The UK’s most prominent banks are potentially missing out on a significant return in capital employed by neglecting the country’s SMEs, according to London accountant, Accounts and Legal.
At the moment, SMEs contribute £200 billion per year to the economy in the UK. Furthermore, a new study released by the Centre for Economics and Research indicates that by 2025 the value of that contribution will have risen to £240 billion per year.
With the SME sector spanning across numerous industries, from tech startups to retailers and manufactures and everything in between, it is reasonable to assume that such a diverse and potentially profitable cohort would have the support of the UK’s banks.
Unfortunately, this is not the case.
A 2015 report shows that when it comes to the development of digital services, banks in Western Europe including the UK have neglected the needs of SMEs.
The study shows a strong desire by SMEs to access digital services rather than in-branch facilities, but the current process with traditional banks is much too long and cumbersome to get up and running properly and at speed.
However, in failing to serve the SME community, banks are also failing to realise the potential return on capital employed that comes with lending to the average SME.
SMEs represent a significant portion of all businesses in the UK, being responsible for 49.9% of jobs in the country as well as the economic contribution mentioned above. As individual clients for the bank we aren’t just talking about a corner shop or cafe either - these are companies who potentially have a turnover of up to £350 million.
Big banks are neglecting the SME market opportunity due to a variety of factors.
One of the main problems is the onboarding process, where in many cases the ownership structure can be unclear, leading to difficulties around initiating relationships with SME businesses.
Second, the nature of the SME growth model makes it difficult for banks to determine the value of the business opportunity. This poses problems when it comes to granting credit facilities to SMEs, as they are seen as higher risk for conducting business with.
Third, banks follow bigger sources of revenue and SME profitability is lower than larger organisations.
Finally, existing legacy software systems prevent large banks from servicing SME customer demands which go beyond traditional offerings. For example, the desire to integrate P2P lending, blockchain, mobile wallets, and accounting and legal functionality all as one end-to-end service.
Although attempts have been made in recent years to support the sector, including the introduction of mobile and cloud technologies, banks continue to neglect the SME community.
The emergence of fintech players are causing an upheaval in the financial world, and SMEs are seeing the value in using non-banking entities to access loans, to make payments and to manage transactions.
A good example of this in the UK is Starling Bank, who is embracing marketplace banking with an aim to expand its network of third party providers to include 25 partners by the end of 2018.
The digital, mobile-only challenger bank will provide will range from finance, accounting, and insurance, to investment and pension companies.
Customers will be able to view their services across one dashboard rather than having to go via multiple providers to access their information, saving customers time and improving user experience.
Banks are still reeling from the credit crisis of a decade ago and now is the time to focus on the future, not attempt to re-establish nostalgic ways of working. For financial institutions to fully seize the SME market opportunity they must champion ‘Open Banking.‘
‘Open Banking;’ the opening up of customer data to third parties, will transform digital operations and help make onboarding and the delivery of services to SME customers more seamless.
Banks will only be able to meet the demands of SME customers by working with these ‘outlier’ service providers, enabling the integration of new services through interconnected application programming interfaces (APIs).
For the majority traditional banks, it is inertia that is holding them back from capitalising on the SME market opportunity. They must be open to collaboration or risk losing their relevance and share in the market entirely.