The evolution of SME banking
While large progress has been made in digitizing retail banking, corporate banking is lacking still behind. Currently only one third of businesses are happy with corporate online banking platforms; only a fourth with their mobile counterparty (EY Global commercial banking survey, 2015).
These facts are mirrored if one looks at the German FinTechs scene: The scene has been centered around B2C business models – according to a McKinsey study the current share is 58% of all German FinTechs are B2C models (FinTech – Challenges and Opportunities, 2016). However, new B2B business models have picked up this year, with prominent examples like Pair Finance, BillFront, optiopay and many more providing services for small to medium enterprises (SME) – see illustration.
Being the backbone of the German industry, the SME segment appears to be particularly interesting for the next wave of innovation in banking. Due to the underlying large transaction volumes, the extensive need for digitization, and untapped budgets, we can expect to see even more traction in this segment in 2017. Already today, over 60% of the German SMEs (see same McKinsey study above) seem to be prepared to utilize the benefits of digital services to drive the extensive need for digitization.
SME banking is traditionally unattractive for established players
The need to rethink SME banking solutions (and here in particular for the small ones) becomes apparent when one looks at the fact that established banks typically serve only 5 – 10% of companies in their portfolio effectively. The rest receives at best basic products like current accounts or small personal loans for the business owner.
This is in particular due to the underlying high cost to serve this specific segment. The reason for these high costs are not only the typically quoted legacy systems of those players. It is much more the fact that this segment bears a high complexity at low scale and that traditional players typically don’t have much data available to effectively create automated processes and risk management systems to serve SME’s efficiently. This leads to decisions, like recently done by German Commerzbank, to serve small business customers only with the solutions that an average retail consumer has access to.
SME’s major challenge: dealing with finances and ensuring appropriate funding
This in turn creates challenges for SMEs, confirmed by the many interviews and discussions that we had with this target group.
As many business owners are running their business during the day, they often find their personal advisor not available after service hours when they have time to take care about their financials. Furthermore, processing times to actually get a credit decision or receive a service are unexpectedly long or intransparent. I myself had to wait for my new corporate credit card 7 (!) months, for instance.
Besides, many SMEs seem to lack sufficient solutions to manage their finances efficiently. Self-developed Excels for budget planning, face-to-face time with their tax advisors and cumbersome efforts to match outstanding bills with recent transactions on a SME’s account seem to be still the status quo; least to forget the good old shoe box. Professional solutions for these tasks are only available to larger corporations or specific niches.
Despite the fact that many financing options are provided by alternative players, many SMEs just don’t know that they exist and even if they do, they struggle to determine which one is the most suitable one for them.
To address those challenges established players as well as emerging challengers need to establish a clear digital value proposition for SME customers. I see 3 trends in the market that will manifest in the next year(s) addressing those SME challenges:
1 – Increased levels of digital self-service and Artificial Intelligence-fueled customer care
SME Banking services will be available when and where needed and with “digital speed“: for instance the sign-up and activation process for a business current account, no matter whether its for a freelancer or a more complex GmbH, will be done within minutes and fully online. This will eliminate the the need to go to a branch or a post office, very similar to how it is done today already for B2C consumers via video ident.
Business customers will further be provided with a high amount of flexible, digital self-services allowing them to customize and change their banking products without the need to talk to their advisor or a call center agent. This means for example that they can flexibly change their monthly loan payments online (obviously within boundaries) accommodating changes in their cash flow.
Furthermore, customer care will also be much more digital than it is today: Chat interfaces become the new norm and parts of the interactions will (transparent to the customers) be conducted by machines. Artificial intelligence will be accepted more and more and take over the conversation to a point that no bank clerk and no visit to a branch is needed.
2 – Integrated view on a SME’s financial well-being
With the increased technical ability to easily integrate various data sources, for instance an SME’s transaction data with other business-related data sources, we will see holistic financial software solutions emerging that become part of a the underlying business account beyond today’s simple online banking.
These dashboards will not only support the SME’s budget planning, treasury and financial analysis providing a „digital CFO as a service“ but will also be key to allow data-driven underwriting and algorithmic credit rating creating new value propositions that are unserved by today’s banks. These integrated views on all financial matters – across different banks and different business softwares will become the new norm.
Similar to the user experience and design coming with B2C software products, the experience of these solutions will be in contrast to today’s business software much more human-centered with simple, clean designs and fast, purposefully built features.
3 – Open ecosystems to navigate the jungle of SME finance products
In the last month it was already apparent that many banks in Europe started to cooperate with FinTechs startups. This trend will further continue and many banks will further open up for 3rd party products. We will see the rise of product ecosystems that combine financial products from different providers to a full financial service portfolio similar to popular app stores & marketplaces.
With these emerging players that offer open ecosystems to SMEs, we will see a further shift from today’s paradigm of providing primarily transaction-based services for small businesses to becoming a business platform for growth & sustainability. Consequently the role of the ecosystem owner shifts from a sales man to a true digital business advisor supporting small businesses to navigate the jungle of SME finance products.