The Need to Reboot Digital Banking for Small & Medium BusinessesUntitled part

Small and Medium Businesses (SMBs) make up an essential value pool for the banking and financial services industry, accounting for more than 90% of all companies and more than 50% of jobs worldwide. According to a 2019 report by McKinsey, SMBs account for a whopping USD 850 billion of annual revenue for banks globally, with an expected growth rate of 7% annually over the next seven years. Even after the severe impact of the pandemic, the annual SMB revenue opportunity for banks would be very close to the trillion-dollar mark by now.

Despite being such an important value pool, SMBs have remained an underserved market for their business banking needs. The finance gap for formal SMBs in emerging markets is estimated to be USD 5 trillion. Taking into account informal SMBs and those from vulnerable and underserved groups, there is an additional financing gap of USD 2.7 trillion for the sector.

SMBs, owing to their low and volatile turnover, struggle to get priority from most traditional banks. The challenge for banks is balancing the cost to serve an SMB customer against the uncertain ticket size and potential risk. Banks have also found it cumbersome to risk assess SMBs efficiently due to lack of documentation, inability to front collateral, or offer structured insight into their financial standing. As a result, SMBs find themselves in a ‘no-banks’-land’ stranded between large corporates and retail customers, inundated with one-size-fits-all products and services that don’t meet their business-critical needs.

The last two years have seen significant shifts in this challenging equation. The COVID-19 pandemic has had a devastating impact on SMBs but has also accelerated their adoption of digital tools and channels across sales, operations, finance, and accounting. This digital adoption offers banks an unprecedented opportunity to assess SMBs’ creditworthiness cost-effectively. Moreover, access to deeper data like sales pipeline, orders, procurements, etc., makes it possible for banks to adopt alternative risk and needs assessment models and innovate more suitable banking and beyond banking products to grow the overall value of the relationship.

Fintech disruption in SMB Banking

The underserved SMB segment offers massive whitespace for a range of new entrants from fintechs, digital platforms, and business tools to innovate for the seamless and contextual distribution of financial products and services. Enabling technologies such as cloud computing, microservices architectures, interoperable APIs, data analytics, artificial intelligence, machine learning, etc., empower FIs to better understand customers, orchestrate personalised experiences, and enhance operational efficiencies to improve risk management practices to reimagine banking for SMBs.

SMB banking reimagined with BANKINGSTACK

All of this, however, requires banks to reboot their current approach to digital banking. Simply enabling digital access to existing products is not solving the challenges of traditional banking for SMBs, which are high cost of acquisition and serving, out-of-date risk and needs assessment, and overall low product fit. This friction in traditional banking offerings and SMB needs has created whitespaces for fintechs, who are rapidly capturing the minds and wallets of entrepreneurs desperate to solve their problems.

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Contact Details :

BANKINGSTACK

Open Financial Technologies Private Ltd.

Tower 2, 3rd floor, RGA Tech Park, Sarjapur

Bangalore, Karnataka, 560035