The challenge of re-purposing support for SMEs 17 June 2021
Starting a business with a loan from family members or searching for capital to take a business on the next part of its journey - the life of an SME owner is complex and consuming, and each owner, partner or director is passionate, and each business is unique.
All these businesses now seek financial products that fit their business needs, not the other way around.
Developments in banking services include fully digital business accounts with superior user experience, data integration and automation, self-service and 24/7 on boarding solutions, and individual business finance solutions built on real-time data as well as modern digital interfaces that integrate with 3rd party business software. The question is who is really delivering what SMEs require.
The combination of a growing, fragmented market that incumbent players have traditionally neglected and an increasing digital adoption rate most certainly accelerated by the impact of Covid-19 and the subsequent global lockdowns, has resulted in the further development or formation of several innovative or challenger fintechs and SME banks that aim to re-design business banking in different ways.
Uncovering the true needs of SME’s
To understand the complexity of SME banking, it is helpful to consider the life cycle of a business:
Phase 1: Planning creativity and ideas - an entrepreneur would be generating ideas and insights for their chosen market. Considering the potential and seeking ideas and feedback from others in the sector. And building up reserves and savings for initial investment or in case of delays and setbacks.
Phase 2: Pre-revenue planning and launch - would involve the launching of the business and the creation of a separate identity and a separation of consumer and business banking. There will need to be establishment of administration for invoicing or payments.
Phase 3: Post revenue grow – Understanding cash flow requirements and managing expenses. Seeking support on financial matters.
Phase 4: Expansion – Employing staff for the first time and the legal implications. Access to loans and working capital. Seeking time saving automation of finance administration. Accounting support. International payments made easy.
Phase 5: Realizing the value and next iteration growth – the greatest challenge for a successful and growing business is raising capital to realize the potential. Also, the business requires succession and exit planning.
The business banks or fintech’s who understand this life cycle are the ones who have been able to create meaningful and exciting next generation services.
Initially most of the emerging FinTech’s had a launch and expand strategy which featured a simple current account product with limited features free or low cost, and then premium account features at an additional cost.
Nevertheless, Tide Bank, for example has created an efficient all digital and straightforward account opening application with frictionless document upload and free banking. Account opening takes minutes, and a debit card is issued on completion of identification. As a business grows and moves into Phase 2 and 3 of the life cycle outlined above, account costs are introduced as more sophisticated products are required, including invoicing and accountant package integration. There is phone support again at a cost.
Fast digital onboarding, and mobile apps as well as accounting integrations, are now the new norm, just offering a business bank account with a few digital features may no longer be a differentiating factor. However, great branding and marketing support and a reputation for delivery have ensured they are well placed in the UK market.
Revolut Business as an early disruptor is not only providing fast online sign up and efficient customer acquisition, but has also actively upgraded their client service with tailored financial products and impressive multi-currency options and is diversifying beyond banking services with its marketplace using API integration. There are also reports that the UK digital banking service will allow crypto customers to transfer bitcoin purchased on the platform elsewhere for the first time. While not specifically aimed at SME banking this is another sign of its potential to continue to disrupt the market.
Serving the needs of the users – the next battleground
So where are the new viable business models? Where are the product strategies? Do SME banking providers own the customers, or do they become a product provider? Or a combination of both i.e., Revolut and Starling have a ‘marketplace’ and they have a customer base.
There are new banks emerging now who have chosen not to provide transactional accounts but rather serve the life cycle needs of a business. They provide solutions to their customers challenges rather than features.
We can look first at Lidya, an international technology company established in Nigeria in 2016 that is rapidly expanding into Europe. We see a Nigerian digital SME lending platform with an office in New York and operations in Warsaw and Prague as well as a tech hub based in Lisbon, aiming to create 100 million jobs globally.
Lidya’s fintech platform lets small and medium-sized business register online for loans from $150 and receive that credit within 24 hours after application. This process also helps SMEs build a credit history often for the first time. As of April 2021, Lidya has disbursed over 25,000 loans globally across its key markets of Nigeria, Poland, and the Czech Republic.
At the height of the pandemic in March 2020, Lidya commenced operations in the Czech Republic and Poland – its first European markets – and has experienced tremendous uptake in its services, especially among SMEs severely impacted by lockdown restrictions. In the first six months, Lidya issued US$2 million worth of loans to SMEs in both countries.
Another interesting bank who is challenging the incumbants in the Australian market is Judo Bank. Offering digitized banking solutions and quick responses supplemented with field or market-based specialists who have personal relationships with their customers and differentiated higher levels of service. Again, they are providing cashflow lending and loans starting at min Aus$250,000. Their emphasis is again on the specific needs of SMEs who want to develop and grow their business with less of a focus on historic track records. They are supported by an nCino platform and have experienced huge growth in lockdown. They have a loan book of Aus$3bn and aim to disrupt the lending market.
It’s clear to see the next generation of business banks are making deliberate decisions regarding their role in the FS value chain as well as their business models and products. And both these organizations have chosen to specialize in funding growth through lending.
There remain multiple growth and innovation opportunities in SME banking. We are now seeing new iterations focusing on seamless workflows and product level innovation, not just on mobile. There is also a return in some cases to traditional style valued service offerings.
SME owners and entrepreneurs want time to focus on their business at whatever stage of development in which they find themselves.
Fintech banks and financial service providers who are successful are providing support for their customers extremely efficiently and transforming fragmented experiences into frictionless, cohesive support. It is clear that the newest entrants are intent on moving away from merely selling to serving customer needs by removing obstacles, mainly administration, and offering solutions to SMEs at the stage of their evolution they have reached.