SME Banking – Then and Now
Traditionally, banks worldwide applied a closed-economy model. They covered all aspects of the value chain, offering isolated products. And due to regulatory barriers to entry, they were alone in doing so.
Alas, times changed. The Open Banking initiative in the UK and the revised Payment Services Directive (PSD2) in the EU now oblige banks to provide access to third parties (provided the client consents). But emerging fintechs and challenging banks did not wait for such regulations to become active. Innovative and business savvy, they have been at the forefront of personalized customer service. And while traditional banks are still grappling with these developments, new financial service providers are winning over small business banking clients through platform partnerships.
What can SME banks do?
What Key Trends Do We See in the SME Banking Industry?
Before we answer that question, let’s dive into the key trends we see in medium and small business banking.
Market Conditions Have Eroded Bank Profitability
First of all, low-interest rates, eroding fee income and a need to cut costs have led to dwindling profitability for SME banks.
Insufficient Response to Changing Customer Needs
Furthermore, SME banks traditionally relied on a push-based strategy, offering separate products - while the SMEs they serve are demanding more bundled services. Although the current regulatory environment is motivating banks to become more customer-centric, it is this very product-silo approach that complicates the development of a 360-degree view of customer needs.
Low appetite for risk has prevented banks from serving the full spectrum of SME customers
On top of that, low appetite for risk has prevented banks from serving the full spectrum of SME customers. Where PayPal and other fintechs use real-time data to work with clients, banks are still reluctant to accept SMEs they don’t know well, requesting extensive financial proof before giving out loans, for example.
Platform Banking: the Rise of Non-banks in SME banking
And that is the third trend we observe: non-banks have entered the market, successfully delivering personalized and bundled services. Amazon, like Shopify, offers a host of online business services, including payments. Providers of accounting software, such as Xero, Sage, Exact and Intuit, have all integrated banking services into their platforms. As we have seen, Paypal offers instant credit and iZettle, while offering payment applications, has now diversified into SME credit as well.
Platform Plays in SME banking
Still, not every player wants to develop SME banking products in all areas of the value chain. Third party players have taken to joining forces, developing services where they have core strengths and diversifying into other areas through partnerships. Their platforms act as a melting pot of services, amalgamating added value to offer optimal customer experiences.
What Threats Does Open Banking Provide to Incumbent Banks?
So far, we have seen that platform and open banking have disrupted the market. But what are the threats they pose to traditional banks?
First of all, it is vital that banks look at SME banking from a more strategic perspective. Regulatory requirements can be a big distraction and banks definitely need to continue to be compliant. But pro-activity in creating markets across product divisions is crucial and strategic partnerships need to be forged.
Secondly, many banks provide profitable lending and forex services. If technological improvements allow fintechs and non-banks to scoop away customers, banks risk losing the primary relationship with their clients. If they are no longer the preferred partner, they will ultimately risk a loss of these revenue centers.
When banks are reduced to being commodity product providers, they might disappear behind the commercial curtains of fintechs. How can SME banks distinguish themselves when everyone has the same plug-and-play applications? This is a question that needs to be answered by a firm strategy.
What Opportunities Are There for SME Banks?
Fortunately, open banking offers interesting export and import opportunities as well.
Export Opportunities of Open Banking
First of all, banks can make raw data available to third parties by using APIs. These can now create new services for end-customers. A great example of this is Mint, a company that offers financial management support. Alternatively, third parties can offer specialized banking services, such as consumer credit checks to fill out their product portfolio.
Using APIs, banks can also sell their services through a third party, thus dramatically increasing their distribution reach. In the UK, for instance, the Post Office services over 2.4 million people, who may or may not be aware that it is actually the Bank of Ireland that provides the loans, mortgages, forex services, and bank account information.
Import Opportunities of Open Banking
Instead of selling its data, an SME bank can also aggregate and bundle services from multiple partners into their own platform. These can be products that traditionally lie outside of their risk appetites, such as loans, money transmissions, and insurance products. For instance, banks might want to partner with third parties who wish to find cheaper ways to accept payments, thus circumventing traditional payment service providers and card networks.
But banks could also opt to extend their services beyond SME banking products. This research into open banking states that 48 percent of consumers want banks to play a role in the purchasing process for non-banking products. It seems that banks are being invited to broaden their propositions to create more complete customer journeys!
What Should Banks Do in the Short and Long Term to Take Action?
Now that you have read about the trends, threats, and opportunities of open banking, the one question to ask yourself is: what should we do?
The Answer to This Question Is Three-Fold
We believe your short-term goal should be to protect and redeem: use the next 12 months to protect your current business from the risk of disintermediation and sharpen your products.
We would advise you to spend the next 12 to 18 months diversifying your product portfolio. This short-to-mid-term goal might require the formation of partnerships.
Finally, your long-term goal should be to create a platform, distributing banking and non-banking services to as broad an audience as possible.
Embrace the Future
As we have shown in this article, open banking has taken off, with fintechs and non-banks now playing the field. Incumbent banks need to embrace these open-source banking developments to continue to provide relevant small business banking products. Accenture has been at the forefront of supporting clients to become future-proof in the changing world of SME banking, offering both strategic and tactical consultancy to banks and non-banks alike. Therefore, we would gladly discuss the opportunities in greater detail with you, if you wish to do so. Stay up to date, download Accenture's point of view on platform plays in European SME banking now.