SMEs represent 99% of the businesses in Britain – there are now more than 5.7 million of them, up from 4.6 million in 2011, and they contribute more than £200 billion to the UK economy each year. Yet despite the fact that more than 90% of them bank with the Big Four, they remain in many cases underserved by their providers.
Chief among the issues are slow onboarding processes, inflexible loan application requirements, and digital user experiences which lag well behind the neobanks.
These shortcomings haven’t gone unnoticed – 37% of SMEs were ‘Unsatisfied’ with their current bank according to a 2016 Accenture survey.
This presents a significant opportunity for a Tier 2 or Tier 3 card issuer willing to adapt and improve to meet the requirements of a huge audience who are hungry for a viable alternative to the Big Four.
For Tier 2 and 3 issuers who already have healthy SME customer bases, it’s also a time of risk. Customers are now multi-sourcing – depending on their bank for only the basics, and using FinTech firms’ services for services such as loans and payments.
Below, we’ve outlined the key opportunities and key risks for Tier 2/3 card issuers in the SME market in 2018.
1. Customers becoming less lucrative due to multi-sourcing
SME bank customers are increasingly retaining their bank account, but taking their most profitable custom – loans and payments – to third party FinTechs.
EXAMPLE: Paypal Working Capital, which is filling the gap left by banks unwilling to lend to many of their SME customers. Importantly, Paypal evaluate creditworthiness on the basis of incoming payments to the applying account, and don’t rely on physical collateral.
The ‘pick ‘n’ mix’ multi-sourcing approach could become a significant issue for banks who are not planning to upgrade how they offer these critical services, and it has the potential to leave them providing the majority of SME customers with only the most basic and least lucrative services.
2. Eventual erosion of customerbase by neo banks
Neo banks are a long way from being a realistic threat to major providers in personal finance. But a new wave of SME-focused neo banks are well positioned to chip away at the unsatisfied customers of bigger banks’ more generic offerings.
EXAMPLE: Coconut – a ‘current account for freelancers and self employed people’, which integrates a traditional Mastercard debit card with slick, mobile business-friendly features such as client invoicing, tax management and expense logging.
If banks do not adapt, what starts as customer multi sourcing could end up as a wholesale customerbase erosion, especially as banks such as Coconut improve and broaden their service offering.
1. Increase revenue from existing SME customers
Existing SME customers are multi-sourcing in part because their banks aren’t offering the features that they need, and in part because where features are offered, they are inconvenient to use.
But banks can replicate the slick, mobile-first interfaces and richer functionality of newer FinTech services – either by choosing to develop their own bespoke services, or by using off-the-shelf products.
The latter, like Vipera’s SME Pay, offers proven technology, a modern and fully customisable user interface, and rapid implementation. By partnering with an off-the-shelf product provider, banks can get their startup-style services to market significantly more quickly.
And once their services are available to their customers, they are well positioned not only to stem the flow of multi sourcing, but to increase revenue from customers who may not have considered taking additional services from them.
2. Generate new revenue from customer multi-sourcing
Few bank accounts today will work smoothly with a FinTech service such as Paypal Working Capital – the account and the service must be operated independently of one another, with money simply transferred between them.
But banks who embrace Open Banking and ‘fintegrate’ with specialist services stand to benefit from their multi-sourcing customers. Without needing to build and maintain their own competing services, they can strike deals with the most successful FinTechs, integrating directly the services their customers find most useful – and help increase customer loyalty while boosting the bottom line.
‘Fintegration’ tools which allow bank systems to smoothly, securely integrate with FinTech services are the key – Vipera’s Motif offers an off-the-shelf solution with the support of a highly experienced implementation team.