Creating a banking value proposition for SMEs

Anton Verkhovodov
Nov 5 · 5 min read

Fintechs and challenger banks set a new high standard for consumer banking — digital, simple, transparent, convenient. Large banks followed the trend. Now, it is time to do the same for SMEs. Here, some fintechs already give an idea of what to do.

Key takeaways

  • SME banking is a lucrative opportunity for fintech play
  • Most pains can be resolved through a simple set of features around business management journey
  • Sharp customer segment focus gives an additional go-to-market advantage
  • SME banking value proposition is a bundle of financial products and non-financial services around running a business
  • Fintechs have an edge in building banking value propositions due to a digitally-native core infrastructure that allows for much faster scalability, plus a focus on building great customer relationship

SME banking is a sizeable opportunity

SME market is lucrative. In the UK, according to EY, it generates £14bn in revenue and 10%–15% ROE. The number of SMEs is increasing in most economies but the quality of financial services they receive is not making any progress.

CB Insights

This did not come unnoticed by startups. Fintechs targeting SMEs are attracting VC money, having assembled more than $10bn in the US alone (CB Insights data). Some of them are already noticeable brands like Kabbage, Brex, Tide, Stripe, or iZettle. Like in the “overall” fintech, the payments category is the most active one in the SME space — some of the largest names like Stripe, Adyen, Klarna, iZettle, SumUp

Still, despite a large opportunity and a growing positive sentiment of SMEs to start/continue the business, this customer segment remains underserved financially. In particular, they lack value propositions that are relevant to their business journey, access to credit with non-traditional scoring, and non-financial tasks.

Let’s see how top fintechs are already addressing some of these issues and how the SME offering can be improved — either by fintechs or incumbents.

SME fintech challengers and their products

Following the logic of fintech rebundling, challenger banks are the ultimate form of financial innovation, combing both product and customer category focus. Hence, our view is on some of the hottest names in the space:

This is how these challenger banks compare to each other:

Most of these challengers are growing their customer numbers at a pace incumbents would envy. They also boast higher-than-average customer satisfaction. How is that possible. There are 2 fundamental insights to get from them.

First — a rather limited product portfolio but a very similar set of killer features which address fundamental jobs-to-be-done of founding and running an SME business. Here, the Pareto principle comes at play: a significant pain can be removed by a relatively small effort — and this is what the challengers offer to their customers.

As the sample shows, the killer features to attract modern SMEs are:

  • Digitally-native UX (mobile and web where approptiate)
  • Quick and remote account opening
  • Team cards with expenses management (online allowance and access level setup, digital expenses submission)
  • Bookkeeping simplification: in-app visualisations, integration with specialised financial software and productivity apps (e.g. Slack)
  • Invoicing and automatic payments

Second — a sharp focus on a specific category. Be it sole proprietors, freelancers or YC alumni, these banks picked a very well-defined niche (that is still big enough to build a solid business), deeply empathises with them and managed to build both a value proposition and brand customers totally resonate with. The customers also dictate specials like category cashback, e-residency or predictive cash flow.

Another highlight of these challengers is their ability to deploy new products/features/tweaks much faster than it would take a traditional bank to do. Part of the reason is their narrow customer segment focus — thus a higher certainty of success. But to a greater extent, this is powered by a truly digitally-native core banking infrastructure.

But how much of the total pain do SME neobanks cover and what else could be added?

Looking at SMEs real needs

McKinsey did interesting research on what SMEs have to deal with daily. Turns out, 74% of the time is spent on non-core (that is — non-value-adding) activities.

McKinsey

Let’s see what parts of that are related to cash flows and hence can be directly helped with by the banks:

  • bookkeeping (direct integration)
  • a tiny part of CRM (checking the counterparts’ creditworthiness)
  • banking (obviously, less time waste on operations through automation)
  • lending (obviously, less time spent on bureaucracy and alternative scoring mechanisms).

That easily amounts to a 30%+ potential time saving to focus on things that really matter: doing business.

Bain & Company

Bain & Company offer another framework of looking at SME needs. Banks (and fintechs) must the value to SME clients, relevance to their core capabilities, and the broader ecosystem around such services. This forms a basis for decision to launch new products or features.


The ultimate SME banking value proposition

Leading SME challenger banks and customer research send us the following message:

SME banking value proposition must revolve around the broader business management journey and bundle financial products with non-financial services which are highly relevant to customers.

Essentlially, it transforms the bank’s role from a pure custodian of money and loan-giver into a helper that makes earning money and making business easier.

I translated these insights into a pyramid of SME banking needs:

Besides the products and features, it is important to keep in mind that superior customer traction is usually achieved through a narrow focus on a particular customer segment that they deeply understand and can build relevant propositions. To make this work, providers (be it fintechs or traditional banks) need to rely on a digitally-native core infrastructure.

I can imagine this to play out in 2 main strategies:

Financial supermarkets. A broad range of products, doing a great job of customer segmentation and semi-personalisation of offering (showing only relevant products at a relevant stage). This can be built on top of existing SME banking with radically improved UX and tech stack.

Dedicated brands. Like digitally-native vertical brands (think Warby Parker) but for banking. Targeting specific SME segments who are receptive to this and where a limited number of services, in the beginning, can significantly improve the quality of business (remember the Pareto principle).

Anton Verkhovodov

Written by

Untone — music, innovation, entrepreneurship. Corporate innovation advisor. Opinions are personal.

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