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Next generation SME banking

How banks can apply innovation to seize the SME revenue growth opportunity

From mobile credit card payments to virtual advisers, and from automated cash deposit machines to social networking, the next generation of SME banking is emerging now. It’s time for banks to deliver the services SMEs want profitably – or risk losing out to competitors and new entrants.

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It is generally held that the SME segment is underserved, reflecting the risks associated with the sector. Despite the number of small businesses in the UK remaining broadly stable at ~4.5 million, the sector is highly dynamic, experiencing frequent births and deaths as companies are established, are acquired, and in some cases close. However, for UK banks, the SME market still represents a huge and under exploited growth opportunity.

Employing nearly 60% of private-sector workers, SMEs generate a proportion of UK private sector turnover that is virtually identical to that of the UK’s 6,000 large businesses. Their attractiveness is further underlined by their tendency to be fiercely loyal and ‘sticky’ customers that are historically unpredisposed to multi-banking.

Today, a powerful combination of new regulation, evolving customer needs, and the emergence of new players and technologies is driving an unbundling of SME banking. This has pushed the market towards a ‘tipping point’, and created a clear but short-lived window of opportunity for banks to seize the initiative and grow SME market share and revenues (See Figure 1). However, getting SME banking right presents real challenges and risks in a period of intense economic uncertainty.