The future of SME banking and the value of real time financial data

A blog by Greg Michel, Fiskl’s Chief of Growth

“BUSINESS BANKING SUCKS!”. I will never forget these words. This is how Luka Ivicev, co-founder of the Berlin-based neobank Penta, started his demo day pitch at Startupbootcamp Fintech London in December 2016.

A bit more than three years later, SME banking still sucks for millions and millions of micro-businesses in the world. Why? Because the overwhelming majority of banks, old and new, still don’t give them what they actually need. And by doing so, banks are missing out on substantial revenues, both now and in the future.

Before we go into this, don’t be misled by the term “micro-businesses”. Their importance is remarkably macro. Companies with less than 10 employees represent around 90% of all companies in western countries. They produce on average more than 40% of the GDP, a substantial contribution to most economies. Most of all, they are poised to grow at an average of 10% year on year. In the last decade in the US alone, 60% of all net new jobs were added by SMEs according to the SBA.

At the same time, micro-businesses are the most underserved by banking and the overall financial ecosystem. The UK neobank Starling reported earlier this year that micro-SMEs in the UK spend on average 8 to 10 weeks every year wrestling with their finances, often after the workday or during the weekend. Most of them say that they would reinvest this time into growing their business if they could. And this is just the UK, where access to finance and financial tools is ubiquitous. The situation is the same, if not worse, in other countries.

Picture this: businesses contributing just under half of the GDP waste a fifth of their year on non-productive tasks. This statistic really brings home how big the problem is from the point of view of business owners. But it also shows how big the potential rewards for supporting and investing in them can be.

Many companies have already identified this opportunity. Big tech is swooping in – take the example of Amazon partnering with Goldman Sachs to power its SME lending efforts.

So how do you make the most of this enormous opportunity as a bank, a lender or a payment provider?

There are two parts to the answer that we’ll develop in more detail:

  1. By creating an integrated banking offering that tackles the actual needs of micro-business customers. This can be achieved via partnerships and/or integrations with a specialist SME fintech platform or, if the right internal tech capabilities exist in-house, by leveraging external APIs to surface functionalities directly into your business banking offering (web and/or mobile).
  1. By linking the integration/partnership into the relevant existing product lines or infrastructure in order to seamlessly offer the small business customers the full extent of the bank’s revenue-generating solutions.

The first point brings into focus the particular needs of the micro-businesses and self-employed, which are substantially different from those of larger SMEs. The latter group generally relies on an internal employee (finance director or similar) to handle financial and accounting task whereas for the former, most of the time, the burden resides with the business owner. The complexity of tools needed will vary accordingly. Recognising this important difference is the key to building an offering your target customers will want to use.

At Fiskl we spoke to over 900 of our customers across the world to clearly identify what would improve their financial and business life.

Here are the distilled learnings of what they told us:

  • I want a single place where we can manage everything
    And this means everything for daily business: P&L, payments in and out, invoices, expenses, VAT/ tax submission, time and mileage tracking, products catalogue, client and staff management.
  • I want clarity on where I am and help on where I’m going
    They want to know if they are financially stable, if they’ll be able to make payroll in the next months, how well the business is actually doing and, if the need arises, that they have quick access to finance to bridge them over or to grow.
  • I want stuff to happen automatically
    Having to reconcile financial data across multiple applications is time consuming. Context-aware automation, automated invoicing, scheduled payments, reminders to themselves and their own customers; all of this allows them to focus on getting more business done.
  • I want a product that works for the type of activity I do
    Designers, physical therapists, painters and lawyers don’t have the same needs so flexibility and horizontal features matter as well as being able to manage all finances from mobile, on the go.

The second point about linking the offering into revenue-generating product lines is especially important. Giving small business customers a product that will save them precious time and worry is very powerful in itself and worth doing to prevent them going to challengers. Making sure this product is embedded in the firm’s wider SME banking offering to unlock new revenues is even more powerful.

By offering an environment where micro-SMEs can seamlessly manage all their finances, a bank can create a paradigm shift. It leverages the trust of its customers to become the place where they manage all of their business, instead of using a different provider. One of the successful implementations of this is the French neobank Qonto. This is how the future of SME banking is shaping up.

With this paradigm shift comes the true value: live, real-time data you need and can trust to proactively suggest revenue-generating propositions for the banks i.e. loans, lines of credit, invoice factoring and discounting, overdraft, credit cards, etc. Better yet, risk can be monitored in real time and remedies suggested before the default hits.

In the last 5 months, Fiskl has spoken to more than 30 leading banks on 4 continents. The shift is happening quicker than one would think. Neobanks and fintech challengers are already aggressively tapping the market.  The leading banks are leveraging a variety of fintech platforms, APIs and data processing capabilities to deploy seamless and compelling SME banking propositions. The next three to five years will be decisive. By then the competitive advantage accumulated by the players who are moving now will be hard to make up for those currently sitting on the sidelines.