Banks worldwide continue to report mixed revenue and profitability, resulting in increased pressure from stakeholders. Institutions face depressed returns on equity (ROE) and higher costs, yet the cost of equity (COE) has remained largely consistent with the levels preceding the global financial crisis.
In response, banks continue to assess their customer segments to understand which ones can provide a much-needed boost to both revenue and profitability. The small and medium enterprise (SME) segment is often underserved but is potentially very profitable, and will remain a key segment for banks, regulators, and national governments moving forward.
Banks need to act now or else they risk seeing a previously static market disrupted by new competitors. However, banks will need to revamp service models (including both origination and post-acquisition servicing) to match evolving customer needs.
Banks have struggled to serve the SME business segment effectively as they have shifted their models back and forth, seeking ways to segment customers, assess risks, service accounts, and manage relationships. The root cause of these model revisions is the complexity of the SME segment, not in terms of product or service needs, but because the segment is not homogeneous. Despite similarities in size and structure, SMEs may operate and behave very differently in terms of scope of business, risk appetite, growth potential, product needs, and customer demands.
Rapidly changing technology platforms and evolving global political agendas further complicate matters. How banks leverage innovative technology to provide transparent products and solutions in a convenient and competitively priced way will be the key as they move forward.