Get the Report! The Modernization Imperative for Insurance – in partnership with Datos Insights

By · August 20, 2021
8 minute read

Digital-first SME Banking: Key Learnings

Digital-first SME Banking: Key Learnings - Featured image Digital First_Repurpose_Unsplash #1

Small businesses need digital offerings just as much as they need finance. How are banks responding?

An artist selling his creative work online, two self-employed engineers producing software for a global company, and a baker’s family whose business operates in the neighborhood have nothing in common – at least at first glance.

One day, the artist wants to buy a drone to shoot pictures of wild animals, and to kick off a marketing campaign to raise funds for his short videos. The engineers must invest in upgrading the IT system, and the baker desperately needs to hire two more employees to meet the increasing demand for donuts.

Seen from this perspective, all these three micro and small businesses have one thing in common: the need for finance. Sometimes, an SME’s available cashflow isn’t enough to cover its current expenses, let alone its growth. Where should the artist, the engineers and the baker go?

Banks seem to be the obvious first choice. But, as The World Bank notes, SMEs are less likely to obtain bank loans than large firms. Instead, they rely on their personal savings, or cash from friends and family, to start and run their businesses in the early stages.

Digital First_Repurp #1 pict 2_Unsplash
In emerging markets, SMEs create 7 out of 10 jobs. However, access to finance is a key constraint to their growth

Who’s ready for better and more exciting services? 

SME customers want banks to offer them the financing they need. The International Finance Corporation (IFC) estimates that 65 million firms, or 40% of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year. 

SMEs also demand digital offerings that can help them manage their businesses: onboarding, account opening, payments, lending and so on.  

How are SME bankers responding to the needs of the market? What would be their first initiatives and triggers to turn into digital-first SME banks?  

FintechOS partnered with Efma to analyze the challenges and emerging initiatives in SME banking. The most valuable insights were published in the “Digital-first SME banking” report. You can find a selection of key learnings below: 

#1 To understand the complexity of SME banking, it’s helpful to consider the life cycle of a business 

The business banks or fintechs who understand this life cycle are more likely to create meaningful next generation services, our research found. 

Digital-first SME Banking: Key Learnings - Blue_The life cycle of an SME_1000x2430px

The life cycle of an SME 

Understanding the SME life cycle is key, Sue Douthwaite, a long-time SME banker, explained in a report that we published recently with support from Efma, a leading banking association. Start with considering the life cycle of a business: 

  • Phase 1: Planning, creativity, and ideas – requires building up reserves and savings for initial investment 
  • Phase 2: Pre-revenue planning and launch – establishing processes for invoicing or payments is needed 
  • Phase 3: Post-revenue growth – understanding cash flow requirements and managing expenses is key 
  • Phase 4: Expansion – Employing staff and the associated legal implications. Access to loans and working capital is vital 
  • Phase 5: Realizing the value and next iteration of growth – the greatest challenge for a successful and growing business is raising capital to realize its potential 

Source: FintechOS – “Digital-First SME Banking”  

#2 According to banks, digital business banking has become a red ocean; ecosystems are essential 

When they stepped into the financial market, most fintechs challenged incumbents with a simple current account product (with limited features that were free or low cost). But in just a few years, the market has become crowded and competitive. “Fast digital onboarding, and mobile apps as well as accounting integrations, are now the new norm”, the report shows.  

The demand for digital offerings boomed during the pandemic. For instance, Lidya, an international technology company established in Nigeria in 2016, was able to expand to Europe amid last year’s crisis.  

“At the height of the pandemic in March 2020, Lidya commenced operations in the Czech Republic and Poland and has experienced tremendous uptake in its services, especially among SMEs severely impacted by lockdown restrictions”, the report notes. 

In the first six months, Lidya issued US$2 million worth of loans to SMEs in both countries. 

Traditional banks are being pushed by nimble entrants like Lidya to transform their business models and digitize their offerings. To achieve that, banks need to build ecosystems with services that go beyond banking. The starting point is listening to customers. 

“HSBC Kinetic was developed using insights from over 3,000 small business owners, who told us they need a digital bank that helps them stay on top of their finances and understand what actions to take based on what their finances are telling them.” – Martin Hyde, Head of HSBC Kinetic  

“We believe the banks that will be successful will [be] those that are able to create ecosystems and offer complex value propositions to their clients – combining their financial products with some value-added services” – Tibor Csonka, Managing Director, Corporate Directorate, OTP Bank. 

#3 While banks continue to provide the same services they did 20 years ago, the real evolution is in how these services are delivered 

Banks have entered the digital space, with some even operating entirely within apps on smartphones. ABN AMRO, for instance, has introduced many new offerings. The bank has created a digital funding platform expressly for SMEs. They also developed TikkieZakelijk, a WhatsApp-based payment channel. 

“Never stop learning, that’s extremely important. That means sometimes you have to look beyond the borders of your sector. For example, inspired by the telecom sector, we developed a payment proposition where clients can choose between three payment packages” – Patrick Pfaff, Director Commercial Banking Clients, ABN AMRO 

#4 There isn’t just one path  

Each bank follows its own strategy, and from Efma’s interviews and the survey we conducted with SME bankers across Europe, one key learning is that “there isn’t one common path being chosen”. Banks are creating their own partnership mix based on their own situations. 

“Partners can produce a holistic, digital bank offering (like FintechOS), or a partner can be brought in for one specific product that a bank seeks to offer. 

“We have existing partnerships for providing services to SME customers, so we can say that we have started to experiment with partnerships and assess the impact they have on time to market” – Nina Arkilahti, Head of Business Banking, Nordea. 

#5 Banks everywhere are sitting on troves of data. The challenge is to tap into that data and provide customers with the right loans at the right time 

A loan at the right moment can be a key accelerator in the SME life cycle, Sue Douthwaite explained. To offer loans quickly and seamlessly, banks need the right tools to access and process the data they haveUnfortunately, many banks “are lacking the right IT tools to offer the type of digital quality that customers expect”, the report shows. 

Benefits for SME Banking 

That’s where partners like FintechOS can play a key role. FintechOS provides SME banks and other financial institutions with a scalable, customer-centric and data-driven platform called Lighthouse. You can explore how below. 

Benefits for SME Banking 

  • Customer-centricity 

Use customer data at any stage of any interaction. Customer data is an integral part of the platform. 

  • Connected to the Ecosystem 

Benefit from data and services provided by third parties to complement your own services. 

  • Fast Time-to-Market 

Launch products and customer journeys faster by building with modular Automation Blocks. 

  • Reduced IT Complexity  

Enable business teams to innovate by themselves with the low-code Innovation Studio. 

  • Continuous Innovation 

Use any data source or any service to improve your offerings. The Evolutive Data Core will grow with you. That’s what it’s made to do. 


Register here to read the full report. 

On the same topic: “10 Key Findings from the Efma Survey on SME Banking”  

For more findings on this industry, ➡️ follow the Insights section on our website. 

Share this article with your connections