A recent webinar hosted by Banking Circle and The Paypers looked at how micro, small and medium-sized enterprises (SMEs) are currently being served when it comes to financial services, and the future of the SME banking model.
The webinar featured an esteemed panel and was moderated by Mélisande Mual, Publisher and Owner of The Paypers. Read on to find out what the panel members had to say on a range of issues impacting SME banking, and what the future could, and should, look like. You can also read more on this topic in Banking Circle’s latest whitepaper, Bounce-back banking: 5 markers for success in delivering SME financial services, here.
SME needs and segmentation
SMEs constitute 99% of companies in the EU, provide two-thirds of private-sector jobs and contribute to more than half of the total added value created by businesses in the EU. But with no two SMEs alike, banks can find themselves unable to provide the flexible, fast-paced banking solutions that SMEs really need to help them thrive.
According to Panagiotis Kriaris, the issues begin at the very root of how SME business is segmented. Many banks follow the EU definition of an SME, which is based on staff headcount and either turnover or balance sheet total. “The problem with this categorisation is the fact that this is based only on quantitative criteria,” Panagiotis says – which means that a host of other qualitative factors are ignored. “This is not very helpful for banks or financial institutions in understanding what kind of clients they have.”
Joel van Arsdale points out that there is a ‘catch 22’ when it comes to SME banking as they can often be misunderstood. “On the one hand, traditional banks struggle with profitability in SMEs because their operating models are too expensive as a function of serving multiple channels, including lots of people-based channels. On the other hand, the fintech mobile-only servicing model does not work for the profitable segment of SMEs,” he says. “There is a tendency to think of SMEs as being micro-sole-traders, when in fact the SME market has a broader set of segments and needs.”
Current pain points in servicing SMEs
According to Ghela Boskovich, there are two key areas in which SMEs are currently not well-served by the market: payments and credit.
The ability to initiate payments and use direct account-to-account payments is not yet fully realised for SMEs, which has a considerable knock-on impact and can create issues around reconciliation and liquidity management. Ghela says that in order to improve the situation for SMEs, access to “direct and real-time payments on a faster payment rail,” plus “better credit and risk profiling, and better and quicker distribution of that credit,” is needed.
Søren Skov Mogensen points out that many SMEs are also often unaware of what’s currently on offer from banks and FinTechs, and lack either the time or tools to find out more. “According to Banking Circle’s own research, less than half of SMEs said they’ve looked elsewhere for banking solutions that better suit their needs,” he says.
Are SMEs getting what they want?
Banking Circle’s latest research, which looks at the attitudes of SME business leaders across Europe, reveals a significant gap between their needs and expectations and the quality of advice and service they’re receiving.
It also suggests that there could be a level of overconfidence among traditional players: While two-thirds of banks believe they are keeping pace with technological change, the data suggests that some European SMEs are turning to alternative providers for faster, cheaper solutions – and more could follow.
Today, consumer expectations are increasingly shaping how SMEs expect to be served, says Don Ginsel. The success of money management apps in the retail space shows that consumers want a simple, consolidated view of their finances which they can also use for their servicing needs – and entrepreneurs want this too. “If you know something is possible as a consumer, why would you accept a lesser solution as an entrepreneur?” Don says. “B2B used to be far behind B2C with regards to the levels of innovation, but this is becoming increasingly unacceptable.”
What should the future look like?
According to Joel, payments providers such as Stripe or Mollie have proven the value of integrating financial services into core business software, such as web shop platforms. “There is now rapid expansion of integrated payments across many software verticals,” he says. “The same will happen to SME banking, where there is clear value of integration into ERP/accounting and many other types of software. Fast movers in this domain will benefit hugely in attacking the SME banking opportunity.”
For traditional banks, innovating remains a key challenge in preventing the loss of SME customers to newer players, says Søren. “Banking tech was once pioneering but has not been able to keep up with the pace of change in other industries, and the monolithic systems and in-house servers on which they are built have held them back from competing with the agility of new entrants,” he explains. These legacy systems now pose a significant challenge for banks deploying new software and applying best practices. By partnering with specialist providers in a platform or white label arrangement, banks can reduce costs and are empowered to offer tailored services through existing digital channels.
Open Banking could also play an important role in the future for SMEs, Ghela points out. As well as improving the availability of transactional history which could help credit ratings agencies to better understand small businesses, account aggregation will create a more joined-up approach, and enable SMEs to develop a single dashboard from which they can access a real-time overview of their business accounts.