Like a blessing in disguise, digital banking may become a high-ranking innovation in financial services that can help small and medium enterprises survive during the new normal. According to DBS Hongkong, SMEs must be proactive in both good and difficult times in adopting financial technology to remain competitive. The crisis caused by the coronavirus must be perceived as an opportunity to take advantage of digital banking and reap long-term benefits in the future.
"We understand that SME businesses cannot take the time to visit offices, deal with daily banking issues, and conduct trades during this outbreak, so we are improving our digital banking solutions. Not only is it safe for owners and employees alike, but long-term operations will also be more effective," said Alex Cheung, managing director and head of institutional banking at DBS Hong Kong. According to Techstar mentor Brad van Leeuwen, it is not easy to provide financial services to SMEs. He said 99 percent of all businesses in Europe are classified as SMEs, so the market is diverse with different needs, interests, and identities. This shows SMEs and big business cannot be served in the same way.
Van Leeuwen compared the diversity with customer relationship management (CRM) tools where cloud computing provides a lower threshold for a CRM solution at a much lower cost.
Today, there are hundreds of CRM systems that benefit from the low cost of developing software, and they are aimed at a specific market. They may not reach the scale a company such as Salesforce has, but they are highly relevant and solution-driven for their target group. Microservices in the cloud make banking systems similarly flexible, with shorter development times and faster processes to meet customers' specific needs.
SMEs must look beyond conventional banking
Financial services such as digital banking are not currently a priority for many SMEs because they are more concerned about banks' liquidity than innovation. A report by the Belgian Financial Sector Federation (Febelfin) shows banks had suspended the credit facilities of 116,000 professionals and businesses in that country and 111,000 in the Netherlands. During the current situation, inefficient processes, infrastructure, and credit scoring lead to questions about which banks are or are not good partners for SMEs.
On the issue of credit scoring, Luc Gillain, managing partner at fintech company FinFlag, refers to the case of Maxi Toys, a chain with 200 retail and e-commerce stores. It had no credit history, simply because it was doing well during normal market situations. But due to the pandemic, Maxi Toys started facing liquidity problems. For the first time, it approached a bank for a €30 million loan. However, no banks would help because they were prioritising existing customers with sound credit records.
SMEs account for 90 percent of businesses and 50 percent of jobs worldwide, with combined annual global revenue of around $850 billion. US-based management consulting firm McKinsey & Company also reported that 80 percent of banks see this as a priority growth area. Fintech firms such as Sage and iZettle are also eyeing this potential, which includes SME loans and other banking services in addition to accounting and payment solutions. Challenging banks Starling and OakNorth have launched products focused on SMEs over the past few years.
In Singapore, Hong Kong and Malaysia, digital banks are emerging with the support of new licensing programs specifically aimed at the SME market. The 2020 Visa Study on Digital Banking and SMEs in Singapore showed 88 percent of small businesses in the wealthy city-state are considering switching some services to digital banking. About 55 percent of respondents said digital banks would provide lower banking costs, 54 percent expected greater convenience, 53 percent believed it would make it easier to pay bills, while 52 percent indicated that it would and save them time and effort.
However, despite this data, SMEs continue to be an under-served market.
Modern financial services must be integrated
After the pandemic, a new generation of SMEs is expected to emerge with an above-average presentation of success compared with those that will fail. These new entrepreneurs will have different expectations and ways of dealing with business. Likewise, this will also apply to their relationships with financial institutions. They only know digital banking, and expect superior user-interface-like technology for future businesses. High-street banks are examples of traditional banks whose on-site activities have changed with the internet over the years.
Meanwhile, a new generation of enterprises will look for all types of financial services that can be integrated into their models. The newsletter Moneythor analysed the need to reform the products and services, as well as the processes and tools of banking that will drive more growth and revenue. Open Banking, for instance, can improve the way SMEs interact with banks by improving credit infrastructure, providing real-time cash-flow management, and improving product offerings. The high accessibility to SMEs' complete data under Open Banking provides banks with more room to offer personalized products and improve the customer experience and financial management of small businesses. According to a poll by banking community media outlet The Banking Scene, 42 percent of correspondents consider partnerships with specialized fintech companies as having become increasingly important.
"Banking is going to be a step in a user journey. Today this is in a seamless payment in Uber, tomorrow it will be in the recruitment process perhaps; it will be in the onboarding process of a new supplier when you want to manage your cash flow. This will no longer be something you discuss with your bank, it will just happen," van Leeuwen, who is also a co-founder of payment management platform Cledara, told The Banking Scene.