SMEs: a neglected opportunity for UK big banks

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By Martijn Hohmann, CEO and co-founder, Five Degrees

The SME sector contributes more than £200 billion a year to the UK Economy, and according to the Centre for Economics and Business Research this is set to grow to £240 billion by 2025. The sector is diverse, spanning fast growth tech start-ups and sole traders to medium-sized manufacturing and retail businesses – all with different needs. It is clear that the sector is a large and highly profitable market segment that you would expect to be well-serviced by the banking and finance community.

However, a report published by PwC in 2015 shows that when it comes to the development of digital services, banks in Western Europe including the UK have neglected the needs of SMEs. The study shows a strong desire by SMEs to access digital services rather than in-branch facilities, but the current process with traditional banks is much too long and cumbersome to get up and running properly and at speed.

Why are SMEs neglected?

Big banks are neglecting the SME market opportunity due to a variety of factors. One of the main problems is the onboarding process, where in many cases the ownership structure can be unclear, leading to difficulties around initiating relationships with SME businesses.

Second, the nature of the SME growth model makes it difficult for banks to determine the value of the business opportunity. This poses problems when it comes to granting credit facilities to SMEs, as they are seen as higher risk for conducting business with.

Third, banks follow bigger sources of revenue and SME profitability is lower than larger organisations.

Finally, existing legacy software systems prevent large banks from servicing SME customer demands which go beyond traditional offerings. For example, the desire to integrate P2P lending, blockchain, mobile wallets, and accounting and legal functionality all as one end-to-end service.

Although attempts have been made in recent years to support the sector, including the introduction of mobile and cloud technologies, banks continue to underserve the SME community.

The impact of underserving SMEs

The emergence of fintech players are causing an upheaval in the financial world, and SMEs are seeing the value in using non-banking entities to access loans, to make payments and to manage transactions.

A good example of this in the UK is Starling Bank, who is embracing market-place banking with an aim to expand its network of third party providers to include 25 partners by the end of 2018.

The digital, mobile-only challenger bank will provide will range from finance, accounting, and insurance, to investment and pension companies. Customers will be able to view their services across one dashboard rather than having to go via multiple providers to access their information, saving customers time and improving user experience.

Seizing the market opportunity

Banks are still reeling from the credit crisis of a decade ago and now is the time to focus on the future, not attempt to re-establish nostalgic ways of working.  For financial institutions to fully seize the SME market opportunity they must champion ‘Open Banking.‘

‘Open Banking;’ the opening up of customer data to third parties, will transform digital operations and help make onboarding and the delivery of services to SME customers more seamless.

Banks will only be able to meet the demands of SME customers by working with these ‘outlier’ service providers, enabling the integration of new services through interconnected application programming interfaces (APIs).

For the majority traditional banks, it is inertia that is holding them back from capitalizing on the SME market opportunity. They must be open to collaboration or risk losing their relevance and share in the market entirely.