According to a joint study by the Competition & Markets Authority and the FCA:
99% of UK businesses are SMEs
85% of those SMEs hold accounts with the four biggest banks (Barclays, HSBC, Lloyds and RBS)
90% of business loans made to those SMEs are provided by the four biggest banks
Yet the SME market remains relatively under-served with banks, who are in many cases failing to monetise their SME customers as effectively as they could.
In some cases banks are over-reliant on account holder inertia and a lack of clear differentiation between the major providers for customer retention and acquisition. A 2016 survey by Accenture revealed that 37% of SMEs are ‘Unsatisfied’ at best with their banks, and it isn’t difficult to see why. Loans can be difficult to acquire – with many banks still forming opinions based on physical collateral rather than focusing on cash flow and/or IP and knowledge based assets.
Just as important, on-boarding is often a lengthy, inconvenient process (although steps are slowly being taken to improve this: a group of 18 British banks recently standardised the account opening process for SMEs by simplifying the set of information usually required) while digital customer experience lags significantly behind what’s offered for personal financial management. Online and app-based experiences frequently fail to offer features that are both technologically within reach and which provide genuine value for small business owners.
The new entrants
A range of FinTech companies have sprung up over the past few years to fill in the gaps that banks are leaving in the SME market.
Coconut, for example, is a soon-to-arrive ‘current account for freelancers and self-employed people’ – a banking service that directly integrates client invoicing, tax management and expense logging, among other small business focused features. Taking a different tack is PayPal Working Capital, a more established entrant that offers small, short term, low cost business loans, basing its decision on creditworthiness on incoming payments made via the applying account.
These are just two examples in what has become a thriving constellation of FinTechs, largely focused on catering to specific niches. What ties these companies together is their emphasis on an area in which most major banks still lag significantly – the provision of modern, frictionless ‘digital first’ approaches that allow app-based on-boarding and fully online management, without the need to make phone calls or visit branches.
But the FinTechs aren’t a perfect solution for SMEs. Most ‘current account’ based services – Coconut, Revolut Business, and others – aren’t yet true replacements for traditional banks, since they’re technically usually ‘e-money’ providers. That means they come with various restrictions: IBAN provision and annual limits on total cash transaction value can be problematic, for example.
FinTech startups as a whole are also atomised – most focus on ‘doing one thing well’, rather than offering an integrated service. This means that SME owners can end up managing accounts and services from a number of different providers, a situation made awkward by the lack of easy integration between most FinTech startups -to date, at least.
The opportunity for banks
Neither FinTechs nor major banks offer an ideal SME service. But the banks are better positioned than the startups to make up for their current shortcomings – a revised approach to digital user experience would go a long way towards increasing SME customer satisfaction alone. Even more powerful would be an Open Banking approach that enabled integration with select FinTechs.
Crucially, both of these improvements would enable banks not only to get an edge on their competitors in a satisfaction-starved SME market, but having attracted those SMEs, to also monetise them much more effectively.
We’re already helping major retail banks to offer their SME customers a market leading digital service. Talk to us about how we can help you to do the same.