SME gap becoming saturated

The struggles faced by SMEs when it comes to securing bespoke products and services from banks have been well-documented. Small and medium enterprises, as we know, have very different financial needs and face very different challenges to the large corporates, and as a consequence they have tended to be under-served by traditional financial providers. Given that SMEs have been calculated by McKinsey to represent a fifth of global banking revenues, any under-servicing represents a huge growth opportunity for challengers. 

Little wonder, then, that challenger banks have sprung up to fill the SME gap. Agile, innovative and digital-centric, this plethora of neobanks offer smaller businesses with financial services which meet their unique needs. From easy access and lending for business growth to digital wallets, neobanks are helping SMEs to access the bespoke approach to banking and finance previously affordable only to big business. 

Nevertheless, traditional banks are not resting on their laurels. As they catch up with the new entrants and develop their own next-generation and digital-led banking services, the so-called SME market gap looks set to close. The question is – where next for the banking and finance industry?

The next market opportunity: corporate banking

One good bet is to look again at the corporate end of the sector and the needs of larger organisations. The ripple effect in the financial sector caused by challenger banks is starting to be felt in terms of the expectations of senior professionals and business leaders at large corporate organisations.

These businesses are increasingly looking for ease, efficiency, convenience, and the same digital innovation that they have come to expect from their consumer banking and retail services. BCG, for example, has found that bankers and corporate customers alike are hungry for simpler, more straightforward transactions and the option of self-service when it comes to corporate banking; they want data to be seamlessly transferred between their relationship manager (RM) and the devices they use to access their services whenever and wherever they are.

Meanwhile, a McKinsey report on the future of corporate banking predicted that ‘ecosystems will replace numerous value chains in the next ten years. In other words, thanks in part to the explosion of FinTech challengers, new digital platforms and the broader shift to open banking, the corporate banking model is shifting to one of greater interoperability and collaboration between different providers. Such ecosystems will likely reach beyond the core banking industry, and begin to involve digital giants such as Amazon, Google, Apple and Microsoft.

What does all this mean in practice? Traditional banks which are still overly dependent on cumbersome manual paper based processes and which have not yet achieved the seamless transfer of data between different areas of their business – and with third parties – have some catching up to do. 

Agility and continual innovation will keep traditional banks competitive 

The banking and finance industry, like so many others, has been shaken by the digital revolution. Innovation after innovation including the rise of cloud banking, automation, big data analytics, machine learning, and mobile apps have changed customer expectations around banking services - and now corporates’ expectations too. 

For traditional banks and financial institutions to remain competitive when it comes to servicing their big corporate customers, emulating the agility and innovation of challengers, and being prepared to collaborate and form digital ecosystems with other third party FinTech organisations will be critical.