Banking the Under Banked: Serving the SMB Segment

By Binesh K, Strategy, CEO’s Office, SunTec Business Solutions

Small and Medium Businesses (SMBs) play a vital role in most economies, especially developing ones around the world. This sector represents 90 percent of businesses and 50 percent of global employment.1 The formal SMB sector contributes up to 40 percent of national income in emerging economies. This is of course a significant, high potential customer segment for banks. Unfortunately, SMB focused banks have never been able to generate profits. This is primarily because of the varied portfolios as well as the high risk of defaults. But this is a sector that holds tremendous promise and banks need to relook at their strategies for tapping into the SMB segment effectively.

Traditional Banking Challenges in the SMB Sector

For banks, the SMB business came with multiple risks – non availability of quality data for risk underwriting, high servicing costs, low returns on equity, default risks and the lack of SMB focused business models. The stringent lending criteria that banks follow make it difficult to accommodate the cash flow challenges and varied credit ratings of SMBs. As a result, most SMBs feel that their unique needs are not understood by the formal banking sector and that no products or services are being tailored to meet their specific requirements. Often, they have to manage with diluted commercial products scaled up for them, which do not help them.

The Fintech Opportunity

The emergence of technology powered financial services models has opened up new opportunities for the SMB sector. Fintechs, challenger banks and tech giants were quick to step into the void left by traditional banks to offer tech powered customized and flexible products. They created new service models and varied customer propositions making the business profitable for banks and relevant for SMBs. They tapped into advance analytics models to look at alternative data for assessing companies and leveraged technology to assess company performance and health in real-time to manage risks. Use of API based banking helped these new players to access more data, offer fast services at low cost and integrate with third party tools like accounting and taxation. Fintechs like Asto, New10 and OakNorth provide real-time personalized assistance to SMBs including banking products, business services like invoice management, payroll support, tax preparation, and inventory management. UK based Tide focusses on payments, credit, business services and financial services. Neo-banks like Rho and Wise focuses on full-stack banking solutions for SMB customers. While players like upSWOT and Codat build infrastructure to help SMBs analyze and forecast the business with greater accuracy. After decades of having to settle for what was available, SMBs now have the choice of working with lenders who offer them personalized solutions at the best interest rates.

Banking Ecosystems for SMBs

Despite the headway made by fintechs in the SMB space, the game is not yet over for traditional banks. As they accelerate their digital transformation journeys now, they have the opportunity to come up with customer centric, differentiated strategies for SMBs. They have the advantage of having large data repositories, huge capital base and the significant customer trust that can be used effectively. Banks can now become orchestrators of a comprehensive SMB focused ecosystem that provides them with everything they need to conduct their business. By bringing on board financial and non-financial services and product partners, banks can create a robust ecosystem that can meet stated and unstated requirements of SMBs. By opening new opportunities to cross sell and up sell, this SMB ecosystem will help in creating a value driven profitable business model for banks.

Such an ecosystem model will help banks in claiming primary ownership of the customer and boost depleting returns on banking products. They could also be part of other ecosystems partnering with nonfinancial companies looking to expand their platforms into financial services. This will help expand the reach of their services to a huge and previously untapped customer base. For example, Gobank in the US has partnered with Uber for extending financing options for entrepreneurs on their platform. Banks could also simplify the platform model by becoming aggregators of partnerships. Idea Bank of Poland, for example, has a cloud platform that offers end-to-end financial and business support, including accounting services, cash flow analytics tools and promotion support, for SMBs through partnerships with other service providers. The ecosystem play will help in creating new business opportunities within and across the platform. The Royal Bank of Canada introduced an end-to-end tech platform called Ownr through its subsidiary. This offers a complete set of services for SMBs ranging from setting up their business to managing and marketing it.

Technology Transformation

The one thing holding banks back from competing in the SMB sector is their legacy banking core. They lack the agility required to identify and respond quickly to customer requirements or bring to market innovative offerings. One way out is for banks to work with third-party solution providers who can deploy agile middleware over the legacy cores to ensure agility, flexibility, and scalability. With such technology platforms in place, banks can fully leverage the opportunities thrown up by new open banking regulations.

Open banking holds tremendous possibilities as banking becomes increasingly customer driven, relationship based and digital. Emerging open banking regulations make it easier for traditional banks to establish themselves as orchestrators of innovative ecosystems that are created and operated with SMB needs in mind. After missing out on the SMB sector, this is the opportunity banks need to bring value driven financial services to this underserved but valuable sector.


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