The small / medium enterprise (SME) sector is fundamental to the British economy – there are six million SMEs (99.9% of the businesses in the UK) and together they employ 60% of the working population. Notwithstanding this, SMEs have been underserved by banks who have historically focused on larger businesses. Customer satisfaction scores are typically low, while innovation has been limited and focused on reducing cost to serve rather than enhancing customer service.
But things are changing. The possibilities opened up by new technologies and Open Banking, the emergence of disruptive new entrants, the opportunities for profitable growth, customers’ thirst for change and the catalyst of the Banking Competition Remedies (BCR) initiative mean that SME banking is, for the first time, the primary target for a huge range of players.
Over the last 12 months, we have had the privilege of working with BCR to support delivery of the Capability and Innovation Fund (CIF), which has distributed almost £500m to 15 firms to enhance competition and capabilities in the sector. Being so close to the CIF process has given us a unique opportunity to look into the future of banking for SMEs, with 165 hugely varied applicants across the four pools. Reflecting on what we have learned, and building on insights and experience from our other work across the sector, we have pulled together some considerations for providers looking to succeed in this busy market.
- Don’t do it all yourself
While there is undoubtedly hyperbole around the FinTech ecosystem, significant players are emerging with disruptive business models and high aspirations, building on new technology to challenge established providers.
Critically, these firms work together, providing a comprehensive range of services to customers through partnerships. New banks and providers such as ClearBank / Tide, Starling and Monzo leverage products and services delivered by the likes of Iwoca, Form 3 and CurrencyCloud. Many of the players in the market (new and old) are underpinned by payments providers such as Modulr and platforms such as 10x and ThoughtMachine. This new ecosystem enables customer choice and also makes it possible to provide SMEs with a broader, more sophisticated range of offerings which have, until now, been the sole province of much larger corporates – trade finance, real time FX, asset-based finance and many more.
Adopting this collaborative approach rather than the traditional “build your own” mentality allows these players to focus on optimising their own offerings, with the flexibility to work with emerging and varied partners as the market develops and the ability to bring services to market with unprecedented speed. Providers seeking to build everything themselves will be simply left behind by the agility of the market.
- Product push doesn’t cut it any more
SMEs needs are far broader than those met by banking products alone. Our research suggests they are looking for advice, help with admin, connections to local networks, access to a range of funding and much more. All providers, new and old, have to be very clear on how their propositions will meet the broad needs of their customers rather than conform to product-led approaches – and if traditional players don’t change this approach they will lose out to those who do. The offerings of Fluidly and Swoop, in particular, provide insights into how the new ecosystem can combine to meet this much broader spectrum of customer needs.
There are also real differences within the SME sector. A £10-20m turnover established SME, trading across Europe, is a very different business to that same firm 5 or 10 years earlier when it was an 18 month old start-up looking for a foothold in the market. Understanding the lifecycle needs of customers and how they evolve over time, and delivering propositions which specifically meet these needs, will be key in gaining and retaining a sustainable customer base.
- Data is key
API technology and its deployment through Open Banking is a central catalyst. While interesting retail propositions are developing, the real traction looks set to take place in the SME sector where the gap between customer needs and existing offerings is largest. Integration with accounting packages and the growth of “open finance” can provide a level of data on SMEs which will have huge impact on businesses’ relationships with their bank. Credit decisioning, next best actions, pricing and many other fundamental decisions can be enriched and honed, enabling a move away from the overly conservative, broad brush approach which has left SMEs underserved historically. RBS Invoice Finance already benefits from this approach – API technology, with companies like Codat in the vanguard, can transform the availability of data for Financial Services providers.
- Businesses need credit – but the right credit
While the size of it is debatable, there is no argument that there has been a significant gap between the demand for credit by SMEs and its supply by the banks. At the same time, some businesses have been able to get credit where the better solution would have been advice on tighter management. And the ancient adage, “Cash is King”, is as true as it ever was.
The range of propositions to fill this space, accessing alternative lenders with ambitions to grow while also helping SME owners understand their actual needs, was one of the dominant themes in the BCR applications. Cash flow solutions included suggestions on business decisions; lending providers emphasised the all-round relationship; and both moved well away from the guarantor model into genuine business finance.
At the same time, the supply of funding is broadening. There is institutional thirst for SME assets in the financial markets, while awareness of social / government / development funding is growing. The lending market for SMEs is evolving with extraordinary speed.
- The personal touch still counts
The high street banks’ withdrawal from the relationship manager model left SMEs craving face to face support. This is reflected in two potentially divergent models.
- First, the propositions from Metro and Nationwide demonstrate a clear future for the branch – but within a model which meets the needs of the customers, not the bank. Opening hours, service availability, community and location are all key considerations in delivering a successful branch - crucially as part of an omnichannel offering, not standalone.
- Secondly, as accounting packages automate bookkeeping and reporting, accountants are filling the advisory void. Several proposals to BCR sought to leverage and enhance their role within the SME sector and this dynamic is likely to develop and become ever stronger, requiring banks (especially digital only) to consider and build their role within a three way relationship.
These themes apply to branch based providers just as much as digital, to the established High Street banks and the new challengers alike. The winners in the market will adapt and respond to the opportunities available, working with new and different providers to genuinely serve the SME sector and deliver a fundamental challenge to the established order of this crucial part of the economy.