UK banks must ‘rethink approach’ for growth-driving SMEs

Established banks must go digital with tailored services to compete with SME-ready challengers.
28 June 2019 | 57 Shares

Banking monoliths? Source: Shutterstock

As individual businesses, SMEs don’t have the footprint or turnover of 1000-staff-strong organizations, but as a combined force, they are the fundamental drivers of economies.

In the first quarter of 2019, UK GDP grew by 0.5 percent according to the Office of National Statistics.

The largest contributors to this are the country’s current 5.7 million small businesses which constitute 99 percent of businesses in its economy. They provided 16.3 million jobs in 2018, and 60 percent of all private sector employment.

Despite their evident importance and contribution, SMEs continue to be overlooked by large banks– especially when it comes to borrowing to fund their working capital requirements and, ultimately, grow their businesses.

An overall failure of banking institutions to optimize their offerings for SMEs is having a knock-on effect on the productivity of smaller businesses.

Richard Davies, TSB Commercial Banking Director, said in the Telegraph last year that under-investment by SMEs is leading to a drop in output per worker. This is putting the UK on the backfoot to rivals.

“I have worked closely with SMEs for most of my career and I have always been inspired by their capacity to ride the economic waves, create jobs and serve communities,” said Davies.

“Yet it is also a group that has been under-served, under-valued and over-charged for two decades– neglected by the big banks.”

As a result, SMEs have little confidence in their ability to raise finance and grow their businesses, and relationships with banking partners have suffered as a consequence.

Spanning every sector and ranging up to 250 in personnel, SMEs are a diverse business group with very different needs depending on their stage of development and the industry they operate in.

This means banks can’t apply a one-size-fits-all service. Instead, every client requires a tailored approach that best manages their needs. It’s the extra resource and complexity demanded here that has so far contributed to large banks overlooking smaller clients.

But given the size of the current sector and its rapid growth, large banks must begin to rethink their ability to cater to this market, and salvage relationships with a burgeoning client base— which is currently not the top priority for relationship managers.

If they don’t, however, the danger is that they will lose out to the sweep of new challenger banks, which can offer innovative tech-driven products and financial planning services to address SMEs’ unique demands.

Cloud-based Tide, for example, now claims over 1.4 percent of the UK’s SMEs as clients and is aiming for 8 percent market share by 2023.

Earlier this week, Monzo— which claims to have 15,000 users on its business account waiting list— announced it had doubled its value to US$2.5 billion ahead of its launch in the US.

Starling Bank, meanwhile, is directly focused on creating a “better bank” for SMEs, pledging to make more than £900 million of lending available to small business owners.

The London-based bank calls SMEs the “lifeblood” of the British economy, while founder and CEO, Anne Boden, said there was an “opportunity to bring new technology and a new approach to the [SME] sector.”

Rupa Ramamurthy, Executive Vice President at Teleperformance D.I.B.S, said traditional banks are realizing they can’t offer SMEs the same “broad set of services” they offer large businesses and are more readily equipped to do, such as international trade management or advisory counsel.

“The first thing that’s an issue for SME enterprises is cash flow – most small business owners find it difficult to track and forecast their flow.

“They require banks to be a strategic advisor and product specialist who can help them to navigate through their cash flow journey and enable them to fulfill their growth ambitions,” said Ramamurthy.

The majority of SMEs (84 percent) want their financial planning and business growth advice delivered digitally, said Ramamurthy, but only 17 percent of banks currently offer digital financial management tools.

“Banks have a real opportunity to capitalize on SMEs’ need for advice, helping small business clients manage risk, business plans, and cash flow.”