The five-step journey to SME banking transformation

To help SMEs succeed, banks must first understand their challenges. Here’s where to start.

Small and medium-sized enterprises (SMEs) are often the hardest hit when crises emerge, and the COVID-19 pandemic has been no exception. A recent EY survey found that almost three-quarters (74%) of small businesses said they have been impacted negatively by the pandemic, with revenue, profit margins and sales volumes taking the biggest hit.

This type of short-term impact was to be expected, but the pandemic has also led to more profound change in the SME world — like all of us, small business directors have been forced to look inwards and think about their company’s place and purpose in the economy. As a result, more than half (56%) have decided to change their business models in response to changing market conditions, with the majority leaning towards more digital channels.

1. Conscious digitization

Digitization is hardly a new trend, but it is one that has increased dramatically during the pandemic. SMEs are turning to more digital business models, leveraging e-commerce and marketplace platforms to drive sales. This is having an impact on their interactions with providers, and a majority of SMEs now expect to be able to engage with their banks through a variety of digital channels.

Over the last 12 months, 43% of SMEs have increased their use of online banking services via computers or tablets, and 40% used more mobile banking services. In contrast, 38% said they decreased their visits to branches and offices, and 24% reduced their use of ATMs. While it was certainly influenced by lockdowns and pandemic restrictions, this trend is set to continue, particularly as customers’ preference for card and mobile payments makes branch visits increasingly unnecessary.

If they don’t want to lose their market share, banks need to pay attention to what SMEs really want. When asked specifically about the onboarding process, SMEs listed human interaction, transparency, speed and automation as priorities. More generally, respondents also shared their main satisfaction drivers: first, it is crucial that financial providers be responsive to client requests; second, a clear understanding of the customer’s business is required; and third, making the customer feel valued will go a long way in enhancing loyalty.

Getting these aspects right will allow banks to capitalize on the trust they inspire in their SME customers, and to build a strong foundation for the remaining steps in the journey.

3. Credit transformation

There are also significant gaps between customer expectations and bank offerings when it comes to time to credit: of the SMEs who received bank loans to help them through the COVID-19 crisis, 48% would have liked faster access to credit. This trend is not limited to pandemic conditions: in general, more than half of SMEs (55%) would like to be funded within seven days, and 31% would like to receive funds within three days. This is far from the current time it takes most banks to approve credit.

To address this issue, banks should leverage the incredible wealth of data available to them to gain a real-time understanding of their clients’ credit health. Open banking is making it easier to garner data from new sources, including accounting software and various specialized databases, and banks need to tap into this opportunity. In the future, the augmented relationship manager will have access to a range of artificial intelligence (AI) tools to process this data, such as smart pricing, that will enable fast, efficient and customized decision-making. By embracing this trend, banks will not only future-proof their business but also create new revenue opportunities.

But the credit transformation goes beyond speed. The pandemic has brought deep and meaningful changes to the SME landscape, and banks will soon be expected to rethink the way they manage their portfolios. Of the companies that received credit during the crisis, almost a third (29%) are very or extremely concerned about repayment. This is undoubtedly a risk that will have to be managed.

At the same time, there will also be new opportunities to explore while a greater number of SMEs entered the “decline” phase of their lifecycle during the pandemic than before, only 1% went into the “exit” phase. This suggests that instead of selling, SMEs are trying to adapt and refocus their business in new market conditions. Banks need to shift their focus from short to long-term profitability in order to provide them with the support they need for this transition.

4. Personalization and flexibility

As more and more data becomes available, and as competition from Big Tech puts pressure on their market share, banks will need to create new customer-centric engagement models and products that can deliver more progressive and strategic support and make them a more trusted advisor.  For example, augmented relationship managers will become a cost-effective solution to meet clients’ expectations of personalized service with a human touch, but the change will entail more than AI adoption.

Moving beyond traditional segment and data silos will be crucial. Instead of categorizing SMEs based on their turnover or number of employees, banks should place greater focus on where they are in their lifecycle, from conception to growth, maturity, decline and exit. And as part of new segmentation models, getting to the heart of SME behaviors and predicting needs will be critical.

As seen above, the SME lifecycle has been accelerated by the pandemic, yet companies’ needs and expectations change dramatically throughout the journey. It is up to financial services providers to monitor their progress, predict the tools and products they will require each step of the way, and offer them in the most relevant manner.

New purchase models, such as subscriptions, will also become more prominent as the consumer trend of hyper-flexibility seeps into the SME world. Businesses will expect to be able to add and remove financial products from their portfolio seamlessly through integrated corporate or marketplace platforms.

The survey shows that SMEs are very open to sharing more data to make this personalized experience a reality. Banks that embrace this change can also count on new revenue streams in the long term, as 50% of SMEs would be willing to pay for this enhanced experience.

5. The SME ecosystem

In time, SMEs will expect a fully integrated platform from which to access not only financial products, but of all the services they need to run their businesses. In the survey, over half (56%) of SMEs said they feel this platform would help to better support them in their current stage.

It is worth noting that more than one-fifth (22%) of SMEs would be willing to access such an integrated platform through a bank, and more importantly, that 17% would be willing to pay for it.

The most forward-thinking banks can capitalize on this trend by moving toward a marketplace model themselves, building a single dashboard where SMEs can buy core products (such as credit) and non-core services (such as ESG consulting), but also be connected to ancillary service providers such as web designers or insurers.