A new model for SME banking

Five data-driven ways banks can revolutionize their SME relationships and build value

By Kam Chana, Product Innovation Director, Temenos

SMEs, the lifeblood of our economy representing 90% of businesses around the world, have long been underserved by banks. Often seen as high risk and low value until the point at which they become visibly profitable; banks have typically had a reactive relationship with them.

To add insult to injury, SMEs have been disproportionately affected by the Covid-19 pandemic but accounting for such a large amount of the world’s economies, they must be better served and nurtured. They are however misunderstood; they want and deserve much more than just cashflow management and funding and banks are in the prime position to help them. By adopting a new digital model and embracing innovation, banks can create a win-win situation for themselves and SMEs. Here’s how.

Adopt an empowered business model

Most early-stage companies need knowledge and support, as well as funding, to help them grow. Banks that can create innovative products and services to move upstream in the SME’s business cycle and do more to nurture early-stage businesses into scale-ups, can help them become profitable. At the same time banks can gather information to approve lines of credit faster, so the SME can respond to challenges sooner as they arise.

For the bank, getting to know their SME customers early creates greater understanding and reduces risk. The proactive data-led approach allows banks to minimize operational costs by allowing more automated decisions on routine matters, allowing staff to focus on higher value activities.

Use open data to move beyond banking

SMEs often struggle to manage business operations due to a lack of resources. Many technology platforms exist to provide this support, but a typical SME would need dozens of software packages to cater for all its operational needs. Banks are in the perfect position to bring this support together into a single view.

There is clear evidence to suggest SMEs want their banks to be more holistic advisors. Research from Accenture found that 31 per cent of SMEs are looking for close engagement from banks, seeking help to optimise their business.

By embracing open data, banks can bring in data from other industries to provide new products and services for their customers, from recommending better utility providers to reduce costs, or linking with accounting software providers to develop additional services with broader data sets. This enables banks to take a more holistic view of their customers’ financial welfare and position themselves as a trusted advisor and guardian of data.

ABN Amro has embraced open data to create several value-add API products supporting different business functions.  Examples include its payments request application, Tikkie, and its Business Account Insights API, which allows SMEs to connect their ABN Amro accounts to their other financial systems (like ERP or TMS) and have a complete overview of real-time transaction details and balances. Innovative products and services like these suit the strategy of the bank whilst providing its customers solutions to their broader business needs.

Be Intelligent

Banks have tremendous amounts of data, but most don’t create enough value from it. Intelligent banking uses AI and advanced analytics to analyse data and not only understand what is likely to happen, but to suggest courses of action and their implications.

SME owners might be fantastic at floristry, design or manufacturing, but that doesn’t necessarily mean they are adept at managing their business operations or finances. By using a combination of data analytics and AI to help business owners make better-informed decisions, banks can support SME owners with experiential intelligence and knowledge, and simulate multiple scenarios to solve day to day problems and reach better outcomes.

By taking a partnership approach the bank gets much greater insight into the business’ operations and growth intentions, as well as de-risking the investment by providing business support.

Become a trusted partner, not just a product utility

In the drive to customer-centricity, banks need to change their relationships from transactional to trusted advisor status. One way is with a “nudge”, utilising behavioural economics to encourage behaviours and decisions more aligned to the survival and growth of the business. A nudge could drive reward-based engagement anchored to the SME’s growth rather than the banks’ intentions, ensuring time-poor business owners don’t miss key information and moments. Creative solutions like this create a relationship where the customer is much more actively engaged with their finances and the bank generates trust and value, increasing customer loyalty.

Fund predictively and proactively

Funding is the lifeblood of SMEs but there is a gap between what they are demanding and what banks are positioned to provide. In 2019, this gap was estimated to be 3 per cent of GDP or €400bn in the Eurozone.

Banks can help to close this gap by acting as marketplaces or brokers for other lenders or investors, where the request falls outside their risk appetite.

By doing this, banks can generate increased sales through brokering activity while maintaining their risk management and enhancing their customer relationships.

Santander UK and Funding Circle’s referral arrangement sees Santander proactively refer SME customers seeking a loan to Funding Circle. In return Funding Circle signposts borrowers to Santander for day-to-day relationship banking support. The relationship makes it easier for SMEs to access finance and shows how banks and alternative finance providers can work together for the benefit of SMEs.

A commitment to innovation is essential

SMEs deserve better from banks, and technology makes it possible for banks to simultaneously create value for SMEs and themselves.

The next generation of SME propositions requires a new service model, one that helps them survive the odds, achieve sustainable growth, and become self-empowered. Banks can enable this growth, not just with the implementation of cutting-edge digital technology, but also with a commitment to thinking differently, introducing new value add services and business models. All it requires is a fresh mindset and a culture of innovation within an organisation to see the value of SMEs.