Are SMEs reshaping the financial landscape more than first thought?
Small and medium-sized enterprises (SMEs) are emerging as the unsung heroes of the global economy.
A recent study by the IBM Institute for Business Value, in collaboration with the Banking Industry Architecture Network (BIAN) and the SME Finance Forum, has shed light on the critical role of SMEs and the urgent need for banks to adapt their services to meet the evolving demands of this vital sector.
SMEs are the backbone of the global economy, representing a staggering 90% of all firms, employing approximately 70% of the world’s workforce, and contributing 50% to global GDP. Despite their significance, these enterprises often find themselves overlooked by traditional banking institutions, which can be deterred by the substantial costs and complexities associated with serving such a diverse market.
The study reveals a stark disparity between the perspectives of bankers and the actual needs of SMEs. While financial institutions tend to focus inward on risk management and productivity, SMEs are clamouring for seamless experiences on integrated ecosystem platforms. This misalignment highlights a critical gap in the financial services sector, one that innovative banks and fintech companies are racing to fill.
The research underscores a significant shift in what SMEs value from their banking relationships. Gone are the days when proximity to branches and dedicated managers topped the list of priorities. Today’s SMEs are seeking partners who demonstrate a deep understanding of their sector and business ecosystems.
SMEs are increasingly valuing banks that can offer expert support in planning for expansion, provide market and economic analysis, and ensure fast access to funds. This desire for comprehensive, tailored solutions extends beyond traditional banking services. The study reveals a growing appetite among SMEs for integrated platforms that combine banking and non-banking services, effectively creating a one-stop-shop for their financial and operational needs.
This shift presents both a challenge and an opportunity for financial institutions. Banks that can successfully transition from being mere transactional providers to becoming valued partners in the growth and development of their SME clients stand to gain a significant competitive advantage in this lucrative market.
As banks strive to meet the evolving needs of SMEs, technology emerges as both a solution and a challenge. The study identifies key technologies that banks are prioritizing to enhance their SME services: cloud computing for business-critical processes, AI for credit risk management, and modular core banking systems.
However, the adoption of these technologies is not without its hurdles. Banks must navigate the complex landscape of data security, regulatory compliance, and the integration of new systems with legacy infrastructure. The research indicates that while many banks are making strides in automating critical business activities, there’s still a long way to go. By 2027, the median expectation is for 50% of processes related to SME borrowing and refinancing to be automated, up from 30-35% in 2024.
Particularly noteworthy is the role of AI-driven risk modelling in enhancing security and compliance. By integrating new data sources, such as cash flows and real-time transaction data, banks can develop more accurate risk assessments and credit evaluations. This not only allows for more informed lending decisions but also opens up opportunities to serve a wider range of SMEs while maintaining financial stability.
Despite the push towards digitalization, the study emphasises the enduring importance of human connection in SME banking. While SMEs are rapidly embracing mobile apps and digital services, they still value personalised support and expertise. The challenge for banks lies in striking the right balance between digital innovation and human interaction.
The research suggests that successful SME banking strategies will empower dedicated relationship managers with AI-driven insights and integrated data about clients and their industries. This approach allows for proactive outreach and more meaningful connections with SME clients.
Interestingly, only 6% of banks give themselves an “A” grade in effectively serving SMEs, indicating significant room for improvement across the sector. This self-awareness could be the catalyst for transformative change in SME banking services.
As the financial landscape continues to evolve, it’s clear that the banks that will thrive are those that can adapt to the unique needs of SMEs. By embracing technology-led innovation, fostering deep understanding of SME ecosystems, and maintaining a human touch, financial institutions can position themselves as indispensable partners in the success of these economic powerhouses. The race to serve SMEs effectively is on, and the winners will likely shape the future of global finance.
This article was originally published on The CFO’s sister publication, The Global Treasurer.