With the Brexit negotiations reaching a critical stage this week, the UK is under greater pressure than ever to do all it can to improve productivity and drive economic growth. Against this backdrop, the SME sector is becoming a major focus for the government because of its potential impact on both the economy and society.
The Federation of Small Businesses estimates that SMEs accounted for 99.3% of all private-sector businesses at the start of 2018 and employed 16.3m people, 60% of all private sector employment in the UK. Aggregate annual turnover of UK SMEs was £2trn, 52% of the private-sector total. No matter what the outcome of Brexit, the ability of this sector to grow will largely define the prosperity of post-Brexit Britain.
Despite representing a huge market, the SME sector has always been hard for banks to serve efficiently for reasons including its diversity and price sensitivity. However, the combination of the Brexit imperative and the availability of new technologies creates a huge opportunity for banks to help raise SMEs’ productivity and growth.
Here are three key areas they should focus on:
First, they need to adopt a customer-led approach to providing products and services. Historically, banks have been organised around products, they have departments for lending, trade finance, cash management and so on. But SMEs don’t want to have separate conversations with multiple departments, banks need to structure themselves to deliver a seamless, frictionless customer experience.
Being customer-centric could also mean diversifying their services to meet the end-to-end needs of SMEs. In most cases, SMEs are looking to reduce complexity and deal with fewer providers – banks can facilitate this by offering a broader set of services. This could involve leveraging their partner network to provide services like tax, invoicing and even property maintenance. It could also involve the creative use of banks’ own IP, for example in providing digital authentication, fraud detection and even IT services.
Digital technologies can reduce the cost to serve the vast SME customer base. We already see banks exploring Artificial Intelligence, for example to allow faster onboarding of customers, automated credit checking and algorithmic predictions of defaults. But these tools are not yet being applied at sufficient scale. Modern approaches like agile and design thinking also drive innovation and speed of execution.
Banks must standardise their processes. Basic operations like Know Your Customer data-gathering or arranging a Letter of Credit can be hugely time consuming and frustrating for customers because every institution does it differently and the process usually involves a lot of manual document checking. Industry groups and government must work with banks and SMEs to streamline this. We have already seen this happen in areas like derivatives clearing and FX settlement, it needs to happen in SME banking.
Standardising processes will also enable institutions to realise much greater value from the huge quantities of data they hold on SMEs. Standardising data around identity, transactions, invoices and so on will make it much more valuable for all parties. The more usable data banks can access, the more they can use sophisticated models to enable rapid onboarding and loan underwriting.
One of the key reasons banks have traditionally concentrated on large corporate customers is because there is a large amount of publicly available information on them, which reduces the risk of lending to them. The relative lack of information on SMEs has led to banks regarding them as higher risk, resulting typically in higher interest rates or no offer of finance. Access to more data on SMEs via their digital footprint will give banks a better view of the risks and makes the market more easily and efficiently addressable. Fintechs such as SME-focused bank Oaknorth are already showing the way.
These may seem like straightforward fixes, but they are extremely difficult to implement because of banks’ legacy IT systems, product-centric structures and poor understanding of the power of technology. To succeed, banks must redesign their services to put the customer at the centre. Leading providers in other sectors, like Netflix or Domino’s, have used technology to create a stronger proposition and better experiences for their customers. Why not banking too?
Ultimately, digital can improve the productivity of banking for SMEs, and that in turn can improve the productivity of SMEs themselves, to the benefit of the whole UK economy.
The change requires investment, certainly, but will pay huge dividends if it drives customer acquisition and growth. Major UK banks have the capital and the reach to do this, what they also need is strong leadership and strategic intent. Taking this path will ensure that whatever headwinds await post-Brexit Britain, we will have stronger growth and higher productivity to help us deal with them.