Why SMEs are the number one market opportunity in digital banking
By Sudeepto Mukherjee, SVP and head of financial services at Publicis Sapient, and Pawan Udernani,digital transformation lead, financial services, at Publicis Sapient
With the Brexit negotiations reaching a critical stage, the UK is under greater pressure than ever to do all it can to improve productivity and drive economic growth. Against this backdrop, the SME sector is becoming a major focus for the government because of its potential impact on both the economy and society.
The Federation of Small Businesses estimates that SMEs accounted for 99.3% of all private-sector businesses at the start of 2018 and employed 16.3 million people, or 60% of all private sector employment in the UK. Aggregate annual turnover of UK SMEs was £2 trillion, 52% of the private sector total. No matter what the outcome of Brexit, the ability of this sector to grow will largely define the prosperity of post-Brexit Britain.
Despite representing a huge market, the SME sector has always been hard for banks to serve efficiently. There are many reasons for this, including the diverse types and needs of small businesses (a clothing manufacturer is very different from a furniture maker, for example), the sector’s price sensitivity and its geographical spread.
However, the combination of the Brexit imperative and the availability of new technologies creates a huge opportunity for banks to make a meaningful contribution to raising productivity and growth in the SME sector by providing rapid, frictionless access to capital and credit. Digital technology provides tools to reach customers at lower cost and deliver services very efficiently. This in turn frees up the bank’s capital to allow it to serve the market better.
There is an important opportunity for banks here, but also a necessity. They have historically focused on larger corporate customers as their main market – a strategy that worked well before the financial crisis when the global economy was growing strongly. Since the crisis, slower global growth has put the spotlight more on the health of domestic economies. In almost every advanced economy, therefore, SMEs, which are overwhelmingly domestically focused, now represent an important lever to increase total factor productivity and therefore gross domestic product.
On the upside, there is much to play for: SMEs represent a growth segment with unmet needs that is forecast to contribute £241bn to the UK economy by 2025, a 19% increase from 2018.
Can banks grab this opportunity? For the winners, success will not only help increase their return on equity, but also help them to regain public credibility and trust by proving they can be a catalyst for growth and prosperity.
In the retail banking segment, the leading banks have been largely on the backfoot, playing catch-up with fintechs and major digital companies such as Google and Amazon that are setting the benchmark for customer experience and value. The pressing need for banks to reclaim leadership in the SME and broader corporate segment is clear.
In Publicis Sapient’s work with leading banks and investors, we have seen a real opportunity not only to offer new value propositions but also to reimagine current offerings to implement some very innovative digital centric products that can transform the experience of SMEs in areas like onboarding, lending and trade finance. Here are some focus areas that can help banks unlock SME growth and productivity:
First, they need to adopt a customer-led approach to providing products and services. Historically, banks have been organised around products – they have separate departments for lending, trade finance, cash management and so on. But SMEs don’t want to have separate conversations with multiple departments. The traditional, product-centric structure of established banks makes it very difficult for them to cater properly for the diverse needs of the SME segment and create a compelling customer experience. Even the process of taking out a loan can vary widely, depending on the type of business seeking to borrow.
Being customer-centric could also mean that banks might have to diversify their services to ensure they can meet the end-to-end needs of the SME market. In most cases, SMEs are looking to reduce complexity and deal with fewer providers – banks can facilitate this by offering a broader set of services that would be attractive to a larger base. This could involve leveraging their partner network, for example to provide essential services like tax, invoicing and even property maintenance. But it could also involve the creative use of their own IP to benefit their customers, for example in providing digital authentication services, fraud detection and even IT provision such as access to cloud and network infrastructure.
Banks need to leverage digital technologies to reduce costs and add value. Modern tools and techniques are finally making it possible to serve the vast SME customer base at lower cost. This potentially allows banks to deal with complex cases like loan defaults, cross border disputes, bankruptcies and so on without raising the cost for all customers.
We already see banks exploring Artificial Intelligence technologies, for example to allow faster onboarding of customers, automated credit checking and algorithmic predictions of defaults. These are all exciting use cases, but most are still at the proof of concept stage and are not being applied at scale. Techniques like these need to break out of banks’ innovation centres and take their place at the heart of the value chain. Modern approaches like agile and design thinking also drive innovation and speed of execution. Banks need to embrace them to make a meaningful difference.
They must also standardise their processes. Basic operations like Know Your Customer data-gathering or arranging a Letter of Credit can be hugely time consuming and frustrating for customers because every institution does it differently and the process usually involves a lot of manual document checking. Industry groups and government must work with banks and SMEs to streamline this. We have already seen this happen in areas like derivatives clearing and FX settlement – it needs to happen in SME banking.
Standardising processes will not only make the banking supply chain more efficient, it will also enable institutions to realise much greater value from the huge quantities of data they hold on SMEs. Data fuels the digital economy but it can be used effectively only if it is available in standard formats. Standardising data around identity, transactions, invoices and so on will make it much more valuable for all parties. The more usable data banks can access, the more they will be able to use sophisticated models to enable rapid onboarding and loan underwriting.
One of the key reasons banks have traditionally concentrated on large corporate customers is because there is a large amount of publicly available information on them, which reduces the risk of lending to them. The relative lack of information on SMEs has led to banks regarding them as higher risk, resulting typically in higher interest rates or no offer of finance. Access to more information on SMEs via their digital footprint will give banks a better view of the risks and makes the market more easily and efficiently addressable. Fintechs such as SME-focused bank Oaknorth are already showing the way.
These may seem like straightforward fixes but they are extremely difficult to implement because of banks’ legacy systems, product-centric structures and poor understanding of the power of technology. To succeed, banks need to redesign their services to put the customer at the centre. Leading providers in other sectors, like Netflix or Domino’s, have used technology to create a stronger proposition and better experiences for their customers. Why not in banking too?
Ultimately, digital can improve the productivity of banking for SMEs, and that in turn can improve the productivity of SMEs themselves – to the benefit of the whole UK economy.
The change requires investment, certainly, but will pay huge dividends if it drives customer acquisition and growth. Major UK banks have the capital and the reach to do this – what they also need is strong leadership and strategic intent. Taking this path will ensure that whatever headwinds await post-Brexit Britain, we will have stronger growth and higher productivity to help us deal with them.
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