Small and medium enterprises (SME's) are one of the fastest growing sections of the business market across the world. If we take the UK as a case in point, the SMB sector has grown by over 64% since 2000 and makes up 99.5% of businesses in every main business sector. (Figures obtained from the Department for Business, Innovation & Skills)
This massive growth has come about through three main drivers. The first being the growth of the digital world. The internet has changed everything. Through a combination of being able to work anywhere, smart technology, smart devices and Apps, new 'Gig' style economies have grown up that enable people the flexibility to work how they want, where they want and when they want.
But there is also a secondary style of SME, which has particularly come about thanks to the fallout from the global recession of 2008. These SME's either lost their jobs during that period or couldn't find work in their field, so they set themselves up as freelance independents providing their services to the businesses that couldn't afford to keep on staff but still required the work to be done. Many of these people have flourished and have remained independent and grown. Despite the return of the economy larger corporates still see the value in utilising these third party resources, because of the expertise many of these people bring - without the need of long term contracts.
And finally there is the traditional self-employed trader, or sole trader, comprising mostly of trades people such as Electricians, plumbers, and builders. Again this section has grown massively since the recession as national house builders stopped directly employing builders themselves and instead subcontracted out to teams of self-employed contractors, so that they could scale up or down as the property market fluctuated.
Banks have been slow to adapt to this new market
Traditionally these SME customers had two choices – either run their business as a sole trader and use your current retail bank account, or, open a business account that was aimed at larger businesses. These were expensive to run and didn't provide the functions that small business people really required. Business accounts have also traditionally been notoriously difficult to open for SME's and could literally takes weeks before the entrepreneur was ready to trade.
The FinTech revolution started to change this. New Neo Banks providing accounts in minutes not weeks started to become prevalent. And a host of FinTechs started offering App based tools like accounting and expense management solutions, dedicated to these SME customers. But the question still exists – what banking model do SME's actually want? A retail App based banking model from a Neo Bank or a corporate banking model from a High street provider?
So what does a SME customer require from their bank?
It's a combination of the two. Small businesses succeed by being dynamic and fast moving, moving faster towards creating customer satisfaction than larger enterprises can do. So they require a banking partner that can offer them solutions that are seamless and turnkey. They also require help. Now this help comes in two formats – additional business functionality and guidance on how to run their business better.
SME's have limited resources – both time and money – so if they can manage several core aspects of their business together and centrally, it has to be a benefit to them. This is where the FinTech API story comes to fruition. Where SME's can now link business process functionality to their business core banking data, to create seamless experiences with straight through processing.
That's why you now see companies like Xero – the online accounting platform - connecting directly into business banking Apps, allowing for invoicing, payments, and P&L management to tie directly to the bank account in real time. In fact this type of interaction is so important to SME's that RBS recently purchased FreeAgent, a Xero competitor for £53m to provide exactly this service.
But SME's also require guidance and knowledge, and banks in house small business account managers don't cut it – because these account managers on the whole, have no experience running businesses themselves.
SME's are craving the sage words of advice from someone who has done it before, someone who has experienced the same problems and has a solution. They are also wanting to trade with likeminded people. To procure services from people who mirror their beliefs and ways of working. So banks that can incorporate a network engagement model into their offerings will see significant take up.
But what about money?
We can't talk about small business banking without talking about the biggest challenge facing every single one of them – working capital.
This is where small businesses suffer the most because they generally don't have vast amounts of cash set aside, and they find it difficult to raise funding to see them through either lean periods or periods of growth that require investment.
Unpaid invoices thanks to buyers stipulating longer payment cycles is the core problem that they all face. That's why short term receivables financing is such a core requirement for any SME banking provider. Invoice factoring is nothing new, and has provided a solution to many SME's in this situation. But, it has its downfalls such as many providers requiring their customers to go 'all in' with its adoption and put 100% of their invoices through the platform. Whilst this provides a solution to the customer, it does remove any flexibility for the customer, who may only require gap financing during particular periods of the year.
So newer, FinTech lead methods of invoice financing are gaining traction where SME customers can choose which invoices to take early payment on, and on what terms, are gaining in popularity. As are methods such as dynamic discounting, where customers can choose to take a percentage discount based on a sliding scale for early payment. There are also additional 'win win' early payment options where the SME supplier can be paid early for a couple of percent discount and the buyer still pays at 60/90 days etc.
These style of solutions are musts for any bank looking to successfully engage with SME's. How they do it depends on their business model. But either by developing their own solution or connecting to a FinTech provider via API's these working capital enablers are SME gold.
So when we say SME – What size business is that?
Ask a room full of people what constitutes a SME and you will get multitude of answers. One person, less than 10 employees, under 250 employees, somewhere in the middle...
And this highlights the gap in banks positioning of banking solutions for SME's versus large enterprises, because there is no nice round hole to place this square SME peg.
When we talk about banking customers in general we often discuss customer lifetime value. Well for SME customers there needs to be a lifetime view – what they look like on day one as the company is formed by one person, and what they may look like in twenty years' time with multiple offices and 200+ employees. The needs will vary and additional products will be required as they hopefully grow. But how do you provide that?
Banking services for SME's should be seen as a platform where you provide a core transactional banking solution that can then be built upon as the customer requires more functionality, right up to core corporate solutions. Those functions or products maybe in house, or they may be third party via API's but they deliver services that scale with the customer – either up or down – and must offer business process benefits, as well as banking transactions.
As previously mentioned the network effect cannot be overlooked, and a banking provider who can successfully enable inter networking and trading between their SME community will build unsurpassed customer retention as well reduced risk, and not to mention increased liquidity deposits by keeping transactions 'in house'.
The SME customer really does underpin the entire global economy, and they deserve a banking platform that underpins their business and enables them to trade seamlessly.