Discovering the full potential of your SME banking strategy: Unleashing hidden SMEs in a mass-market portfolio

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SME Banking
06/12/2022 Study

There are many ways to describe the journey that financial institutions have taken to better serve their SME clients and transform these offerings into a fully fledged and profitable banking strategy. From underserved to apriority segment. From being a financial partner to a real business partner. From basic financial operations to a full range of business services and beyond. From tedious, lengthy bureaucratic account opening procedures to an end-to-end digital and customer-centric approach.

After successful forays into retail banking, the segment has also become a point of focus for many fintechs and neobanks looking to carve out their own slice of the SME pie.

The last two pandemic-impacted years have especially highlighted the importance of SMEs across all industries and our everyday lives. Many small businesses with no online presence were severely impacted by CoVID-19. It was an extinction level event for many of them, as they struggled to merely survive, let alone thrive. In the financial services industry, a lot of attention was dedicated to this segment in the form of immediate support to SMEs amid the crisis – primarily financial, but in many cases the support went beyond immediate financial concerns. helping SMEs transition to online, implementing marketing campaigns to support local businesses, and networking and procurement platforms to find new clients among other SMEs or corporates were just some of the focus areas from many banks.

Luckily, we seem to be reaching the light at the end of the tunnel in terms of the pandemic. Looking ahead, the question then becomes where to focus in order to enhance and leverage a complex, transformed SME banking strategy. We believe that one focus area should be the entrepreneurs and SME clients that haven’t been served properly and are currently using their personal banking accounts for their business because of cheaper and easier transactions or because they are not aware of further benefits that a business account can bring them and their businesses. Moreover, there is a relevant segment of micro-SMEs that cannot access a business account due to outdated KYC processes and lack of data strategy.

Many banks haven’t set a clear strategy regarding this hidden segment due to the following:

1. Lack of business cases or know-how

It’s understandable that this segment is misperceived as very niche with low revenue generation potential, and many institutions would need to invest significantly to arrive at the right strategy; however, we believe this stems from a lack of understanding of the potential value this segment brings and the absence of the necessary expertise to create an efficient approach to capture SMEs. Also, it’s a rather long-term strategy that can be challenged by short- term approaches that require quick revenue generation. This means only well- informed, experienced, and business-backed SME leaders are able to properly plan an approach for this segment. or, as we will address later, those leaders that can identify the right, external ready-to-use solution. We understand all the issues here and believe there are relevant business cases and solutions to prove the potential of this segment. We’ll try to highlight some of them in the next pages.

2. Segmentation issues

Many financial institutions have outdated approaches to segmentation. Micro segment or single profession clients are included as part of retail/mass-market strategies and in some cases, even SMEs are included as well. This is mainly due to the fact that banks do not assign dedicated relationship managers or teams to them or the customers expect just a basic, digital-first offer with self-service management. We believe it’s once again a lack of understanding around the real needs and business potential for banks. Moreover, these customers are often novice entrepreneurs with low financial literacy who require further education or at least more information on how to run their business, optimize their operations, and the clear options in terms of financing. In their beginnings, these entrepreneurs simply require more support from their bank in terms of business advisory and services and they will surely repay it with loyalty, once they grew into large corporates.

3. Lack of cross-department collaboration and agility

Traditional banks are used to working in silos and focus primarily, and in many cases purely, on their own customer segments. With segments like SMEs, a joint approach between the retail segment and the business banking segment is essential to identify hidden SMEs and reach out to them with the services they need. SMEs often use their personal accounts for banking because they either do not see the monetary value in switching to a business account or they lack information about the options, possibilities, and benefits.

4. Insufficient data strategy

In many financial institutions, overall data-based strategies did not exist prior to the pandemic; hence, banks were not yet able to utilize them for different business lines and the SME segment was definitely not among the top priorities. Moreover, the most common sources of data gathering are not robust enough for banks to develop actionable insights. transactional data, CRM insights, and all market financial data should be enriched by behavioral, business performance, e-commerce and other third-party data insights. There are obviously many more insights to obtain, but the most important element is to adjust to market specifics and follow the key customer data points.

The COVID-19 pandemic brings to mind the years of 2008-2015, during which most banks realized there was a segment deserving of their attention and created a dedicated approach with a stand-alone department or business line to serve their needs. The financial crisis not only highlighted SMEs as

the backbone of most economies, but revealed their potential to eventually become long-term and loyal high retention customers if served the right way. And all of these changes in strategy were achieved while providing crucial support to these businesses and helping local economies out of the crisis.

We believe it’s the ideal time to set a data-based strategy to serve this segment, because many of these SME clients revealed themselves when asking for government-backed loans during the pandemic. Additionally, once digital transformation has achieved a certain level of maturity and beyond banking services can be offered, there is ample space for banks to increase and diversify their client portfolio. Based on our research, these customers form in some cases 10-20% of all your SME banking clients and the number is only expected to grow. There is unlimited potential in what these businesses and individuals behind them may become – progressively-growing businesses backed by strong affluent/premium segment-type individuals; exactly the type of clients every bank wants to have in their portfolio.

We hope that in the following pages of this report you will find answers regarding the current state of data-based strategies in SME banking from leading financial players worldwide, best practices on identifying these customers, how to make them your business customers, and ultimately how to serve them and overcome challenges on this exciting journey.

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