SME Ecosystem; The Future Approach
SMEs Have Been a Difficult Market Segment for Banks
In Canada, 99% of businesses are considered small and medium sized enterprises (SMEs). They represent 90% of employer businesses, employ 88.5% of the total private labour force, and account for well over half of Canada's GDP.* Yet SMEs have always been a difficult market segment for banks. With relatively complex needs, and perceived higher risk, the cost to service and underwrite has made this segment difficult to profitably address.
SME Demand for Improved Services Is Accelerating
Fueled by technological trends and the impact of the COVID pandemic, SME demand for improved digital services has accelerated. In the US, EY found that during the pandemic 43% of SMEs increased their use of online banking services, and 40% used more mobile services.* In Canada, research shows similar results with 24% doing more online banking in 2021.* SMEs are looking for improved speed, access, and integrated services that support their business processes.
Fintechs and NeoBanks Realize the Potential
Fintechs and NeoBanks have long targeted retail clients, but now we are seeing the focus shift to SMEs. Globally, in 2021 B2B startups raised six times more funding than B2C equivalents.* Fintech players are challenging financial institutions from all angles, either through full-service or selective-service models. Companies such as Square or Stripe are delivering personalized and bundled services for SMEs, expanding from payments into credit. While mega players such as Wise and Ayden are acquiring banking licenses in Europe and the US, enabling them to offer SMB products and services such as bank accounts, cash advances and payments. Platforms such as these are well positioned to address the various needs of SMEs, with Boston Consulting Group estimating it is an estimated addressable market of ~$110bn of revenue in the US, Europe and the UK, which represents ~45% of the total SMB banking revenue pool.* According to EY 2019 Global Fintech Adoption Index, 25% of SMEs worldwide have used services in the past six months provided by Fintechs in all of these four categories: banking and payments, financial management, financing and insurance.* While the SME Fintech market in Canada is more nascent, last year saw the launch of Pillar’s beta solution targeted at SMEs offering online business account applications and cards.
SME Ecosystem; A One Stop Value Proposition
Despite the rise of Fintech challengers, banks still hold the critical pieces of SME business; accounts and payments. Furthermore in Canada, SMEs are still very loyal to their banks, with the majority of them preferring to do all their financial business with the same provider.* This puts incumbent banks in an excellent position to build an ecosystem of integrated partners that enables SMEs to benefit from value added services as part of their workflows and make use of their banks’ different products and services in an integrated fashion. An ecosystem approach enables SMEs to more easily manage their business operations through partner integrations between critical SME financial platforms (i.e. accounting and payroll). By linking the apps and services to their bank accounts, banks can maintain their core relationship with SME clients around how they pay and get paid.
Critically, these integrations can facilitate the flow of data reciprocally between platforms, enabling banks to benefit from increased data on their customers. Furthermore, direct integrations improve the quality of data and enable banks to leverage those connections to build integrated services, or simply to just charge customers for the benefit of having auto-reconciliation of payment and receivable data in their accounting platforms. However, time is of the essence; research indicates that while SMEs in Canada are largely loyal to their banks, they do not feel appreciated.* Furthermore, they are willing to share data with Fintechs or challenger banks.* Thus while these study sizes are small, it shows there is an interim period whereby banks have an opportunity to capitalize on the SME segment before new entrants come to the market.
But What About Open Banking?
But what is the role in open banking for SMEs? The first phase of open banking, targeting consumers will do little more than improve the security and access of the data consumers typically access today via screen scrapping. When SME data is included in the Open Banking implementation in Canada, data sharing will be streamlined for accounting platforms and other Fintechs currently leveraging screen scraping services. On the reverse side, however, banks do not benefit from access to the SMEs’ accounting data which could be used to improve their product and service offering (such as real time credit advances based on cash flow projections). The answer to this dilemma lays in the future of open finance; a trend that is playing out in the EU and Australia.
Open finance goes beyond bank account information, enabling users to share data such as investments, insurance, taxes and pensions, and resulting in the ability for financial service providers to offer a more complete view of their customers’ financial picture. Critically, for SME clients, open finance would enable banks to leverage data about the SME’s business, such as accounting information enabling them to provide more targeted, real time, and effective products and services. Open Banking and Finance for SMEs, however, is progressing at a snail’s pace, and the demand is far exceeding the pace. Fintechs and other challengers are developing their own ecosystems to facilitate data sharing and it is clear the opportunity is now.
Banks Need to Act Now
Open banking, open finance, digital identity, payments modernization and even DeFi, are paving the way for a data economy which will fundamentally change the future of financial services and how banks build products and interact with their customers. In the meantime, there is a considerable opportunity for banks to lay the foundation of an API lead SME strategy and provide the open partner ecosystem of data SMEs need. Banks, particularly in Canada, are well positioned take advantage of this opportunity but they will need to act quickly and strategically to avoid the Fintech challengers.
References
2 https://www.ey.com/en_gl/banking-capital-markets/the-five-step-journey-to-sme-banking-transformation
3 https://canadiansme.ca/post-covid-smb-banking-needs-the-new-normal/
5 https://www.bcg.com/en-ca/publications/2022/smb-banking-embedded-finance-potential
7 https://www.phase-5.com/marketing-financial-services-to-small-medium-businesses-phase-5-0
8 https://www.phase-5.com/marketing-financial-services-to-small-medium-businesses-phase-5-0
Written by: Jennifer Jarvis, Head of Advisory and Channel Partnerships