According to UK Cabinet Office figures there are in the region of 5.4 million small and medium-sized enterprises (SMEs) in the UK. They represent approximately 60% of employment and roughly 50% of total private business turnover. Their banking business is worth some £2 billion in revenue and SME business loan balances are around £90 billion. By any standards, this is a sizeable market. But for banks it could be a much more valuable opportunity.
However, to date the major banks have not been able to develop their provision of higher value services to the sector with any real success. When asked what they want from their banks, most SMEs frame their responses in terms of basic banking services. The improvements they identify are for those services, eg business current accounts, payments and related processes to be cheaper and/or faster. Most SMEs are also reasonably content with the services they receive today – in many ways they have few strong feelings about their banking services one way or another. And these low expectations present a challenge to banks seeking to do more in this sector of the economy. Providing high-volume, low margin services to the SME sector successfully depends on achieving operational excellence to drive results. But there are limits to this strategy which sees banks becoming utility players with little scope for competitive differentiation.
The alternative is for banks to achieve greater relevance to the SME market and its requirements. To do that requires a more agile and nimble approach with investment in technology platforms to provide services that can help SMEs to manage their operations more effectively and, for example, deploy data and analytics to grow their business. And to do that, banks need to earn the right to be relevant. What that means in practice is developing a more detailed understanding of their customers. Rather than a focus on selling products, services need to be built around a detailed picture of customer needs.
SMEs are not a homogenous bloc. They range considerably in scale and ambition, from fast-growth tech start-ups to stable, medium-sized manufacturing businesses. Banks that seek to do more in this sector need to create a more detailed picture of the specific requirements of each. The services and advice that a technology business just starting out requires, will be very different to a well-established manufacturer. Today, many SMEs will look to others as the first port of call for advice and support. That may include professional advisers such as accountants or lawyers or their investors. In addition, other players are entering the SME space, with digital offerings. The key question for banks is whether they can continue to invest in the operational excellence required to deliver basic services at a competitive cost at the same time as developing more agile, nimble and responsive digital capabilities to drive relevance and compete successfully with others in the sector. And that’s the question we’ll look at in more detail in my next posts. Stay tuned.