Competition in the market for SME banking is kicking into high gear.
Incumbents may still hold on to the bulk of market share, but challengers of all stripes are making inroads. That’s why we thought we’d take a look at where the market is at right now and set out our vision for how traditional banks should respond to a rapidly evolving landscape.
New players are targeting SME lending
Across Europe, SMEs experience more difficulties in accessing finance than larger firms[i]: the most recent data even shows an increase in bank loan rejection rates.[ii] So what’s the upshot? There’s been a net decline in demand for SME bank loans[iii], and almost half of SMEs now say that they’re not a ‘relevant’ source of finance for their businesses. Of course, SMEs haven’t stopped needing finance, but if they aren’t looking first to their bank, where are they turning?
The answer should worry banking leaders. Since 2015, there’s been a steady upward trend in the use of alternative sources of finance.[iv] Online markets for SME finance have been growing quickly across Europe, with $7.1 billion loaned in 2017.[v] New competitors are coming to market in the shape of eCommerce, peer-to-peer and non-bank direct lenders: Amazon is exploring an expansion of its SME lending business in partnership with Goldman Sachs[vi], lending platforms such as MarketFinance and Funding Circle offer fast access to funds, and iwoca has loaned over £1 billion to SMEs in the UK and Europe since its launch.[vii] And every one of them wants to get between banks and their SME customers.
Challenger banks are gaining market share
There’s cause for concern, too, in the market for business current accounts. On the face of it, things look good for traditional banks: they hold the majority of market share and their customers appear loyal. In the UK, for example, only 15% of SMEs say they’ll switch banks in the next year.[viii] But while SMEs often trust the brand and reputation of their bank, there are some who argue their ‘loyalty’ is really down to a lack of differentiation between incumbents.
This has presented an opportunity for a wave of challengers to target SMEs with slick digital offerings. From Tide and Starling in the UK to Qonto in France, and Penta in Germany and Italy, the focus is the same: offer simple, low-cost products; include useful features for financial-management, such as expense tracking, invoicing or book keeping; and create fast and frictionless customer experiences.
But the challengers won’t stop there, of course. They have the customer centric-culture and agility to serve the unmet and evolving needs of SMEs, and their long-term prospects will be decided by their ability to expand the boundaries of the SME banking experience.
As the CEO of a challenger described their mission, “we want to be the operating system of an SME, not the application layer.”[ix] The vision is to be at the centre of how an SME runs their businesses, rather than simply providing financial products in the background. With nimble, ambitious and well-funded competitors like these, traditional banks need to take decisive action.
Incumbents are playing catch up on customer experience
While the arrival of challengers has made traditional banks recognise that customer experience is fast becoming the new battleground for growth, playing catch up with the newcomers isn’t easy. As a leading neobank recently put it:
“While [incumbents] can copy our features, they cannot copy our cost base. They have to contend with legacy technology, not to mention the massive costs of maintaining a branch network and the slowness to action that is inevitable with large bureaucracies.”[x]
It’s true that banks face many obstacles to speeding up their digital transformation. In fact, 41% of SME banking leaders say that their biggest challenge in the previous year has been technology adoption, while 53% say it’s the area they’d be most likely to invest in.[xi] Some banks are making progress, though, whether it’s by launching greenfield ‘flanker’ banks to meet the threat posed by challengers (HSBC’s Kinetic and RBS’s Mettle, for example) or through acquisition, such as BBVA’s purchase of Holvi.
These are all steps in the right direction, but there’s still a lot of work to do to get their core businesses fit for the future, and with competition intensifying the urgency to act is getting stronger. A bank might be tempted to funnel investment into a ‘big transformation project’, but the truth is most fail.[xii]
Fortunately, plug and play solutions have matured to the point that digital customer journeys can be launched alongside legacy systems in a matter of weeks. Hyper-personalised SME banking, tailored to customer needs and powered by automation, is now easily achievable, and the banks that act fast will sharpen their competitive edge when they need it most.
Today’s threats and tomorrow’s opportunities
In this age of growing competition and shifting customer expectations, banks have to tackle two challenges. They have to respond quickly to the threats to their market share, and they must take the right actions today to make sure they’re relevant in the future. Put another way, they need to achieve quick wins while working on their long game.
Our view is that, with the right technology, banks can do both at the same time: they can tackle today’s threats while seizing tomorrow’s opportunities, and they can do it by following taking the 4 Steps to Future-Fit SME Banking:
It may seem ambitious, but the potential rewards and the risks of inaction are equally great.
These are challenging yet exciting times for SME banks, but the ones that act fast can set themselves on the path to success in the digital future. And we believe our vision of The 4 Steps to Future-Fit SME Banking can help them on their way.
This article is part of a series of FintechOS articles on SME banking. For more findings on this industry, ➡️download our whitepaper from here: https://bit.ly/2z0FpGT
About this whitepaper:
We wrote this whitepaper to explain the why and how of the four steps we be believe are critical for future success. We’ve gathered the latest research on the state of the SME banking industry and combined it with insights from SME banking leaders spearheading digital change in their organisations. The result is a clear-eyed view of where the industry is at this moment and the actions banking leaders should take to win in the digital future.
[i] European Investment Bank, 2018, Investment Report 2017/2018: From Recovery to Sustainable Growth
[ii] European Central Bank, 2019, The euro area bank lending survey – Fourth quarter of 2019
[iii] European Central Bank, 2019, The euro area bank lending survey – Fourth quarter of 2019
[iv] OECD, 2019, SME and Entrepreneurship Outlook 2019
[v] OECD, 2019, SME and Entrepreneurship Outlook 2019
[vi] Financial Times, 3 February 2020, ‘Goldman Sachs in talks with Amazon to offer small business loans’: https://www.ft.com/content/41866efe-4521-11ea-aeb3-955839e06441
[vii] UKTN, ‘iwoca announced £1bn milestone on funding SMEs’: https://www.uktech.news/news/iwoca-issues-1-billion-in-funding-to-over-30,000-small-businesses-20191104
[viii] Accenture, 2019, Finding the Balance: the forces at play in UK commercial banking
[ix] Sifted, 3 June 2019, ‘The online business banking startups compared’: https://sifted.eu/articles/sme-small-business-banking-startups-europe-compared/
[x] Business Times, 10 May 2019, ‘Banks waking up to fintech threat throw billions into digital’: https://www.businesstimes.com.sg/banking-finance/banks-waking-up-to-fintech-threat-throw-billions-into-digital
[xi] International Finance Corporation (World Bank Group), 2019, Banking on SMEs: Trends and Challenges
[xii] McKinsey, May 2016, ‘The ‘how’ of transformation’: https://www.mckinsey.com/industries/retail/our-insights/the-how-of-transformation
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