Globally, small, and medium enterprises (SME) account for more than 60% of total employment. SMEs contribute about $850 billion of annual revenue for banks through deposits, payments, lending, and overdrafts. Therefore, it is safe to say that MSMEs constitute a vital part of a country’s economy.

There is a spike in the number of SMEs and start-ups worldwide, and this presents a significant opportunity for banks. However, to successfully explore such opportunities, banks must introduce technology-led innovations that drive operational efficiency, growth, and personalised customer experiences for MSMEs.

The Segment is Becoming Increasingly Attractive

Changes that have contributed to making this segment attractive:

  1. Small business owners are increasingly becoming exposed to curated and easy customer experiences in their personal lives. This greatly influences their expectations when it comes to dealing with banks or financial institutions.
  2. Secondly, Digitization has thrown light on how banks can service SMEs better. Banks have access to valuable data and advanced analytics (previously unavailable). Apart from improving cross-selling and up-selling opportunities, it greatly improves the predictive power of the credit models used by banks.
  3. Open regulations have allowed new entrants to storm the market with offerings that are tech-savvy and innovative. It is time for the banks to “up” their game.

What do SMEs want from their Banks/Financial Institutions?

Talk to any small business owner, and you will find that they would prefer operating their business rather than spend time on administrative duties (book-keeping, financing, payables and receivables, tax planning, and banking).

Quite simply, SMEs need value-added services along with personalised, simple, and intuitive banking experiences.

Challenges SMEs face with banks:

  • Most often, MSMEs are too small to have dedicated finance teams. Therefore, cash flow issues, Capex investment, access to small SME business loans are just some of the challenges they face.
  • Most SMEs treat banks as custodians- a safe place for their collections. Most of them do not know how to access/use the entire gamut of services that banks offer.

How banks can help SMEs overcome these challenges

  • Creating fresh revenue streams- SMEs are beginning to look at banks and financial institutions as mentors who can play an active role in their growth. Whether it is SME cash management, or business finance management, banks can craft a comprehensive suite of offerings (digital or otherwise) based on financial and operational data of the SMEs.

For instance, using technology and some innovative thinking, Equity Bank of Kenya introduced the concept of “Agency Banking”. Not only did this increase the bank’s visibility, but it also created fresh revenue streams for the SMEs. As a partner of the bank (agency banking), SMEs offer easy access to the bank’s products and services to their customers, adding to the list of value-added services they offer. This makes their business attractive to existing and new customers. SMEs also benefit from other conveniences that technology offers. For instance, businesses become digital, allowing banks to offer other financial products (such as SME business loans) and services based on business activity (transaction history and credit rating).

  • Offer assistance in managing cash flows- According to a study conducted by Intuit, 69% of small business owners are concerned about their business’s cash flow status. They don’t have clear visibility of their financial position due to the lack of proper maintenance of books, which leads to a situation of banks unable to lend to these MSME’s due to lack of structured financial data for credit assessment. Banks can come in here to help this small businesses to have better control over their accounts receivables/payables, leading to the advent of BFM (Business Financial Management) and then contextualising providing credit facilities and other banking services, based on the SME’s data and projected financial positions.
  • Moulding agents into captive SME banking customers- As a bank expands its Agent network, not only it creates a wider net to onboard and service its retail customers, these Agents also become a captive SME customer base for the Bank, who can help in funding the agent floats through credit lines, or deliver instant POS based lending (Buy-now Pay-later) to finance consumer purchases or provide contextualised invoice discounting capabilities….and many more.
  • Offering better merchant propositions-
  1. Innovations for contactless or less contact – In the past year, Covid-19 has compelled banks to offer contactless (or less contact) transactions. In this regard, the digital onboarding of merchants is a simple but effective solution. Merchants can sign up for banking services without physically approaching a bank. For instance, Modefin offers an AI-based customer onboarding solution that has an enhanced capacity to conduct a liveness check and a facial match. This works as a preliminary level of security to check that the customer is genuine, and the documents are valid.
  2. POS/MPOS Technology- traditionally, digital transactions were primarily restricted to mid to higher tier merchants, due to the cost of POS devices. As the consumers are now moving towards digital transactions, due to Covid-19, the lower tier merchants who have been primarily relying of cash, are hit badly. mPOS proposition, converting a merchant’s Android phone into a POS devices, has changed the landscape, and enables even these smaller merchants to accept digital transactions using NFC based payments, Cards, OTP and QR. This is transforming the Acquiring business of the Banks by now enabling them to even bring the smaller merchants under their folds, which was earlier unviable.

The SME segment is diverse depending on the development stage and industry. As business owners seek targeted solutions from their bank, financial institutions must offer technology-led innovations for seamless customer interactions through multiple touchpoints.