What is the future of SME banking in the UK

20 minute read 2 Apr 2018
By

EY UK

Multidisciplinary professional services organisation

20 minute read 2 Apr 2018

The financial services industry is undergoing a transition in the UK. How can traditional banks evolve to meet the needs of SMEs? 

Entrepreneurs come in all shapes and sizes. From the FinTech start-up or family business on the high street, to the home-based manufacturer using 3D printers and the power of the internet to reach new markets, the path from start-up to corporate is no longer linear. The banking needs of small and medium enterprises (SMEs) are changing dramatically, and the banks’ responses need to evolve accordingly. The UK government and regulatory bodies are applying increased scrutiny to the segment to ensure both innovation and competition in the market. There can be no doubt that increased access to debt finance and supporting services is required. There are now nearly 5.5 million SMEs in the UK (signifying a phenomenal growth in recent years). These SMEs have a turnover of £1.9t, covering 51% of all private sector turnover in the UK. We are seeing a growing market with diverse and complex needs. One that needs better products tailored to financial services. A tangible example of regulatory action is the recent formation of the Banking Competition Remedies Ltd., an independent body which is expected to administer access to £775m of funding for those that can demonstrate they will address SME needs. The intent is clear: increase access to capital, enable supporting services to the SME lending market and support the lifeblood of the economy. At EY, we believe this is a great opportunity for the market — not only those bidding for funding but everyone involved — to re-examine and reimagine their propositions by putting the needs of SMEs first.

We think it’s vital for traditional banks, challengers and FinTechs to look at how they can do things better. This is not just about tweaking existing products but about having the right propositions and the right support and services.

Digital is at the heart of the next wave of SME banking services. SMEs use digital platforms for their businesses and have every right to expect to have their financial services on these platforms too. This is even more important with the advent of open banking, which has changed the traditional competitor landscape. Firms need to make sure that they can combine innovative digital and data offerings alongside human advice. In this report, we have outlined several questions which we believe firms need to ask themselves on how they can really help the SME community and provide additional insight, tools and services that will best serve their customers. Firms that answer these questions the best are likely to come out on top. Not just in the funding contest, but in the ongoing battle of attracting and retaining SME customers.

  • What is the status quo?

    UK SMEs are a growing and demanding segment. They account for approximately 99% of the private companies in the UK and a cumulative turnover of £1.9t. We have grouped SMEs into four categories based on their headcount and turnover: sole proprietors, micro-businesses, small enterprises and medium enterprises.

    Dominant incumbents have led to a drive for greater competition and SMEs are increasingly turning towards alternative sources for finance. Despite the rise of challenger banks and FinTechs, there continues to be a significant market opportunity for institutions to grow their footprint.

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  • Changes in the SME banking landscape

    New entrants to the market are capitalising on the previously unmet needs of SMEs. Traditional banks and specialists are facing competition from FinTechs and challenger banks that have brought in new products and services specific to the needs of the SME Market. The regulator is incentivising this change and more than 50 institutions focussed on SMEs have been granted a banking licence since 2008.

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  • The evolving needs of the SME

    Small business owners have unique needs, many of which are not addressed by traditional banking propositions. They are thus increasingly turning to challenger banks, FinTechs or non-financial institutions to service their financial needs. Banks have a real opportunity to grow market share across existing products according to the life stage of the SME. The introduction of value-add services on top of traditional core banking offerings is the need of the hour to service this emerging market base.

    Download our pdf to read more 

  • The future: SME services in a platform world

    Financial institutions must choose what role they want to play in the new world of open APIs. This will decide how they deliver innovative third-party products and services to SME customers. It has also become necessary for service providers to transition from a linear value chain to a platform-driven business model and embed themselves into wider ecosystems concerning external partners.

    Download our pdf to read more 

  • The rise of technology firms

    Technology firms are recognising the challenges faced by small businesses in obtaining finance and are using data to disrupt the traditional business banking model. We have focused on three areas that will be impacted by this disruption and given key considerations for traditional banks.

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  • Closing the gap: how do you create a future-proof SME bank?

    Digitisation provides an opportunity for new ways of working, deciding where to excel and how to differentiate. It also plays a crucial part in transitioning from bank to business partner. We have outlined five areas of focus that can help in this transformation.

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Summary

With the banking needs of SMEs changing dramatically, traditional banks need to keep digital at the heart of their new services. Firms that are best able to address the specific needs of the new-age customer are likely to come out on top, going forward.

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By

EY UK

Multidisciplinary professional services organisation