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What is the difference between fintechs that create real value for small and medium-sized businesses (SMBs), and incumbents that so far have been unsuccessful at reaching the segment? In short - agility and customer focus.

Don’t underestimate the SMBs.

SMBs are the backbone of many economies. According to the World Bank they represent about 90% of businesses and more than 50% of employment worldwide with formal SMEs contributing up to 40% of national income (GDP) in emerging economies. As a customer segment, SMBs offer considerable potential.

Previously, many banks have not prioritised this market due to its relatively low return on equity and high cost-to-serve. All too often smaller businesses are facing cash-flow challenges, have varied credit rating or operate within a high-risk industry. As a result, due to stringent lending criteria, big banks are simply unable to meet the SMBs’ needs, neglecting the segment and leaving the majority underserved and left to fend for themselves.

A new wave.

As thousands of SMBs struggled to access funding, the alternative finance sector gained momentum. Enabled by technology, new challenger banks, fintechs and big tech firms are winning the market with innovative service models and customer-centric propositions.

Aware of better options beyond their current banks, SMBs now choose alternative lenders who do not impose onerous qualification criteria on them before they walk through the door. Instead, they offer flexible repayment terms, secured and unsecured lending and attractive interest rates.

As a result, small and medium-sized enterprises are getting used to convenient and tailored financial services, including real-time personalised assistance and immediate availability. Innovative SMB lending challengers, such as Asto, New10 and OakNorth offer quick decisions on loans and mobile apps that simplify bookkeeping, and are easy to manage on-the-go. SMB-focused fintechs take away headaches related to financing and give small business owners more time to focus on their primary challenge - their core business activities.

A way in for banks.

While the SMB banking market is becoming increasingly competitive, incumbent banks that have gone digital and are supporting new business models can still turn into a source of continual innovation and new revenue.

Early digital banking innovations have become table stakes and no longer differentiate banks.

To remain in the game and win a significant share of the SMB revenue pools banks need to find a way to differentiate. And while technology remains central to such digital transformation, the goal of it is enhancing the customers’ experience and establishing a far-reaching competitive edge. To match the fintech offering and differentiate themselves, banks can focus on a number of things:

  • Ecosystems - Through a vast ecosystem, banks can offer a broad range of services to their SMB customers in a single integrated platform. Such an approach can turn a bank into a one-stop-shop that helps business owners to manage their accounting, plan taxes and offer financial recommendations, nudges about due dates.
  • Use cases - Given the SMBs’ significant unmet needs, banks can create specific use cases for SMB innovation and identify underserved niches, and give their customers what they want and when they want it.
  • Partnerships - Banks can also partner with communications service providers and take advantage of a large (unbanked) customer base, physical stores and cross-selling opportunities.

Incumbents already have a competitive advantage because of their trust-based customer relationships, rich data and ability to invest. Addressing the real needs of SMBs by using ecosystems and use cases, banks can win a significant share of the market and solidify their standing in financial services and beyond.

For an extended list of Gartner recommendations for bank CIOs, download the Gartner 2019 report Bank CIOs: Break Through to SMBs by Creating Innovative Digital Banking Services here.

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Elliott Limb
With over 20 years in banking and fintech, Elliott has been named as one of the most influential people in fintech. At Mambu, Elliott is focused on a customer-centric approach to doing business, growing revenue and helping banks build flexible and scalable solutions.
Elliott Limb