If banks do not change their approach towards the SME lending business, they risk losing – forever – a major portion of this very important customer segment to the alternative SME lenders. It’s therefore the need of the hour for banks to thoroughly review and transform their SME lending business. This white paper provides insights on the market disruptions being rendered by alternative SME lenders, the key challenges faced in banks’ SME lending business, and recommendations for banks on ways to transform their SME lending business.
Small and medium-sized business enterprises (SMEs) are crucial for the economic growth and competitiveness of any country. Consider this – in the USA, small businesses comprise 99% of all companies, employ over 50% of the country’s private sector workforce, contribute over 50% of the non-farm GDP, and for the past two decades have created around two‐thirds of the net new jobs.
Similarly, in Australia, nearly 2 million SMEs make up for around 70% of all industry employment. In the UK, SMEs employ nearly 60% of the private sector workforce. And most of the innovations across all geographies happen through SMEs.
From the aforementioned, it is obvious that supporting SMEs’ financial needs is crucial to a country’s growth. Having seen this, it is no wonder that in recent years, policymakers in many countries (for example US, UK, and the EU) have embarked on initiatives to encourage SME lending. For banks as well, SMEs form a key and loyal customer segment. Unfortunately, despite such positive factors, recent years have actually seen significant unbundling in the banks’ SME lending business. SME lending on the banks’ balance sheets has decreased significantly, even as their loans to large businesses continue to rise. Consequently, the historic strong relationship between banks and their SME customers has gradually begun to erode. If banks do not change their approach towards SME lending business in earnest, they risk losing – forever – a major portion of this very important customer segment.