By Martijn Hohmann, CEO and co-founder, Five Degrees
SME market opportunity: what’s it worth?
3.7 trillion Euros. That is the contribution that the small and medium-sized enterprise (SME) sector made to Europe’seconomy between 2014 and 2015, according to an annual report by the European Commission.
SMEs are vital for economic growth and include a huge variety of small and medium-sized businesses from sole traders and fast growth start-ups, to retailers and manufacturing companies. The sector is highly profitable and you would expect it to be well supported by the financial services community.
Within the UK alone, SMEs are the backbone of the British economy contributing approximately £200 billion a year. According to the Centre for Economics and Business Research, this is set to grow in the UK to £240 billion by 2025.
Despite the opportunity for business development, big banks in Western Europe have been under-servicing the needs of SMEs when it comes to the deployment of digital services. This isn’t a new phenomenon, and it isn’t because SMEs have shown a lack of appetite for their solutions. According to a recent PWC report there is a strong desire for digital services among the SME community.
Why are SMEs being underserviced by big banks?
One of the most obvious reasons for the neglection of the SME market is that big banks follow the largest source of revenue and returns, and SME profitability is lower than that of larger organisations.
However, larger revenue is not the only reason why SMEs are being underserviced and for the most part it is the architecture and environment that big banks operate within.
The application and onboarding process for many traditional banks is long and cumbersome, using manual paper-intensive processes for data collection which can take a considerable amount of time to complete. The process also leads to difficulties around initiating relationships due to complex ownership structures, by which time SME customers have become alienated and sought alternative providers.
In addition, the way big banks determine the value of a business opportunity makes it difficult for SMEs to gain access to its services. The nature of the SME growth model combined with a traditional vetting process, results in SME businesses appearing higher risk to engage in business with. This poses a problem when it comes to granting credit facilities and can lead to the abandonment or rejection of applications.
Finally, the demand from SMEs for more varied offerings includingP2P lending, blockchain, mobile wallets, and accounting and legal functionality all as one end-to-end service, is more difficult to support with existing legacy software systems deployed by big banks.
In recent years, there have been attempts made to support the sector, including the introduction of mobile and cloud technologies. However, big banks are lagging behind being able to create bespoke, tailored offerings matched to the needs of SME customers. Increasingly, SMEs believe that banks don’t understand their business or support them well enough which is something they will need to address from both a product and service offering, as well as a brand perception point-of-view if they are to keep ahead of the competition.
The emergence of FinTechs
Underservicingof SMEs by traditional banks is leading to a large disruptive transformation within the banking and finance world. SMEs are increasingly seeing the value in using non-banking financial technology entities who can support their evolving needs better providing access to loans, manage transactions, and facilitate payments.
Mobile-only and fully digital challenger banks are providing a variety of functions from finance, insurance, and investment solutions, to accounting and pension products – all on one platform. SME customers can view their services across one dashboard rather than having to go via multiple providers to access their information, improving user experience and saving time.
Harnessing the SME market opportunity
For banks to fully harness the SME market opportunity they must look to future-proofing their businesses and be open to new opportunities, and ditch archaic processes and nostalgic ways of working.
‘Open Banking;’ the opening up of customer data to third parties, will transform digital operations and help make onboarding and the delivery of services to SME customers more efficient.
Banks will only then be able to meet the demands of SME customers by working with third party service providers, to enable the integration of services through interconnected application programming interfaces (APIs).
Inertia is one of the biggest threats to big banks failing to capitalise on the opportunity that the SME segment presents. They must be open to collaborate or risk losing their relevance.