Stronger customer relations are key to unleashing SME banking boom
Serving SMEs with products and services that better meet their needs could help banks boost revenue growth and counter the threat of disintermediation.
SME banking could provide lenders with a powerful engine to drive revenue growth and protect their businesses from encroaching competitors. However, to unleash this potential, banks must significantly improve the services they offer small businesses.
The banking industry has enjoyed good revenue and ROE growth during the past decade but it is viewed poorly by many investors, says Alexander Verhagen, partner at McKinsey & Company. Supressing investor sentiment are banks’ modest revenue growth expectations, below gains in GDP, and their vulnerability to disintermediation.
“There’s a danger that banks could become a sort of utility with a balance sheet that supports underwriting but with customer relationships that are owned by others. A utility attracts a much lower valuation than an organisation that holds the primary relationship with customers,” says Verhagen.
By establishing closer ties with SME customers, through products and services tailored to meet the diverse needs of small businesses, banks could overcome the challenge of disintermediation and boost revenue growth.
Verhagen, who is co-leader of the business banking service line at McKinsey, shared his insights at an online event hosted by the Qorus SME Banking Community. The event examined the future growth and resilience of SME banking. It attracted speakers and participants from across the world.
Industry leaders who attended the event are optimistic about the future of SME banking. A resounding 67% expect good growth across most of their SME products this year. A further 10% are very positive about the future and anticipate a strong uptick across all their products. Just 19% expect their SME banking business to be static or register little growth while 5% are preparing themselves for revenue declines across key product.
McKinsey expects SME banking revenues in the EU to climb from around €103 billion in 2022 to about €112 billion in 2026. It earmarks merchant acquiring, payments and deposits as the main drivers of rising revenue. While SME banking markets vary across geographies and industry sectors, and often display unique features, similar trends are likely outside the EU.
Verhagen points to six “blockbuster” moves that successful banks are employing to boost their SME business. They provide a blueprint for other institutions.
1. Make credit processes faster and smarter using automation and analytics.
“Clients want an almost instant decision on their loans. They want money in their bank accounts in less than 24 hours. And they want the credit process to be convenient, simple and pleasant,” says Sasha Brainis, senior engagement manager at McKinsey.
To streamline and quicken credit processing, banks should set out “swim lanes” that steer up to 70% of applications to analytics systems for review, says Brainis. The automated systems should use data provided by clients or external sources to automatically determine whether loans should be granted. Most of the remaining applications, which might need a more thorough analysis, should be assessed using a combination of automated and manual systems. A few may require completely manual assessments.
2. Win the “war” on deposits by bolstering product offerings.
The wide spread in interest income between banks offers nimble institutions an opportunity to create investment products that attract more deposits from SMEs. Banks in Europe, especially in the UK and Italy, face strong competition for customer deposits, says Verhagen.
Advanced analytics systems enable banks to identify which of their clients are particularly sensitive to interest rate changes, says Brainis. They can then adjust their offerings to deter those clients from moving their deposits to other banks.
3. Strengthen customer relationships with excellent data-driven services.
Comprehensive digital service models backed by data analytics enable banks to strengthen ties with customers and deliver tailored solutions that meet their needs at critical moments, says Verhagen. It’s essential, however, that banks combine their data-driven service models with human agents who can engage personally with customers.
“A mistake that some banks made is that they went all in for digitisation but lost some of their human touch. They not only weakened their customer service but they also reduced their opportunity to cross-sell,” says Verhagen.
Ana Marinkovic, executive general manager, Business Direct & Small Business Bank at NAB in Australia, says a key feature of her bank’s successful SME business is its combination of digital services and local well-trained staff. “We have a presence in 500 regional and metropolitan locations. Our banking staff have a strong knowledge of their local communities.”
NAB is the biggest and fastest growing small business bank in Australia, adds Marinovic. “My teams lend on average A$350 million a week. I’ve found that small businesses in Australia are absolutely willing to pay a 70 to 120 basis points premium to talk to a human bank professional.”
Digital ecommerce platforms and supply chains also offer banks an ideal avenue to forge closer links with SMEs, says Aditya Sharma at Standard Chartered Bank in Singapore. Banks can use data drawn from these ecosystems to help them make lending decisions for SMEs. “We have plugged into the ecosystems of a lot of big ecommerce players and merchants and use transaction data to extend financing to SMEs.”
Sharma, the global head responsible for small business clients at Standard Chartered, expects the bank to extend its integration with digital ecosystems. “Lenders can make decisions based on the strength of the ecosystem.”
4. Leverage GenAI to boost productivity and improve the delivery of products and services.
New GenAI applications enable banks to boost productivity across their organisations and improve their delivery of products and services. They are particularly effective in enhancing interactions with clients, such as onboarding, servicing, cross-selling, retention and offboarding, says Brainis.
5. Grow beyond the core by linking with partners to deliver offerings beyond traditional banking services.
Banks can strengthen ties with SMEs by providing them with far more than finance. They can offer them, for example, much needed guidance, information and networking opportunities.
NAB is helping its SME customers beef up their cybersecurity. “In Australia, 62% of SMEs experienced a security incident last year. We have also seen an 80% increase in the number of scam events reported in 2023. We are helping our customers understand, prepare for and mitigate cybersecurity breaches,” says Marinkovic.
One of the big trends in the SME sectors in Asia and Africa is the growing number of women entrepreneurs, says Sharma at Standard Chartered. “The feedback we are getting from them is that they want more opportunities to network and to find buyers and suppliers. They’re also asking for business coaching and mentoring.” In response, the bank has launched the Standard Chartered Women's International Network in collaboration with partners Mastercard and business enablement platform GlobalLinker.
South African banks have become accustomed to going beyond banking, says Andiswa Bata, head of SME banking at South Africa’s First National Bank (FNB). They’ve been compelled to add offerings outside their traditional banking business because many of their potential customers can’t engage with them through conventional branch or digital channels.
About 60% of the financial transactions performed in South Africa involve cash, says Bata. She adds that the high cost of data in her country is also a barrier to many SMEs using digital banking services. “One gigabyte of data in South Africa costs about 100 rand, which is about five or six US dollars.”
To attract and retain SME customers, South African banks such as FNB have established themselves as “one-stop shops” that provide a range of services such as personal ID and business registrations, financial literacy education and entrepreneur networks.
6. Guide green transition by giving SMEs advice and finance to become more sustainable.
Few SMEs have the knowledge or resources to transform themselves into sustainable organisation. Banks have a huge opportunity to draw closer to small businesses by providing them with the finance and guidance they need to become greener companies.
NAB, for example, has developed an extensive climate strategy that supports SMEs and other business clients. Together with Disaster Relief Australia it is producing digital resources to help its customers prepare for disasters such as bush fires. “We also have a partnership with climate technology company Greener to help our clients calculate carbon emissions. SMEs in Australia account for about 40% of the country’s emissions,” says Marinkovic.
The six “blockbuster” moves described by McKinsey’s Verhagen were endorsed by most of the banking industry leaders who attended the Qorus online event. The executives identified the need for faster and smarter credit processes as well as stronger customer relations as the most pressing items on their strategic agendas in 2024. Next were growing their business beyond the core and leveraging GenAI.
It looks like 2024 could be the year SME banking moves to the forefront of the banking industry’s efforts to spark renewed growth and overcome rising competition.
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