Amidst the focus on retail and corporate banking, a quiet digital revolution has been taking place in the SME (small and medium enterprise) segment. The main architect of this change is the Fintech firm, which in a first, created a line of products and services purely to fulfil the unmet needs of SME customers. High street banks in the United Kingdom, may have taken their small business customers for granted, having been caught unaware by the threat of innovative Fintech players. Today, there are at least 25 digital financial service providers in Europe and the Middle East focusing exclusively on the SME customer segment.
These providers have identified the changing needs of micro, small and medium businesses (those with 250 employees or fewer) and offered them innovative, products and services, with a heightened user experiences. Here is a quick look at some of these emerging trends:
Alternative sources of lending: In the past, when an SME needed funding, it approached its bank, which disbursed a loan after assessing the customer’s credit score, risk profile, financial health etc. This process took several days. Digital providers made a dramatic change by introducing innovative, virtually instant funding options, such as online lending and crowdsourcing. Our conversations with SME customers in the U.K. indicate that 80 per cent meet their short and mid-term financing requirements – from alternative sources, such as peer-to-peer lending, equity financing, government grants and loans on credit card. A very innovative funding option comes from a Fintech called Decimal Factor, which offers a business loan of up to GBP 1 million in under 10 minutes that it recovers from the borrowing business’s future credit card receipts. Whenever the merchant receives a credit card payment, a part of the proceeds – which is decided in advance with Decimal Factor through an arrangement facilitated by Master Card or Visa as the case may be – goes directly to Decimal Factor as repayment. Besides Decimal Factor, currently there are 15-20 specialised SME lenders in the U.K. including Funding Circle, OnDeck, Oaknorth and Tide.
Undergoing digital transformation
Optimised funding: Small businesses have layered financing needs that are best met by tailor-made solutions. For example, they require trade finance and forex solutions to enable cross-border transactions, asset financing options, such as hire purchase or equipment leasing, mortgages to acquire property, and more. Cash flow management – estimating cash on hand at any point in time and projecting future flows – is another major day-to-day requirement. Each of these areas is undergoing digital innovation, thanks to niche Fintech providers, from Strands to Flowcast to Fundbox, that are offering tailored services at low cost and quick turnaround time. Another great example is Cashaa.com, a purely blockchain-based provider of quick and secure invoice financing. Other Fintech companies with working capital optimisation solutions include Aztec, Taulia, Traxpay and Invapay.
Compliance, efficiency, automation and insight: Many SMEs seek the help of their banks for managing risk, meeting regulatory compliance mandates, and improving the running of their business. Fintech has stepped into this territory as well, with KYC solutions from the likes of Iverify, Validis (offering underwriting solutions to lenders), and Factern becoming available to SMEs at a fraction of their previous cost. As they embrace digital technology, small and medium businesses are also expressing the need for solutions such as robotics and artificial intelligence to automate their operations. Sensing an unfulfilled opportunity – it is totally unviable for small businesses to buy expensive software solutions from large technology companies – a number of Fintech/ AI/ automation firms, such as Automation Anywhere, Rainbird, Softomotive and Blue Prism have hit upon an ingenious idea. T
hey have broken down automation solutions into small components addressing a specific SME need – say, basic accounting or supply chain management – and made them available at extremely low prices (or even free of cost) to SMEs or to their banks. Other companies, such as Funding Options, Funding Exchange and Validis, are doing the unthinkable by providing sophisticated insights to SMEs through dashboards and data analytics services, once considered big company prerogatives. These moves have massively disrupted SME banking and further undermined the position of the high street bank.
Platforms, ecosystems and alliances: As SMEs evolve their banking expectations beyond credit and liquidity solutions, their demands are expanding to include new distribution channels, such as ecommerce platforms like Amazon and Alibaba. – who with their omnichannel experiences, personalised services for their customers, aggregated supply channels and ecosystem partnerships are enabling access to new products, services, distributors and business models. Here, a great example of a company meeting many of these needs is Indian Fintech, Paytm, which started out as a digital wallet but quickly straddled multiple spaces as a payments provider, retailer and marketplace operator. Should the regulations relax to allow Paytm to accept deposits, there is no stopping it from making deep inroads into India’s SME banking industry.
Speaking of which, governments and regulatory authorities around the world are extending their support to SME financing by introducing massive funding programs, an example being the Alternative Remedies package to stimulate competition in the U.K. SME banking market.
Furthermore, as nimble FinTechs continue to attack the SME banking space, it is crucial for established players to deliver high-quality services to attract and retain clients. Failure to deliver the next-generation services that SMEs expect could see today’s market leaders losing primary relationships.
The development of open banking frameworks and real-time payments processing services has driven a fundamental shift in what SMEs expect (and, increasingly, demand) from their banks. Banks face the challenge of transforming decades of inherited processes and systems into lean, agile operations. This new way of working will create the foundation for future-ready offerings, including greater self-service capabilities, intraday liquidity, real-time payments, and more.
To stay relevant in the digital age, it’s crucial for banks servicing SMEs to reimagine their businesses with the client experience at the centre. With so many forces – Fintech innovation, technology revolution, government intervention – acting in its favour, the outlook is rosy for the transformation of SME banking.
Sanat Rao, Chief Business Officer and Global Head, Infosys Finacle