Redefining SME banking in a post-pandemic world

Banks and FinTechs can help small and medium enterprises (SMEs) across MENA to build back better from the pandemic.

In brief

• Approximately 60% of SMEs are changing their business and operating models to restore profitability and growth.
• 75% MENA SMEs report they did not receive the business advisory support they expected from their banks; they are increasingly turning to specialist technology-enabled advisors to help them restructure their businesses.
• SMEs are now more digital in their banking expectations, with 46% citing frustrations with manual and paper-based onboarding processes for banks.
• Half of SMEs cite the need for additional financing to support growth or to restructure the COVID-19 pandemic loans and ~20% are looking for IPO support as they look to transition or grow.
• Readily available financing will enable SMEs to thrive and support the wider economy;39% of MENA SMEs are looking to FinTech or BigTech for future financing needs.

As the Middle East region begins to emerge from the COVID-19 pandemic, SMEs will play a pivotal role in underpinning the pace at which MENA countries, large and small, recover. SMEs are a dynamic and rapidly evolving segment, defined by diversity. The segment is a composite of unique businesses from different sectors, operating at different stages of the business life cycle, with different ambitions, varied prospects and often with owners or leaders with markedly different personalities. Given the importance of SMEs to the economy, banks need to ensure that they are serving this largely underserved market. A lack of access to finance is one of the main constraints hampering increased SME growth.

SMEs are often the hardest hit when crises emerge, and the COVID-19 pandemic has been no exception. The EY organization has set in place a comprehensive program of research across 20 markets to engage with SMEs and to listen to their experiences, needs, expectations and aspirations. It was underpinned by 5,698 surveys and a series of one-on-one, in-depth interviews with SMEs and with representatives from major banks. This report presents the key insights from across the MENA region.

The recent EY survey has found that 75% of MENA SMEs report that they expected, but did not receive, business advisory support from their traditional banks. 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 inward and think about their company’s place and purpose in the economy.

As a result, approximately 60% of SMEs are changing their business and operating models to restore profitability and growth. Many have no alternative, with up to 56% decline in business revenues and 73% decline in customers paying by cash. In response, most SMEs are focused on driving operational efficiencies through digitization. Approximately 65% of SMEs surveyed are digitizing their processes and moving to mobile or online sales models. Approximately 40% of businesses are changing gear to become freemium and mobile-commerce-led businesses.

About 39% of SME businesses state that they are looking to FinTech or BigTech for future financing needs. This trend is even more pronounced in the UAE, which has a thriving FinTech ecosystem, with 30% of SMEs also looking to other nontraditional sources of financing. Both regional and global FinTechs are also looking to serve the KSA market.

SMEs are digitizing rapidly and expect their financial providers to follow. Coming out of the COVID-19 pandemic, MENA SMEs are much more digital in their banking expectations, with 65% citing mobile or online as their preferred channel for fulfilling banking needs. They are also increasingly frustrated with traditionally manual and disjointed banking processes, e.g., 46% cite frustrations with the amount of paperwork and repeated steps with the onboarding processes of traditional banks. Finally, 74% cite that they would share far more personal data in exchange for better banking services.

Three implications for established banks

SMEs need business advisory support to restructure operations for profitability and transition to new business models. In EY recently published paper, here are some of the steps that SMEs are adapting, with leading banks taking actions to better serve them:

Turning to experienced technology-enabled business and financial advisors

This will help SMEs to restructure their businesses, to secure financing from a wider range of providers and to access public markets for financing. Approximately 85% of SMEs expect relationship managers (RM) to be involved in the business and develop the long-term strategy for the SME by recommending best-suited product as per the life stage of the business.

Leading banks will restructure and retrain some of their RM populations on the nuances of serving SMEs, arming them with SME industry vertical-specific insights, and turbocharging the new SME RM pools with data and insights on individual SME customers. They will also iteratively refine alternative pooled and video RM models to serve smaller SMEs more cost-effectively.

Looking to FinTech or BigTech for future financing needs

This trend is more pronounced in the UAE, which has a thriving FinTech ecosystem, with 30% of SMEs looking to nontraditional sources of financing.

Leading banks will rapidly create nimbler new and alternative credit scoring models that are able to better predict credit risk for smaller SMEs, leveraging cloud and artificial intelligence (AI) technologies that are already mainstream across Asia. This will enable digital-first lenders to dominate the market for short-term working capital loans initially, and subsequently for more complex products as these firms amass data on SME customers’ business models, stock and inventory levels. This will subsequently lead to increased product penetration post-onboarding.

SMEs are digitizing rapidly and expect their financial providers to follow

Emerging banks, FinTech and BigTech are leveraging nimbler digital-native technology platforms, automated processes, and sophisticated data and analytics capabilities to meet SME banking needs with a lower cost-to-serve and a significantly better experience.

Leading banks will transform their data and technology platforms and reimagine fragmented digital processes into front-to-back automated journeys, to retain the primary banking relationship with existing SME customers and to rapidly acquire new ones.

Understanding and implying these changes can help banks to remain relevant to a fast-changing and increasingly demanding SME world. By leveraging data and removing traditional silos, they can create new avenues to mitigate risks and 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. Banks can support this journey 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.