Fintechs will ensure a tough time for traditional financial services industry by disrupting their markets. Therefore, financial institutions should consider forming strategic partnerships with fintechs and bigtechs.

With technological evolution, a drastic change can be witnessed in different industries including the SME (Small and Medium Enterprises) banking. Because of dramatic changes in the banking requirements of SMEs, the banks will have to be prepared in order to cater to those requirements in the future. There is a chance that the new financial technology (fintech) developments might completely reshape the SME banking as we know it.

A significant number of SMEs has gained a phenomenal growth in recent years. This increase means more diverse and complex requirements. Only in the UK, there are almost 5.5 million SMEs with a total turnover of £ 1.9 trillion (source:  EY Report). Despite playing a significant role in the economy, most SMEs still have a limited access to financing. Nearly 50% of SMEs have no access to bank loans despite having a strong growth potential.  This huge number is an indication of demand and how important it is for traditional banks and fintechs to address the needs of SMEs and fill this financing gap.

SME banking: what’s next?

  • For financial institutions, there is an option to adopt the open banking practices and create an API-enabled platform. With open APIs, they can enable innovative third-party services and products.
  • Moving from a linear value chain to a platform-based model is another option for financial service providers. This may allow the SMEs to use their desired services from several providers.
  • It is possible for financial institutions to adopt a number of different platform models for different parts of the banking services instead of using one model.
  • Fintechs will ensure a tough time for traditional financial services industry by disrupting their markets. Fintechs are well aware of the challenges facing the SMEs. With the help of data about SMEs, machine learning can be used to predict future creditworthiness. In short, technology firms can differentiate between good customers (with high chances of paying off the debt) and bad customers (with low chances of paying off the debt). Lending decisions will be improved and well-informed.
  • Another option available to financial institutions is to form strategic partnerships with fintechs and bigtechs. In this way, they can provide digital solutions and meet the requirements of SMEs.
  • We can expect more SME-focused digital banks being launched to provide tailored banking services to SMEs.

Expected results

  • Financing will be approved on the basis of predictive analytics instead of  the credit history used by traditional banks.
  • Component-driven banking with digital banking products, having different components like intelligent finance support, business systems, payment and cash management.
  • Cheaper payment processing.
  • Wider adoption of digital currencies.

Verdict

It is a well-known fact that the businesses have been depended on banks to assist them in managing their cash flow. The SMEs of today use digital platforms to support their businesses. Hence, the financial services providers must embrace digitization to provide the right support and services. The future of SME banking is all about innovation, digitizing legacy products, digital platforms and digital trust. This will also help the SMEs to expand regionally and internationally, and supporting local economies.