By Leonardo Mattiazzi, EVP, Global Innovation at CI&T
Being a small or mid-sized business owner is a tough game any way you slice it — the United States Bureau of Labor Statistics asserts that 1 out of 5 new companies call it quits within the first two years of operation. Now, with COVID-19 rampaging around the world, the need for good financial management and operational decisions is even more important, with more than half of businesses that closed during the pandemic (60 percent) predicted not to reopen.
So it’s a bit of a quandary when you consider that banks aren’t rising to the occasion and giving small and mid-sized businesses the support they need, beyond the obvious servicing of PPP loans. Instead, initial research from CI&T indicates that SMEs are tapping a host of FinTech options to meet their financial management needs — sometimes even for services that would typically be seen as banks’ territory. The leaders of these companies reported feeling well supported and that communications with their banks were good, but getting banks more fully into the game would potentially broaden their opportunities for customized financial help. This could provide much more stability and allow more companies to survive through and thrive beyond the crisis — and not just this one but the other tough times that always present themselves in the life of a small business, as well.
Why are banks and SMEs so disconnected?
Based on our research, SME leaders generally don’t see banks as institutions that can help them run their businesses. And part of this might be because, although some SME products and services are out there, banks simply have yet to present an end-to-end customer journey designed specifically for small and mid-sized companies. Instead, they’ve approached the commercial sector much like they have personal retail banking. They simply have not put enough effort into understanding what the companies need or thought about how to play a more meaningful role in the life of a business.
Each bank has a choice of strictly sticking to the traditional role of accepting deposits and extending credit or becoming the true backbone of financial wellness for businesses — which entails a very different, and much more proactive, attitude towards the services it provides. There are good examples to learn from, including this one from Alibaba and Ant Financial. Of course, Alibaba has resources and capabilities that are very different from a bank’s — but still, if banks passively accept their ineptitude to be closer to their customers, foregoing using digital capabilities to go beyond the basic expectations, then it’s always going to be FinTech and BigTech who will fill the gap.
This lack of connection and technological progress might be contributing to the view today’s entrepreneurs have of banks not being able to help well. Further, banks have to be able to sort through all the regulatory, registration, and other legal considerations, which can be quite complex when trying to deal with companies across states or even other countries. Banks also must consider controlling overhead when introducing new services and how to monetize them, as simply increasing common charges only reinforces certain negative images that SMEs have regarding banks, and they must determine profitability in a wide range of company/industry situations. The number and location of branches a bank has obviously plays a big role in that equation but also in customer reach. Segmenting SMEs and truly understanding how to best leverage each type of resource for each of those segments may be the best answer for banks to truly connect and work well with commercial customers.
The incredible opportunity banks need to seize right now
Admittedly, meeting the needs of small and mid-sized businesses well isn’t a simple affair. There are very real differences between industries and operational goals. For instance, one business might need to do a lot of international transactions online, whereas another does most of its sales in-person locally.
But it is well worth the effort for banks to figure out how to deliver. Small and mid-sized businesses currently represent an impressive $6 trillion or so of GDP. Depending on what a bank considers “mid-size business,” that number could be even bigger. Snagging those accounts could translate into millions or even billions for banks, even if some of the companies eventually close their doors. And since at least some of the companies banks work with will scale up, the yields could get only bigger over time, when small clients become large ones. So there’s a huge opportunity for banks to capitalize on if they establish good relationships from the get-go.
The first step to those relationships, however, is for banks to better understand and empathize with their customers, especially small and mid-sized business customers. Just as they did for individuals, banks need to show interest and better understand how SMEs work, what their preferences are, and how they expect their operations to change in the future. This is as much about technical details (e.g., what a company’s application infrastructure looks like) as it is cultural or personal ones (e.g., wanting to interact face to face instead of completing the transaction or task online).
Once a bank has this data and generates insights from it, they can work on creating solutions that are tailored for specific SME segments. Although banks can offer these solutions independently, they can also create mutually beneficial partnerships and leverage the existing FinTech ecosystem. An outstanding example is Cross River, a small bank in New Jersey that became the 4th largest lender of PPP loans during the pandemic, helping more than 100,000 businesses by partnering with a wide array of FinTech firms who acted as loan originators, such as Affirm, Betterment, Wealthfront, Intuit, Gusto, and many others — which are already part of the day-to-day of small and mid-sized business owners. Whatever the setup, support must be adaptable enough to grow with the SMEs, their lifecycle, and new market realities.
COVID-19 is making all of us personally and professionally reconsider what we do and why. And in that context, both banks and consumers are taking stock and changing how they behave. This provides the perfect foundation for taking new reasonable risks, restructuring, and collaborating. If banks grab this clear opportunity with enthusiasm and good planning, then they’ll be instrumental to the world’s ability to move forward.
A quarter of banking customers noted an improvement in customer service over lockdown, research shows
SAS research reveals that banks offered an improved customer experience during lockdown
This represents some good news for banks in an extremely challenging time, with 59% of customers also saying they’d pay more to buy or use products and services from any company that provided them with a good customer experience over lockdown.
The improvement in customer experience also coincides with a rise in the number of digital customers. Since the pandemic started, the number of banking customers using a digital service or app has grown by 11%, adding to an existing 58% who were already digital customers. Over half (53%) of new users plan to continue using these digital services permanently moving forward.
Brian Holden, Director, Financial Services at SAS UK & Ireland, said:
“It’s notable that in times of need customers value being able to communicate with their bank and place an even higher value on good customer service. A rise in the number of digital customers means banks can now reach a wider audience online, leveraging AI and analytics to offer a more personalised experience.
“There is work to be done, though. Even greater personalisation is needed if banks are to win over the 12% of customers who felt banking services deteriorated over lockdown. And this personalisation will need to get right down to a segment of one to properly reflect the unique circumstances some individuals now find themselves in due to the pandemic.”
While the number of digital users grew over lockdown, there is still a quarter (24%) of the banking customer base that have chosen not to make the switch to digital services.
Meanwhile, failure to offer a consistently satisfactory customer experience could prove costly for banks, with a third (33%) of customers claiming that they would ditch a company after just one poor experience. This number jumps to 90% for between one and five poor examples of customer service, so this just underlines how much retail banks can win or lose in these difficult times.
For more insight into how other industries across EMEA performed during lockdown, download the full report: Experience 2030: Has COVID-19 created a new kind of customer?
Swedish Bank Stress Tests in Line with Recent Rating Actions
The Swedish Financial Supervisory Authority’s (FSA) latest stress test results show major Swedish banks’ robust ability to absorb credit losses. The results support Fitch Ratings’ view that short-term risks have abated in recent months, and are in line with Fitch’s assessment of major Swedish banks’ capitalisation at ‘aa-‘, which was a factor when Fitch removed the ratings of Handelsbanken, Nordea (not covered by the FSA’s stress test) and SEB from Rating Watch Negative in September.
The FSA estimated about SEK130 billion of credit losses over 2020-2022 for the three largest banks (Swedbank, Handelsbanken and SEB) under its stress test. This represents about 220bp of their loans, or about 70bp annually. However, the banks’ pre-impairment profitability in the stress test could absorb credit losses of up to about 110bp of loans annually. Fitch’s baseline expectation is for credit losses below 20bp of loans in 2020 and 8bp-12bp in 2021.
Capital remained strong under the stress test. The average common equity Tier 1 (CET1) ratio fell by only 2.8pp (1.9pp if banks did not pay dividends) from 17.6% at end-June 2020. The capital decline was not driven by credit losses, which could be absorbed by pre-impairment profitability, but by risk-weighted asset inflation.
The three banks’ 3Q20 results showed that capital has been resilient despite the coronavirus crisis. The banks had a CET1 capital surplus over regulatory minimums, including buffers, of almost SEK100 billion (excluding about SEK33 billion earmarked for dividends). SEB had a CET1 ratio of 19.4% at end-September, Handelsbanken’s was 17.8% and Swedbank’s 16.8%.
The SEK130 billion credit losses under the latest stress test are lower than under the FSA’s spring 2020 stress test (SEK145 billion), which also covered a shorter period of two years. However, they are still larger than the actual losses incurred by the three banks during the 2008-2010 crisis. This is despite tightened underwriting standards by the three banks in recent years, including, in the case of SEB and Swedbank, in the Baltics, the source of most of their loan impairment charges in the previous crisis.
In its baseline economic forecasts, the FSA assumes a harsher shock to Sweden’s GDP in 2020 and 2021 (-6.9% and 1%, respectively) than Fitch’s baseline (-4% and 3.4%), although it assumes a similar recovery by end-2022. It also assumes real estate price corrections, which appears particularly conservative in light of a 11% housing property price increase over January to November 2020.
The ratings of Handelsbanken (AA), Nordea (AA-) and SEB (AA-) are on Negative Outlook due to medium-term risks to our baseline scenario. The rating of Swedbank (A+) is on Stable Outlook, reflecting significant headroom at the current rating level following a one-notch downgrade in April due to shortcomings in anti-money laundering risk controls.
Future success for banks will be driven by balancing physical and digital services
Digital acceleration due to COVID-19 has not eliminated the need for bank branches
Faster service (23%), smaller queues (26%) and longer opening hours (31%) are among customers’ biggest asks of their bank branch, new research from Diebold Nixdorf today reveals. But with 41% consumers saying they would be comfortable to engage with all banking services via an app, it is vital that banks respond to the full spectrum of customer needs – balancing and evolving their offerings on multiple fronts.
A third (35%) of customers say they will always want access to physical, in-branch banking services in some capacity and one in ten (10%) consumers will never bank predominantly online in the future. This demonstrates that there remains an important role for the services a branch provides. This role, however, continues to shift away from purely transactional banking:
A quarter (26%) value face-to-face advice when it comes to their banking needs
One in five (18%) seek advice on different products
17% want to speak to the staff or other customers.
Matt Phillips, Diebold Nixdorf vice president, head of financial services UK & Ireland, said: “The majority of banks have spent the last decade focusing on their digital strategies and investing in improving – or establishing – their online customer experience. However, the data shows that there is still an essential role for physical branches. Banks now increasingly face the challenge of continuing to provide customers with access to a range of physical and as well as digital services, giving them the flexibility to choose the best service for them at any given moment in time.”
When looking beyond the impact of COVID-19, planned branch visits by customers are expected to rebound to 28%, following a dip to 11% during lockdown. And when asked about the new services they’d like to see inside their bank, sixteen percent of respondents said more self-service machines would improve their in-branch experience.
Matt Phillips continues: “In a world that is fast evolving and where the future is digital, there’s no doubt that high street banks must, and are, responding to the needs of highly digital customers. But not every customer requirement is digital. There is still a strong need for physical bank branches and the interaction and services they offer, and striking this balance between physical and digital is where the industry must come together to provide solutions. For example, building a strong, leave-behind strategy is something we’re seeing across the board when banks have to close branches, ensuring customers have access to self-service machines to complete all their transactional needs.”
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