The SME sector is a diverse profitable segment, covering fast growth start-ups and scale-ups to medium-sized businesses and enterprises. According to Accenture’s SME Banking report UK banks alone could potentially unlock £8.5 billion in new revenue streams by 2020 solely within the SME market. Below, Martijn Hohmann, CEO and Co-Founder of Five Degrees, explains.
You would think that industry would be saturated by banking and finance service providers ready to capitalise on each and every opportunity. However, a report published by PwC in 2015 shows that banks in Western Europe have been under-serving the needs of SMEs.
Why are traditional banks neglecting SMEs?
Despite the attractive revenue opportunity, traditional big banks are neglecting SMEs. One of the main reasons is the process of ‘hoop-jumping’ that customers need to participate in during the onboarding process. The structure of ownership can be confusing, leading to challenges around kicking off a relationship with SME businesses. SMEs will quickly lose interest in the service offering if they are not provided quickly enough, with multiple systems of paper, digital, and telephone on-boarding making the approval journey for customers highly cumbersome, clunky and frustrating.
Another challenge is the way that the SME growth model is perceived by large financial institutions. Banks will determine the value of the business opportunity assessing a number of tick-boxes to calculate the level of risk of working with the company in question. This poses problems when it comes to granting credit facilities to SMEs, as they are seen as higher risk for conducting business with. Banks will also assess the level of profitability, with larger organisations taking priority and SMEs ending up at the bottom of the heap.
A final hurdle is the existing legacy software systems that big banks operate on. These systems prevent banks from servicing SME customer demands which go beyond traditional offerings. This removes the ability to operate an agile add-on service outside of their core banking services. For example, a customer may desire to add mobile wallets, legal, accounting, P2P lending, and blockchain as one end-to-end service. Nine times out of ten, big banks are not set up to deliver this type of offering.
Enter the ‘Challenger Bank’
Challenger banks are causing a big disruption in the banking and finance community, harnessing the opportunity that traditional banks are failing to capitalise on, by providing greater access to loans, payment solutions, and seamless transaction management. They are also enabling SMEs to use their services at speed without the need for physical paper-work, reducing the amount of time that it takes to on-board a new customer.
Our customer, KNAB bank, is a great example of a leading challenger bank that is seizing the SME market opportunity in The Netherlands. In 2014, KNAB was the first in the market to create pure digital user experiences for SME onboarding. KNAB is also embracing ‘Open Banking;’ opening up their APIs to include third parties to support a variety of additional functions. As a result of its highly personalised, flexible approach to business, KNAB has become the go-to SME bank of the Netherlands with over 175,000 customers.
Open collaboration the key to long-term success
Many large banks are still licking their wounds from the credit crisis of a decade ago. Now is the time to focus on the future with an agile approach to business, not attempt to re-live the past. For financial institutions to fully seize the SME market opportunity they must be harness ‘Open Banking.’
For many big banks it is inertia which is holding them back from the market opportunity. If they continue to operate as closed business protected by high-walls they risk losing their relevance and share in the SME market entirely. Open collaboration by big banks within the banking and finance ecosystem is the key to their long-term success and market relevance.