While traditional banks express the intention to service SMEs, the inherent challenges faced financing SMEs means that the approval rate of disbursements remains relatively low, with outstanding loans to SMEs lower in 2020 than in 2016.
SMEs’ access to credit is a fundamental need, distinguishing them from the retail customer segments served by Traditional Banks. However, in the SME space, credit is used more productively and can go a long way to fuel growth in the business. Currently, traditional banks are not fully exploiting the SME banking opportunity as they do not have the required capabilities to manage the risk effectively.
Hentus Honiball, partner and Africa financial services lead at management consultancy Kearney says that there are three primary considerations banks, and other financial institutions have regarding SMEs that creates the hesitancy to provide credit to SMEs.
- Firstly, SME’s typically experience higher default rates when compared to other client segments (Retail & Corporate).
- Secondly, SMEs often lack collateral of sufficient quality to provide security against funding received.
- Thirdly SMEs lack of managerial capacity in terms of financial and business skills means that Banks can’t trust that any funds will be effectively deployed & managed.
These challenges have contributed to the significant funding gap to SMEs, which is currently estimated at over R375 Billion. Based on current funding levels to SMEs, the total demand for funding in the sector is estimated to be at least R900 billion if you consider unmet demand. The SME market is significant and is underfunded by about 40%, which presents an opportunity for the right player with an innovative approach to fill this gap.
But recently several key players are pursuing this opportunity in the local market. Honiball adds, “It has been innovation and technology that has led to an influx of private sector participants, with FinTech players leading the pursuit to help fund SME’s” he also added that these FinTech Players entering the SME landscape have focused on specific offerings, seldom providing end-to-end banking solutions.
However, by creating an end-to-end Banking solution for the SME market through a single platform, Banks can create a differentiated offering compared to Fintech players with a very narrow focus. Pivotal customer events in an SME’s lifecycle cause specific pain points; at these moments, Banks can engage clients and offer solutions to win them over. These key stages include: Starting-up the business, Running the business, Expanding the business & Restructuring, or exiting the business.
“To successfully deliver the winning value proposition, Banks need to develop specific capabilities that support a differentiated end-to-end offering,” says Honiball. These differentiating capabilities include leveraging data, financial education, Digital self-service models, & Lean operations underpinned by platform integration, enabling the Bank to offer the core banking products itself while opening APIs for integration of ancillary services via 3rd parties. The platform model allows for faster innovation through quick solution deployment.
Honiball adds, “From a data perspective, delivering a differentiated digital customer experience relies on fully leveraging data to create the insights necessary for a unique offering. This requires the Bank to take advantage of trigger points to engage customers & collect data.”
By accumulating diverse data sources, the Bank can use an innovative “credit scoring engine” to make credit decisions, as well as an “insights and learning engine” to create unique customer profiles, which can then be used to inform the orchestration of a unique customer experience catering to the individual needs of the SME.
For example, we have seen several Turkish banks who have successfully considered credit candidates with limited financial inputs by taking an individual-centric approach. With an ever-growing Turkish grey economy, FinansBank took a differentiated approach that maximised the use of the individual’s data when evaluating credit applications by SMEs and taking an individual-centric view.
To deliver a comprehensive value proposition, a Value-Added Services (VAS) Platform provides SMEs access in a single place with additional offerings tailored to their needs, financial and beyond. Such a platform is designed to bring all the elements of the CVP together to create an Omni-channel, personalised experience offering for SMEs. A VAS Platform can be facilitated digitally through the SME banking app. Using a digital-first approach encourages SMEs to share data and engage with the platform even before starting banking.
We must remember that a SME lifecycle can be much shorter than retail customers’ life cycles as SMEs can grow quickly. This poses a challenge for Banks that are faced with rapidly changing needs.
“To win in this space, banks will need to service the evolving needs over the customer’s life cycle. These services could include unique ideas such as Advisory and Acceleration Support and an SME connect platform for SMEs to network & partner with other businesses across the industry value chain,” ends Honiball.