has been no exception. A recent EY survey found that almost three-quarters (74%) of small businesses said they have been impacted negatively by the pandemic, with revenue, profit margins and sales volumes taking the biggest hit.

This type of short-term impact was to be expected, but the pandemic has also led to more profound change in the SME world — like all of us, small business directors have been forced to look inwards and think about their company’s place and purpose in the economy. As a result, more than half (56%) have decided to change their business models in response to changing market conditions, with the majority leaning towards more digital channels.

Beyond the tremendous disruption it has caused, the pandemic has served to accelerate existing market trends in the SME segment. This deep and fast-paced transition is in turn placing immense pressure on financial services providers to adapt to meet their customers’ changing needs.

In a recently published paper, the EY team outlined seven future-focused hypotheses set to reshape the corporate, commercial and SME banking sector: competition from self-banking corporations and Big Tech; the phasing out of traditional client segmentation; the use of data to provide real-time business advice; the dawn of multi-provider platforms; new fee models, such as subscription; integrated service offerings; and environmental, social and governance (ESG) guidance and solutions.

The insights EY teams gathered from 5,600+ SMEs across the globe have confirmed many of these trends, while adding depth and granularity to the analysis. Based on this comprehensive research, it is now possible to draw five clear steps for banks to follow in order to better serve SMEs in a post-pandemic world.

1. Conscious digitization

Digitization is hardly a new trend, but it is one that has increased dramatically during the pandemic. SMEs are turning to more digital business models, leveraging e-commerce and marketplace platforms to drive sales. This is having an impact on their interactions with providers, and a majority of SMEs now expect to be able to engage with their banks through a variety of digital channels.

Over the last 12 months, 43% of SMEs have increased their use of online banking services via computers or tablets, and 40% used more mobile banking services. In contrast, 38% said they decreased their visits to branches and offices, and 24% reduced their use of ATMs. While it was certainly influenced by lockdowns and pandemic restrictions, this trend is set to continue, particularly as customers’ preference for card and mobile payments makes branch visits increasingly unnecessary.

While deepening and refining their digital offering is essential, banks must also remain conscious of the differences in digital and financial literacy among their SME clients. This awareness needs to be built into digitization strategies, in a way that can both support less digitally savvy SMEs on their own journey and alleviate cybersecurity concerns for all.

Implementing a digital strategy is a long and costly process, but banks can make it more efficient by taking some time to clearly define who their SME customers are. Focusing on specific sectors and stages in the SME lifecycle will help banks differentiate themselves by offering the most relevant products in the most relevant formats. While the digitization of the economy is transversal and unstoppable, individual organizations should remember that they cannot be everything to everyone, and only enact conscious and value-adding changes.

2. Brilliant basics

None of the shiny new digital products will matter if banks don’t get their “brilliant basics” right. The EY team has touched upon this concept in the past: brilliant basics include fast and smooth client onboarding (whether online or offline), quick and transparent credit decision-making, and low-cost transactions that are as close to real time as possible. These are simply non-negotiable elements that SME clients expect their banks to deliver well.

The brilliant basics will play a fundamental role in retaining customers in an increasingly competitive financial world. The survey shows that banks are still the most trusted type of financial services provider in SMEs’ eyes, but not by a large margin: other providers such as Big Tech corporations, large companies expanding into financing and FinTech players are quickly catching up.

If they don’t want to lose their market share, banks need to pay attention to what SMEs really want. When asked specifically about the onboarding process, SMEs listed human interaction, transparency, speed and automation as priorities. More generally, respondents also shared their main satisfaction drivers: first, it is crucial that financial providers be responsive to client requests; second, a clear understanding of the customer’s business is required; and third, making the customer feel valued will go a long way in enhancing loyalty.

Getting these aspects right will allow banks to capitalize on the trust they inspire in their SME customers, and to build a strong foundation for the remaining steps in the journey.

3. Credit transformation

There are also significant gaps between customer expectations and bank offerings when it comes to time to credit: of the SMEs who received bank loans to help them through the COVID-19 crisis, 48% would have liked faster access to credit. This trend is not limited to pandemic conditions: in general, more than half of SMEs (55%) would like to be funded within seven days, and 31% would like to receive funds within three days. This is far from the current time it takes most banks to approve credit.

To address this issue, banks should leverage the incredible wealth of data available to them to gain a real-time understanding of their clients’ credit health. Open banking is making it easier to garner data from new sources, including accounting software and various specialized databases, and banks need to tap into this opportunity. In the future, the augmented relationship manager will have access to a range of artificial intelligence (AI) tools to process this data, such as smart pricing, that will enable fast, efficient and customized decision-making. By embracing this trend, banks will not only future-proof their business but also create new revenue opportunities.

But the credit transformation goes beyond speed. The pandemic has brought deep and meaningful changes to the SME landscape, and banks will soon be expected to rethink the way they manage their portfolios. Of the companies that received credit during the crisis, almost a third (29%) are very or extremely concerned about repayment. This is undoubtedly a risk that will have to be managed.

At the same time, there will also be new opportunities to explore while a greater number of SMEs entered the “decline” phase of their lifecycle during the pandemic than before, only 1% went into the “exit” phase. This suggests that instead of selling, SMEs are trying to adapt and refocus their business in new market conditions. Banks need to shift their focus from short to long-term profitability in order to provide them with the support they need for this transition.

4. Personalization and flexibility

As more and more data becomes available, and as competition from Big Tech puts pressure on their market share, banks will need to create new customer-centric engagement models and products that can deliver more progressive and strategic support and make them a more trusted advisor.  For example, augmented relationship managers will become a cost-effective solution to meet clients’ expectations of personalized service with a human touch, but the change will entail more than AI adoption.

Moving beyond traditional segment and data silos will be crucial. Instead of categorizing SMEs based on their turnover or number of employees, banks should place greater focus on where they are in their lifecycle, from conception to growth, maturity, decline and exit. And as part of new segmentation models, getting to the heart of SME behaviors and predicting needs will be critical.

As seen above, the SME lifecycle has been accelerated by the pandemic, yet companies’ needs and expectations change dramatically throughout the journey. It is up to financial services providers to monitor their progress, predict the tools and products they will require each step of the way, and offer them in the most relevant manner.

New purchase models, such as subscriptions, will also become more prominent as the consumer trend of hyper-flexibility seeps into the SME world. Businesses will expect to be able to add and remove financial products from their portfolio seamlessly through integrated corporate or marketplace platforms.

The survey shows that SMEs are very open to sharing more data to make this personalized experience a reality. Banks that embrace this change can also count on new revenue streams in the long term, as 50% of SMEs would be willing to pay for this enhanced experience.

5. The SME ecosystem

In time, SMEs will expect a fully integrated platform from which to access not only financial products, but of all the services they need to run their businesses. In the survey, over half (56%) of SMEs said they feel this platform would help to better support them in their current stage.

It is worth noting that more than one-fifth (22%) of SMEs would be willing to access such an integrated platform through a bank, and more importantly, that 17% would be willing to pay for it.

The most forward-thinking banks can capitalize on this trend by moving toward a marketplace model themselves, building a single dashboard where SMEs can buy core products (such as credit) and non-core services (such as ESG consulting), but also be connected to ancillary service providers such as web designers or insurers.

Following the five steps described above — implementing conscious digitization, perfecting their brilliant basics, transforming credit processes, embracing data for personalization and supporting the entire SME ecosystem — will ensure that banks remain relevant to a fast-changing and increasingly demanding SME world. More than that, by leveraging data and removing traditional silos, they can create new avenues for income, mitigate risks and truly tap into the SME opportunity.

These trends will also kickstart a necessary cultural change in the SME banking sector, from short-term returns to long-term profitability. This is a transformation journey that is both fluid and ongoing, but banks can support it by ensuring they attract and retain the skills needed, as well as by implementing relevant governance mechanisms, such as aligning financial rewards with good practices. If the industry can manage a deep and long-lasting culture shift, there is no doubt that the future is bright for the SME bankers of tomorrow.


The latest EY insights have revealed how SMEs have been impacted by the pandemic, and the five key areas where they need their banks’ support.

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