When it comes to commercial banking, banks already enjoy the loyalty of most large enterprises. But large enterprises only make up a small percentage of businesses in U.S., U.K., and Southeast Asian markets. A majority of senior banking executives are now recognizing small and medium-sized enterprises (SMEs) as the biggest growth opportunity and are shifting their attention accordingly.
Loyalty, however, is earned. Banks must work to understand what SMEs want and need – and it’s not the same as what large enterprises want and need, nor what consumers want and need, though it overlaps both categories.
A recent Fraedom study unravels the intricacies: Why should banks turn their attention to SMEs? What makes SMEs different from their larger counterparts? And finally, how could partnering with Fintechs help banks achieve their new goal of focusing on SMEs?
What is an SME, anyway?
First, a definition: An SME is a non-subsidiary, independent firm with fewer than 500 employees. The exact cap varies by country, with the U.S. exercising the broadest definition: anything under 500 employees meets the criterion. The U.K. is a little stricter, bounding “medium” at 200 employees.
For Mercator’s purposes, we have categorized small businesses as those making between $500,000 and $10 million in annual sales.
Numbers aside, the key here is that SMEs are not large corporates or subsidiaries of them. This makes their pockets distinctly less deep and the stakes much higher around controlling and accessing funds.
Why should banks care?
According to the U.S. Census Bureau, 99.7 percent of U.S. firms had fewer than 500 workers when tallied in 2014, fitting the U.S. definition for a “medium” enterprise (between 50 and 500 workers). 89.4 percent met the criteria for “small,” having fewer than 20 workers.
That’s a total of 30 million small businesses in the U.S., according to Mercator’s studies.
The U.K. Federation of Small Businesses reported similar numbers in 2017, when it found that 99.9 percent of private sector businesses were SMEs and 99.3 percent could be classified as “small.” Together, these categories accounted for more than half of all U.K private sector turnover.
The Asia-Pacific (APAC) story is similar, with more than 70 percent of workers employed by SMEs – less than the U.S. and U.K., but still a substantial majority. Thus, “Why should banks care?” is an easy question to answer: Look at all the opportunities!
SMEs are ripe for the picking
In Western markets, half of SMEs told Fraedom that they struggled to access necessary funding from banks and felt that banks did not fully understand their needs. SMEs, reports Fraedom, want to enhance agility through consumerized processes and technologies. Banks must become enablers of that agility, not stumbling blocks to it.
Furthermore, Western SMEs reported struggling to get a clear picture of spend. Many admitted spending hours per week retracing audit trails to see who spent what, and even then, sometimes it was only possible to see the whole picture at the end of the month – not in real-time when business owners needed it. Even worse, this time-consuming task often falls on senior people who should be focusing their energies on the firm’s core goals.
In APAC, many SME owners reported cobbling together consumer products to manage their business. Matt Baker, Senior Director of Global Product and Solutions (APAC) at Visa, suggests a few possible reasons for this. It may be that their bank hasn’t offered them a business product. They may not know what solutions are on the market. Or, they may not be educated on the differences between the consumer and business versions of a product.
Though the struggles may vary from East to West, one thing is the same across the board: The opportunity for banks to serve this business segment is huge.
Size matters
As noted in our report Small Business Banking: A Captive Audience, Mercator has found that small businesses…
- …Most often have business checking accounts for deposits, but are more likely to use payment cards for business payments, rather than checks.
- …Tend to keep savings accounts at financial institutions, but often prefer business certificate of deposits (CD) over checking accounts at their primary credit unions due to favorable rates.
- …Usually have a business checking, savings, and CD at a bank other than their primary bank.
- …Visit branches often, with 79 percent visiting weekly. That includes 24 percent who visit their bank branch daily.
- …Leverage online and mobile banking, especially for bill payment – and do so at a greater rate than consumers, with 78 percent of businesses reporting that they used mobile banking compared to 64 percent of consumers.
- …Seek financial advice and analytics from their banking institutions.
- …Need a variety of loans to maintain business operations and sustain growth.
- …Are borrowing more than ever, with three in four small businesses reporting credit lines of $100,000 or larger.
- …Don’t shy away from online alternative lenders if they can offer an easier process and faster funding than a bank, even if the rates are comparable or higher.
When courting large corporates, banks can take a somewhat formulaic approach: lower costs, up-weigh rebates, and they’re bound to attract a few new large enterprise customers. But these offerings are not as attractive to SMEs, which are more interested in what the bank can offer in terms of lending.
Unfortunately, due to tight lending criteria, the answer is often: “Not much.”
The role of Fintechs
Financial technology firms (Fintechs) can sometimes be seen as competition to banks. After all they offer attractive, digitally focused features and functionality, so they can sometimes attract users who are disillusioned by what they’ve experienced from traditional banks.
Fintechs deliver very tangible real-world impacts that businesses crave. Their innovative technology can help streamline processes and drive agility, efficiency, and productivity.
However, as Fraedom CEO Kyle Ferguson notes, banks and fintechs shouldn’t be mutually exclusive. The smartest ones are working together.
Banks are starting to partner with fintechs to provide technologies that are not their core focus or strength. This can help banks sidestep issues with legacy systems and reduce development costs, as well as avoiding the time, costs, and risks associated with innovating themselves.
Ultimately through fintech partnership, they’ll still be able to offer payment solutions such as e-payables, virtual cards, and blockchain. By collaborating instead of competing, says Ferguson, banks are free to continue focusing on delivering the overall narrative while also plugging gaps in their service offering with minimal overhead.
Example: Commercial cards
Fintech partners can deliver commercial card tech to give SMEs greater insight and control over spending, streamlining bureaucratic spend management.
A recent Mercator study with Aite (Business Credit Cards and B2B Payments: Opportunity to Improve Market Penetration) showed that commercial cards…
- Enable financial management and control
- Cut down on laborious administrative processes
- Offer faster (or even real-time) electronic statements for instant transaction transparency
- Allow users to set and adjust spending limits, and
- Help business customers avoid the invoice processing cycle.
Businesses often issue multiple cards to employees within the company besides the company owner – although these multiple cards are typically consolidated under one brand.
Mercator’s study with Aite showed that SMEs are most attracted to business credit cards when there’s no annual fee, the customer service is good, and the credit lines are generous. Many small businesses use their commercial cards as an additional line of credit, and 78 percent even considered this a top need, though only 45 percent of respondents said they had access to such credit lines.
That’s likely why 1 in 4 small businesses have a loan with an alternative online lender and why, even though 4 in 5 SMEs have a line a credit, only around half of them are with financial institutions.
In short, small businesses are credit-hungry with surprisingly high use of personal card use for B2B payments supplementing business lines of credit. They are satiating this appetite as best they can with business credit cards, but if banks can get a foot in the door of that space, the market is definitely still there to be tapped.
Conclusion
All of this contributes to the growth potential that commercial cards and other financial technologies can unlock for banks. SMEs want the same digital capabilities they get as personal consumers when it comes to managing their businesses, whether that’s commercial cards, digital support and problem resolution, credit apps, real-time accessibility, or simplicity and control of financial management.
Fintechs recognize these needs and are delivering solutions… and banks, if they’re wise, are partnering with them to do the same.