The future of
SME banking
Minds made for redefining
financial services
December 2018
The future of SME banking
1
When the financial services industry
works well, it creates growth, prosperity
and peace of mind for hundreds of
millions of people. No other industry
touches so many lives or shapes so
many futures.
At EY Financial Services, we share a
single focus to build a better financial
services industry, not just for now, but for
the future.
We train and nurture the inclusive teams
to develop minds that can transform,
shape and innovate financial services.
EY professionals come together from
different backgrounds and walks of life to
apply their skills and insights to ask better
questions. It's these better questions
that lead to better answers, benefitting
EY clients, their clients and the wider
community. Our minds are made to
build a better financial services industry.
It's how we play our part in building a
better working world.
ey.com/ukfs
Contents
Executive summary
1
What is the status quo?
2
Changes in the SME banking landscape
7
The evolving needs of the SME
11
The future: SME services in a platform world
17
The rise of technology firms
21
Closing the gap: how do you create a
future-proof SME bank?
23
The future of SME banking
Executive summary
We have identified dynamic changes in the industry, driven by evolving SME needs and
enabled by advances in technology.
Entrepreneurs come in all shapes and sizes, from the funky
FinTech start-up or family business on the high street to the
home-based manufacturer using 3D printers and the power of
the internet to reach new markets. The path from start-up to
corporate is no longer linear. The banking needs of small and
medium enterprises (SMEs) are changing dramatically, and the
banks' responses need to evolve accordingly. The UK Government
and regulators are applying increased scrutiny to the segment
to ensure that there is both innovation and competition in
the market.
There can be no doubt that increased access to debt finance and
supporting services is required. There are now some 5.5mn SMEs
in the UK (representing phenomenal growth in recent years).
These SMEs have a turnover of 1.9tn, covering 51% of all private
sector turnover in the UK. We are seeing a growing market with
many diverse and complex needs; a market that needs better
products, more tailored to financial services.
A tangible example of regulatory action is the recent formation
of the Banking Competition Remedies Ltd, an independent body
which will administer access to 775mn of funding for those that
can demonstrate they will address SME needs. The intent is clear:
to increase access to capital and supporting services to the SME
lending market and support the lifeblood of the economy.
At EY, we believe this is a great opportunity for the market not
only those bidding for funding but everyone involved to re-
examine and re-imagine their propositions, putting the needs of
SMEs first.
We think that it's vital that traditional banks, challengers and
FinTechs all look at how they can do things better. This is not
just about tweaking existing products; it's about having the right
propositions and the right support and services. Digital is at the
heart of the next wave of SME banking services. SMEs use digital
platforms for their businesses and have every right to expect to
have their financial services on these platforms too.
This is even more important with the advent of open banking
changing the traditional competitor landscape. Firms need to
make sure they can combine innovative digital and data offerings,
alongside human advice.
In this report, we have outlined a number of questions that we
believe firms need to ask themselves with respect to how they
can really help the SME community, considering how they can
provide additional insight, tools and services that will best serve
their customers. Firms that answer these questions the best are
likely to come out on top, not just in this funding contest, but in the
ongoing battle of attracting and retaining SME customers.
Dan Cooper
UK Banking & Capital Markets Leader
EY
The future of SME banking
1
What is the status quo?
UK SMEs are a growing and demanding segment accounting for approximately 99% of
the private companies in the UK.
SMEs account for the majority of registered businesses in
the UK and are traditionally categorised by headcount and
turnover. For the purpose of this publication, we have grouped
SMEs into four categories: sole proprietors, micro-businesses,
small enterprises and medium enterprises.
Sole proprietors are companies with zero employees.
Micro-businesses are companies with a turnover of less than
1mn and fewer than 10 employees. Small enterprises have
between 10 and 49 members of staff and a turnover between
2mn and 5mn. Lastly, medium enterprises make up the
final segment of the SME market, with 50 to 249 employees
and turnover between 5mn and 25mn.
1
1.1 UK SMEs: a growing market
UK SMEs are a large and growing market with
turnover of 1.9tn and account for approximately
99% of private companies.
SMEs are the lifeblood of the UK economy. Despite the financial
crisis, the total number of SMEs has grown over the previous
decade. They have been instrumental to job creation, with
approximately 16.1mn employees in 2017, representing 60% of all
private sector employment.
They are equally important to UK plc, with a combined annual
turnover of 1.9tn, covering 51% of all private sector turnover in
the UK. In times of austerity, the Government has relied heavily
on the growth of SMEs to help fuel the economy and, in uncertain
economic times, further emphasis will be placed on this key sector.
Resilience in times of austerity
We have seen an explosion in the number of new start-ups over
the past five years, each with the same basic need to fuel their
growth: working capital finance. The number of small and micro-
businesses in the UK grew by 1.8% in 2016 to 5.5mn, representing
99% of the UK private sector by volume.
As outlined in Figure 1, the number of active SMEs, defined as
those with either turnover or employment over the course of any
given year, has grown steadily at 3.8% CAGR. Critically, as well as
growing in number, they have also been growing in size, with SME
turnover increasing by 5% CAGR from 2013 to 2017 as indicated
in Figure 2.
3,878
4,155
4,264
4,366
4,520
860
921
948
961
1,002
36
37
39
40
40
2013
2014
2015
2016
2017
202
219
210
220
224
4,976
5,323
5,470
5,587
5,786
+3.8%
CAGR
Sole proprietors
Micro-businesses
Small enterprises
Medium enterprises
237
259
266
285
301
370
407
418
446
536
504
502
558
577
556
515
529
568
577
574
2014
2015
2016
2017
Sole proprietors
Micro-businesses
Small enterprises
Medium enterprises
+5%
CAGR
2013
1,626
1,697
1,810
1,885
1,967
Figure 1: Number of SMEs by size, 201317, (000s)
Figure 2: SME turnover by size, 201317, (000s)
The future of SME banking
2
Since 2010, each year there have typically been more micro-SME
creations (the number of new active companies) than wind-
downs (the number of micro-SMEs that ceased to be active). The
exception to this was 2010, when wind-downs exceeded new
starts, reflecting the impact of the financial crisis which led to the
failure of a number of small businesses:
As illustrated in Figure 3, since 2010, with the increasing
health of the economy, there has been an increase in the net
number of new companies (9.9% CAGR).
The spike in new starts in 2013 (year-on-year growth of
28.5%) reflects the UK Government's focus on promoting and
protecting small companies following the financial crisis.
A number of new initiatives were established as part of the
business enterprise policy, such as start-up loans (2012) and
the Business Finance Partnership (BFP, 2013). Start-up loans
have so far provided over 400mn in government-backed
loans to young entrepreneurs.
The BFP aimed to increase lending to SMEs from sources other
than banks. It invested over 800mn in 2013 in companies
offering finance to SMEs.
228
254
262
337
341
374
403
239
221
243
228
237
272
317
2010
2011
2012
2013
2014
2015
2016
New starts
Wind-downs
9.9%
4.8%
CAGR
Figure 3: Number of micro-SME businesses: new starts
and wind-downs
SMEs are not only instrumental for job creation
and UK plc but are also an important customer
segment for the banking industry.
Whilst attention in recent years has been on serving the
consumer market, the SME market generates c.14bn in
banking revenue and 10%15% return on equity (ROE)*
representing a significant opportunity for existing and
emerging financial institutions.
We have provided a view below of the revenue generated by
each category of SME.
Segment
Definition
Total no.
of SMEs
Revenue
pool ()
1
Sole proprietors
0 FTE
4.3mn
5.3bn
2 Micro-businesses
19 FTE or
0mn2mn
turnover
1.2mn
2.2bn
3
Small enterprises
1049 FTE or
2mn5mn
turnover
208,000
2.2bn
4 Medium
enterprises
50249 FTE or
2mn5mn
turnover
38,000
6.5bn
5
Corporates
>250 FTE or
>25mn
turnover
72,000
16bn
Source: EY analysis, Mintel Small Business Banking UK September 2017.
The future of SME banking
3
1.2 Dominant incumbents have
led to a drive for greater
competition
Though business banking is positioned differently
amongst high street banks, they have dominated
market share.
The major high street banks retain a substantial stronghold of
the SME banking market, particularly business current accounts
(BCAs), where the top five banks account for around 75% of the
market. Whilst their market share is being eroded by the rise of
challenger banks and FinTechs, the incumbent players continue
to hold affinity with their customers. SMEs continue to trust the
brand and reputation of their bank, though they have experienced
challenges in meeting their evolving service expectations.
Each of the major high street banks is set up differently to serve
the SME segment: at Lloyds Bank, for example, SME customers are
grouped into their 'community banking' population, with middle-
and back-office operations supported by the retail and commercial
banking divisions. The table below provides a comparison of the
five major high street banks and provides a view of where the
segment sits within their organisation.
SMEs can find themselves dealing with a retail bank for their
personal needs and then, depending on their choice of bank for
business banking needs, they could be dealing with separate
community, commercial, personal or wealth divisions. Data is
often not shared across the key business divisions, leading to a
lack of detailed understanding and personalisation of the SME
user's needs.
Traditional banks look at the UK SME market in different ways, but are united in the challenge to leverage digital and redevelop their products
Lloyds Bank
HSBC
RBS
Barclays
Santander
Business bankingPosition of business
banking
Between retail and
commercial banking
Separate commercial
banking catering
for all business
customers
UK Personal Banking
and Commercial &
Private
Wealth,
Entrepreneurs &
Business Banking
(Barclays UK)
Retail Banking
(Santander UK)
Market
commentary
Lloyds became
the first provider
to integrate with
a third party
(Yolt) under Open
Banking this year
HSBC increased
their SME Fund
2018 to 12bn
this year
RBS has
announced
that they will
be launching a
standalone Digital
SME bank (Mettle)
Separately, it
is funding the
Alternative
Remedies Package
to increase
competition
Barclays has
taken a stake in
MarketInvoice
and launched
SME funds for
groups such as
UK housebuilders,
and Northern
Powerhouse
Building an open
digital financial
services platform
for SMEs
Santander are
eligible to apply
for the Alternative
Remedies
Package
With increased competition and technological advances, SMEs have a greater appetite for better service and provision of products
tailored to their needs. The major high street banks are aware of the dynamic forces at play and are trying to reposition their
propositions to the SME market, whether this be in the form of improving the existing products and services on offer, or through the
creation of new greenfield digital banks in the hope they can rival their new, legacy-free competition.
Source: Mintel Small Business Banking UK September 2017.
The future of SME banking
4
1.3 SMEs are increasingly turning
towards alternative sources
for finance
Whilst banks have traditionally dominated SME finance, in the
years following the financial crisis, we have seen SMEs turn to a
broader range of suppliers for their finance needs.
Following the financial crisis and the subsequent increase in
regulation, banks have implemented stricter lending requirements,
deterring many SMEs from applying for funding and leading
to a year-on-year reduction in the number of approved loans
(Figure 4).
Figure 4: SME bank loans and overdrafts approved (000s)
201216
112
105
96
91
84
212
162
129
118
119
2012
2013
2014
2015
2016
Number of overdrafts approved
Number of new loans approved
SMEs have also become increasingly frustrated with what they
perceive to be poor customer service through the continued
deployment of legacy processes coupled with restrictive finance
requirements. This has resulted in SMEs seeking finance via
alternative sources (Figure 5).
In a recent survey conducted by Ipsos MORI, 36% of SMEs claimed
to be seeking finance using loans from personal sources (18%
directors in the business and 18% family and friends). Half of those
that injected 'personal funds' did so by choice and half felt they
had to.
The top barriers to bank finance for 'would-be borrowers' are:
Discouragement (47%) (put off by bank)
Assumed they would be turned down and so did not
apply (30%)
Process of borrowing (typically the hassle or expense) (29%)
Figure 5: SME finance obtained in past three years
(% of SMEs using products) 2017
44
39
28
23
5
4
Credit cardBank overdraftLeasing/HPAsset financeCommercialmortgageBank loan orMortgageBanking finance
Alternative finance
36
17
7
2
Loans (director,friend or familyGrants andgovernmentschemesOther third partiesEquity finance andP2P lendingSource: EY analysis, Mintel Small Business Banking UK September 2017 and EY analysis (Federation of Small Businesses (FSB) Verve 'Voice of the Small Business' Panel
Survey), 2017 Business Finance Survey: SMEs, Ipsos MORI, February 2017. 'Forms of Finance Obtained within the past three years' (2017). Based on SME sample: 1,535.
If banks want to protect a crucial market from being further
eroded, they need to address the root causes of SMEs turning
towards alternative sources of finance.
The future of SME banking
5
1.4 There remains a sizeable
market to be served
Despite the rise of challenger banks and FinTechs,
there continues to be a significant market
opportunity for institutions to grow their footprint.
Whilst consumers continue to be a key focus, the industry
has recognised a significant unfulfilled opportunity within the
SME market.
There are sizeable areas to grow market share across a number
of products that are targeted at the SME sector. The table below
provides a breakdown of the growth opportunities with respect
to traditional banking products and the current demand by the
SME sector.
Demand for SME banking services 2017 (bn)
Sole proprietor and
micro-business
Small enterprise
Medium enterprise
UK total
LendingAsset finance
12.2
5.1
1.3
18.6
Invoice finance
(net lending)
1.1
4.2
5
10.4
Credit cards
10.1
22.7
32.8
Business loans
7
15.9
22.9
Commercial
mortgages and
property development
11.2
3.3
1.4
15.9
OtherBusiness current
accounts
29.3
34.9
64.3
Foreign exchange
141.5
178.1
67.8
387.4
Savings (balances)
14.5
17.3
31.8
As the number of SMEs continues to grow, we will see demand increasing for products traditionally provided by a financial
institution. As well as traditional lending products, there is opportunity for growth in other key product areas such as BCAs and
foreign exchange (FX).
Source: Finance and Leasing Association (FLA), UK Finance, The UK Commercial Property Lending Report, Cass Business School, Mintel, Office for National Statistics,
HM Land Registry, L.E.K. Consulting Analysis HiFX, Bank of England (BoE), The UK Cards Association, CreditCards.com, EY analysis.
The future of SME banking
6
Traditional banks
Lloyds Banking Group*
Santander*
HSBC
Royal Bank of Scotland
Nationwide
The Co-operative Bank
Clydesdale Bank
Dankse Bank
Specialists
American Express
Close Brothers
Bibby Financial Services
Changes in the SME banking
landscape
New entrants to the market are capitalising on the previously unmet needs of SMEs
2
2.1 The market is awakening to the
opportunity
Pre-crisis, the market was served primarily by traditional banks
and specialists; post-crisis, a number of new entrants such as
FinTechs and challenger banks have emerged.
There is now stronger competition in the UK SME banking
landscape. A decade ago, an SME would turn to the traditional
banks or to niche specialists for sources of finance. Today, there is
a much broader range of options, with each provider striving for
critical market share.
Figure 6: New entrants targeting SMEs
Market
Landscape
in 2007
A sample of new entrants, products and brands launched to the SME Market (20082017)
2008
Capify
Aldermore
2009
Funding Circle
Metro Bank
2010
Ezbob
TradeRiver
ThinCats
Funding Knight
Nucleus
Commercial
MarketInvoice
Shawbrook Bank
2011
2012
Merchant Money
FOLK2FOLK
Pay 4
PayPal SME Lending
2013
Spotcap
Lending Crowd
Fleximize
Amazon Lending
2014
Oak North
Growth Street
2015
Newable
Esme
2016
Redwood
Tide
2017
Traditional banks: incumbents offering a comprehensive range of
products to SMEs and large corporates
FinTechs: new entrants leveraging tech-enabled innovations to micro-
SME lending products and business models
Specialists: specialised, product-led players offering a narrow range of
products to specified customer segments
PayPal launches working capital loans to merchants in the UK
Challengers: specialised banks targeting particular customer
segments, including non-bank brands and digital-only banks that have
emerged post-crisis
Amazon enters UK SME lending market offering small business loans
to website companies
Legend competitive segments
*Entities renamed post-acquisitions since 2007
Capital on Tap
365
Start up Loans
Iwoca
The future of SME banking
7
2.2 FinTechs are also disrupting the market
Additionally, a number of FinTechs are active in the business banking space, offering products and
services to address a spectrum of targeted needs.
The table below shows a selection of FinTechs that have impacted the SME market in recent years.
Cash flow
management
Accounting
Invoicing
Know Your Customer (KYC),
identity and verification
Robotics and AI
Aggregator platforms,
and data and analytics
Supplier loyalty
Cross-border and B2B
payments
SME lending
Working capital
optimisation
C2FO
Taulia
Ebury
Transpay
Dovetail
Traxpay
Traxpay
Funbox
Xero
Holvi
Tide
Sage Pay
Cashforce
Zervant
Invoice2go
ShoCard
Rainbird
Funding Options
Optiopay
Yoyo
Aimia
Funding Xchange
Validis
Plaid
Yodlee
DueDil
MX Group
Business Finance
Compared
Softomotive
Persado
Automation Anywhere
Blue Prism
WorkFusion
Clinc
Trunomi
Onfido
Validis
Factern
EyeVerify
BioID
Kyckr
Tradeshift
Viewpost
TrustWeaver
Taulia
Budget Insight
Float
Flowcast
Strands
Rimilia
Aztec Group
Invapay
Currencycloud
Payoneer
OnDeck
Funding Circle
MarketInvoice
Modula
Ezbob
iwoca
Kabbage
WorldFirst
Ripple
Figure 7: FinTechs targeting the SME sector
The range of services offered to SMEs by FinTechs is both broad and deep, enabling SMEs to access new levels of financial services
that were historically only available to corporate clients.
The future of SME banking
8
2.3 The regulator is incentivising
this change
The Alternative Remedies Package was introduced
in 2017 to boost competition through regulatory
intervention.
In 2009, the European Commission approved a number of state
aid measures granted to The Royal Bank of Scotland Group plc
(RBS). This approval was given on the basis of a restructuring plan
submitted by RBS and a number of commitments given by the UK
Government, including the divestment of a part of RBS' branch-
based retail and SME business, which later became known as
Williams & Glyn (the divestment).
As a result of considerable challenges in achieving the divestment,
the UK Government proposed substituting the 2014 commitments
with a revised package of measures, with the objective of
promoting competition in the market for banking services to SMEs.
The Alternative Remedies Package was agreed in principle in July
2017 and formally approved by the European Commission on 18
September 2017.
Fund
Details
Capability and
Innovation Fund
(425mn)
The Capability and Innovation Fund aims at encouraging challengers to develop and improve their capability to compete with
RBS in the provision of banking services to SMEs, to develop and improve financial products and services available to SMEs.
This fund will be administered by an independent body and will comprise of 15 grants that eligible challenger banks and other
financial services providers can compete for to increase their business banking capabilities.
These awards will range from 5mn to 120mn and have been categorised into four pools:
Pool A for development of advanced BCA offerings
Pool B to facilitate modernising existing BCA or new proposition development
Pool C to facilitate development of SME lending and payments
Pool D to facilitate commercialisation of FinTech providing SME services
Incentivised
Switching
Scheme
(350mn)
The Incentivised Switching Scheme funds are to be used to encourage SME customers who were intended for
Williams and Glyn (W&G) to switch their BCAs and loans to eligible challengers
The funding aims to incentivise 120,000 relevant SMEs to switch their accounts to eligible challengers, comprised of:
225mn paid in the form of 'dowries' to challengers to incentivise SMEs to switch their BCAs
50mn to facilitate the switching of related loans
75mn set aside by RBS to cover customers' switching costs
Aldermore
Aldermore was launched in 2009 as a specialist lender and savings bank to SMEs, homeowners, landlords and individuals.
Key products include savings accounts, mortgages, invoice financing and asset finance. Following its acquisition by
FirstRand, Aldermore is planning to employ investment from its new owner to accelerate the delivery of its business
banking proposition.
Shawbrook Bank
A specialist bank founded in 2011 that focuses on the needs of SMEs and individuals, Shawbrook Bank offers savings
products, loans, commercial mortgages and business finance. It is currently following a diversification strategy to expand
into new areas such as motoring, online estate agencies and new propositions such as financing for IVF.
OakNorth Bank
A specialist lender launched in 2015 focusing on UK entrepreneurs and owner-managed businesses, OakNorth Bank was
established on a cloud-based technology platform, using machine learning techniques and artificial intelligence tools. Key
products include business savings, loans and property finance.
Redwood Bank
A 'born in the cloud' bank that launched four months after receiving its banking licence in 2017, Redwood Bank focuses on
lending to local communities in the UK from offices in Letchworth and Warrington.
2.4 The rise of the challenger banks
More than 50 institutions have been granted a banking licence in the UK since 2008, with a number
focusing on the SME banking market.
A number of challenger banks have emerged with a specific focus on serving the needs of SMEs, including those detailed below.
New challenger banks and fintechs have emerged that are successfully targeting a specific set of financial needs. These new challengers
are not constrained by legacy processes or technology, and are able to offer targeted products and value-add services created
specifically to meet the demands of the SME business.
The future of SME banking
9
2.5 The major high street banks
are beginning to respond to
disruptive forces
Businesses professionalise as they grow and
banks can help SMEs develop their financial
maturity and capabilities.
Whilst focus may have been on averting the flow of consumers
to disruptive players, the major high street banks are also now
focusing efforts to retain their market share in the SME market.
A number of market forces are driving this impetus, stimulating a
new critical period for the development of competition in the SME
banking sector.
Collaboration
and
partnerships
Banks are increasingly partnering with providers of
SME services to increase the attractiveness of their
proposition. NatWest has partnered with Sensibill,
an electronic receipt management system which is
built into the bank's banking app. Other banks are
providing access to alternative sources of finance
via select partners or discounted access to SME
tools such as Xero accounting software.
Contest over
the 700mn
Alternative
Remediation
Package
Smaller rivals, including Clydesdale Bank and
Metro Bank, are competing for funding from the
Alternative Remedies Package. The pool, which
will be funded by RBS as a result of regulatory
pressure, will be available to a number of
challenger banks and financial service providers,
with the intention of creating further competition
in the SME banking market.
Those high street banks that leverage their deep knowledge of
business banking and sector specialisation (such as agriculture), and
combine it with the richness of data available to them, will be able to
offer increasingly competitive products and services to SMEs.
The future of SME banking
10
The evolving needs of the SME
Bespoke targeting of SME customers to address individual needs
3
3.1 Small business owners have
unique needs, many of which
are not addressed by traditional
banking propositions
As a consequence of the complex needs of small
business owners, SMEs are increasingly turning
to challenger banks, FinTechs or non-financial
institutions to service their financial needs.
Techniques such as design thinking, improved customer
experience and the use of internal and external data provide
opportunities for banks, FinTechs or non-financial institutions
to service SME financial needs by segment. Several examples
identified by EY research are listed below:
The storefront entrepreneur
The factory home
The freelance plc
I need to meet my financial goals.
It's my name on the door.
I can't be great at everything.
My first year was critical.
I want more time with my customers.
I miss having peers.
I had to get the location right.
Digital is at the heart of my business.
I am open to collaboration.
Designing products and services around the jobs that SMEs need to do provides the basis for more targeted and innovative solutions.
This can include addressing previously unmet needs such as cash flow management, working capital solutions and payroll services.
The future of SME banking
11
3.2 Targeting products to business
life stages
There is a real opportunity to grow market share
across existing products, by tailoring products for
each SME segment.
There isn't a 'one size fits all' approach to servicing SME
customers. Rather, providers should tailor their proposition to
service a specific SME segment or offer products according to
the life stage of the SME.
As small businesses grow, their needs become more
complex creating an opportunity to provide tailored
products based on maturity stage, to help them realise the
next stage in their growth journey.
Success rates for lending applications vary by the size and scale of
an SME. As demonstrated in Figure 8, the success rate for lending
increases as the business grows.
84
82
86
89
89
2012
2014
2015
2016
All SMEs
Sole proprietors (0)
Micro-business
(19)
Small enterprise
(1049)
Medium enterprise
(50249)
44
41
37
37
37
38
38
35
32
32
33
34
58
55
49
49
46
49
70
67
61
60
59
64
73
73
63
61
64
73
2012
2013
2014
2015
2016
2017
All
Sole proprietors
(0)
Micro-business
(19)
Small enterprise
(1049)
Medium enterprise
(50249)
Figure 8: UK SME success rates in applications for finance (%)
Figure 9: SME use of external finance by size, %, 2017
External finance, such as bank loans and lending, is a key source of
funding for SMEs. As shown in Figure 9, use of external finance is
much higher amongst medium SMEs. In 2017, 73% of medium
businesses (with 50249 employees) used external finance
compared with 49% for micro-businesses (19 employees).
Medium enterprises are a key area for business finance and
consistently demonstrate approximately 50% higher demand for
financing.
Whilst lending outcomes are broadly positive, the service and
experience often fails to meet the needs of SMEs, presenting a
sizeable opportunity for institutions that are able to deliver an
exceptional customer journey.
Base: All SMEs that sought external finance in the last three years, %, 2017
(886 in 2016)
The future of SME banking
12
3.3 Needs become more complex as SMEs grow
The businesses that constitute the SME sector are hugely diverse, with needs that depend on both their
development stage and their industry focus. Small business owners want their bank to provide targeted
solutions based on their business needs.
As shown in the following table, SME needs vary by the size of business.
Micro-business
(19 employees)
Small enterprise
(1049 employees)
Medium enterprise
(50249 employees)
Corporate
(250+ employees)
Example drivers
behind need for
working capital
finance
Day-to-day liquidity
Smoothing out irregular
cash flows with low level
of predictability
Releasing liquidity for
growth
Seeking less rigid, time-
consuming forms of
finance
Day-to-day liquidity
Smoothing out irregular
cash flows that may be
highly predictable
Releasing liquidity for
growth
Seeking less rigid, time-
consuming forms of
finance
Releasing liquidity for
growth
Performance metric
management
Investment for short-term
projects
Performance metric
management
Investment for short-term
projects
Financial challenges
Highest credit risk across
all segments
Generally find it difficult
to provide security, but
owners may be able
to provide personal
guarantees
Limited financial data
available
Very limited ability to
handle administrative
burden
Limited ability to handle
multiple relationships
with finance providers
Higher credit risk than
larger firms
May find it difficult to
provide security
Limited ability to handle
administrative burden
Limited ability to handle
multiple relationships
with finance providers
Higher credit risk than
larger firms
Limited ability to handle
administrative burden
and complexity of some
traditional products
Lowest credit risk across
all segments
Level of financial
engagement
Generally no dedicated
finance function
Low awareness of
financing options
Relatively
unsophisticated finance
function
Relatively low awareness
of variety of financing
options
Sophisticated finance
function
Awareness of variety of
financing options
Sophisticated finance
function
High level of awareness
of variety of financing
options
Ability to automate
processing of payables
and receivables
Businesses professionalise as they grow
Unless businesses professionalise, there is a risk the wrong
financial products maybe used.
As SMEs grow in size, they are more likely to engage financial
specialists to professionalise and manage the complexity of
financial products they use.
20
32
48
70
Medium
No employees
Micro
Small
Source: EY analysis/Harvard Business Review (HBR)
https://www.bdrc-group.com/wp-content/uploads/2018/03/RES_BDRC_SME_Finance_Monitor_Q4_2017.pdf.
Figure 10: SMEs employing a financial specialist (%)
The future of SME banking
13
3.4 The emergence of ecosystems
for SMEs is a global trend
The introduction of value-add services on top
of traditional core banking offerings is allowing
providers to position themselves in the centre of an
SME's financial network.
Value-add needs
Core needs
Omni-channel
Personalised
services
Credit solutions
and funding
decisions
Integration of
business tools
Expense
management
FX and
payments
Cross-border
trade and
assisstance
Risk
management
Financing
and funding
Liquidity
management
Integration of
non-financial
services
Intelligent
automation
Market
insights
Aggregation
services
Alliances and
partnerships
Fundamental needs
As these value-add services become more prevalent, we will see an evolution of needs,
with more becoming core and fundamental to the market.
In the face of constant competition within the SME banking market,
providers need to provide a broader, more integrated offering
with relevant value-add services. The provision of services beyond
those traditionally offered within the core banking proposition will
enable access to new revenue pools that may have been previously
inaccessible.
Moreover, strengthening the understanding of the SME market
will reinforce and bolster their SME relationships. This will not
only deter SMEs from switching, but will also widen access to
information that can then be used to tailor current services and
gain further insights into the SME banking sector.
Single provider
SMEs are increasingly looking for an easier way to meet all of their needs to run their business. This provides an opportunity for
providers that are willing to address wider business needs to deepen their relationship with their SME customers.
Figure 11: SME value-add needs
The future of SME banking
14
3.5 SMEs want an omni-channel
experience
Omni-channel banking provides seamless and
consistent customer interactions through multiple
touchpoints. Integrating digital and traditional
channels into a truly omni-channel offering helps
to anticipate and fulfil customer needs seamlessly
across multiple channels.
A number of financial institutions are either developing or have
recently launched digital offerings to the market. Whilst this
will serve a significant proportion of the market, some SMEs
will continue to demand an omni-channel experience in order
to benefit from existing products and solutions such as cash
management or alternative lending via intermediaries.
Cash solutions
For SMEs that want to maintain cash-based banking services, a
digital-only service will not suffice.
Cash withdrawals and deposits
Example:
Handelsbanken
Example: Nationwide
Building Society
Example: HSBC
Cash management
Safe deposit boxes
Alternative lending
A number of SMEs are happy to use online channels only; however, as needs increase in complexity, SMEs are more likely to use advisors
and third-party intermediaries.
Provision of advice
Physical relationship
manager
Skype or
teleconference
Robo advice
Whilst the use of online banking remains the main touchpoint
between an SME and its bank, as demonstrated in Figure 11,
SMEs are still engaging with their bank via traditional channels
for business purposes:
43% of SMEs have used their branch in their past three
months compared with 29% using mobile banking.
Personal relationship management continues to be
an important offering which SMEs are using, with 17%
interacting with the relationship manager in the past
three months.
Those wanting to provide the most comprehensive SME proposition will need to provide an omni-channel experience, either
through their core offering or by tailoring any targeted proposition to the need of SMEs, i.e., provision of branch-based banking for
SMEs that have identified the need for cash solutions.
Figure 11 : Financial services used by SMEs in the
last three months for business purposes (%), 2017
85
43
29
22
17
16
16
6
6
5
4
Online banking
Branch-based banking
Overdraft
Telephone banking
Mobile banking
Personal relationship managers
Cashier desks for business customers
International business transactions
Extended branch opening times
Business planning advice
None of these
The future of SME banking
15
3.6 SMEs' advanced customer
needs are not being met
consistently
Despite the emergence of challenger banks and
FinTechs, there is a gap between the increasing
expectations of SMEs and what is being offered by
incumbent players in the market.
Whilst there have been some new offerings to the market, the pace
of change has been slower than demanded by some SMEs, and
offerings can appear to be undifferentiated or based on the retail
banking product. Propositions across the market show gaps in
fulfilling the full suite of SME customer needs.
High street banks
Challenger banks
FinTechs
Current proposition
SME proposition, including BCAs,
offered by all major banks
Wide product range, but service
focused on low cost only
Strong insurance capabilities
Specialised propositions based on
knowledge of the SME market
Specialised proposition usually
based on specific SME need,
e.g., lending solutions
Areas of strength
Brand loyalty
Low switching rates
Products across full SME
growth spectrum
Customer contact options
(branch, online and telephone)
Products created to serve specific
segments or industries
Longer-term lending solutions
Flexible lending options
Personalised approach
Digitally enabled offering built on
new agile platforms without the
constraints of legacy systems
Frictionless processing and pace of
change to introduce new feature-
rich functionality
Areas of focus
Innovative offerings via digital
platforms and increased speed
to market
Catering to other service needs of
SMEs e.g., accounting, HR, payroll
Personalising solutions
Using data more effectively to meet
SME needs
Building market share
Developing transactional
banking propositions
Expanding suite of services
to include value-add such
as accounting and cash flow
management (CFM)
Customer contact options
Developing in-house capabilities as
businesses scale
Partnerships and alliances to
provide a complete solution offering
to SMEs
3.7 What options can be employed
by players in the market?
We expect there to be a number of pathways that
will be employed by key players to provide the full
spectrum of new innovative products and services
required by SMEs. Banks will no longer dominate
the provision of SME financial services. New
application programming interface (API)-enabled
platforms and mega tech platforms will start to
target the SME sector.
Ecosystem
and platform
approach
New API-enabled platforms will enable providers
to deliver a wide range of innovative third-party
products and services, generating consumer
stickiness and creating a network effect as the
number of ecosystem participants expand.
Tech companies
offering the
full suite of
services
Tech giants could enter financial services by
extending their platform to provide core banking
services such as BCAs and lending.
Furthermore, the big tech platforms could leverage
the abundance of customer data, advanced data
analytic techniques and frictionless user journeys
to offer new propositions such as cash flow
management and working capital solutions.
These key pathways are described in more detail in the
following sections.
The future of SME banking
16
The future: SME services in a
platform world
Finding the right pathway for your business
4
4.1 It is not possible to ignore
the rise of platforms and the
development of ecosystems
Financial institutions must choose what role
they want to play in the new world of open APIs.
Options exist to create an API-enabled ecosystem
market in the SME finance value chain, providing
innovative third-party products and services to
SME customers.
The prevalence of API technology in the ecosystem will also
play a part in transforming and digitising relationships with
SMEs, changing the way in which products and services are
made available.
In an ecosystem where SME customer account and transaction
data can be shared, the process of finding and applying for
banking services, such as credit, will be quick and seamless.
The rise of API-enabled platforms
An API-enabled platform is a digital infrastructure that allows
multiple stakeholders (the providers platform owners, third-
party developers, distribution and services partners and
end-users) to connect online, interact, and create and exchange
value with each other. Participants in platforms shift from
operating within a specialised industry to being part of a broader
ecosystem, expanding their reach by linking to interconnected
businesses from across multiple sectors. Operating in an
ecosystem allows providers to fulfil customers' needs through
an integrated user experience, raising collective value for all
participating stakeholders involved.
These API-enabled platforms are based around four key principles:
1
Data
They are powered by interconnected customer data. Data is the collective digital asset upon which entire ecosystems are
built, allowing providers to utilise integrated customer information and new data insights captured within their platforms
to determine product strategies, identify new market opportunities or craft new commercial opportunities.
2
Customer-centric
gateways
The ecosystems within platforms are highly customer-centric marketplaces that allow consumers to access and switch
between a range of related offerings across different providers without needing to toggle between portals or manage
multiple login identities. An example of such a frictionless gateway is Facebook Messenger, which enables users to
instant message, make voice and video calls, transfer funds, place reservations, interact with retailers and play games
amongst other features.
3
Network effect
They create a network effect as their ecosystem of participants expands. Well-constructed platforms take on a
momentum of their own as participants interact, generate reciprocal value and help extend these ecosystems. As
ecosystems grow exponentially, providers are collectively able to deliver a wider range of solutions and generate
consumer stickiness. This, in turn, creates much greater distribution and access to a broader range of customers than
could easily be achieved by any single company.
4
Open APIs and
standards
Solutions on platforms are built using open APIs and standards, creating new distribution opportunities via partner
technologies and channels, and facilitating expansion into complementary services or new, adjacent businesses. Given
the more diverse community of providers, customers also benefit from feature-rich experiences and a much wider scope
of offerings compared with the original platform.
The future of SME banking
17
From this ...
To this ...
Traditional value chain: product focused
Platform-based models: customer obsessed

Typically singular provider

Purpose-built solutions, with independent product offerings

Proprietary protocols

'Command and control' product development methodology

Slower time to innovate via a linear value chain (development,
distribution and marketing to the consumer)

Diverse community of providers (platform owners, developers and
partners) and customers

Solutions are built on an extensible platform, leveraging
open standards

Offerings are interoperable, feature-rich and targeted

Flexible, iterative development and crowd-sourced innovation
4.2 Transitioning to a platform-driven business
Financial services providers are transitioning from a linear value chain to platform-driven
business models.
Platform-based models in financial services
Platforms and their ecosystems are most mature within consumer-
centric verticals such as health care and medical advisory,
travel, real estate and financial services. In financial services, an
ecosystem encourages financial institutions (FIs) to go beyond a
proprietary, product-oriented approach (see table above) and work
with partners to deliver comprehensive solutions that can simplify
customers' financial lives.
For instance, insurers are embedding themselves into wider
ecosystems for mobility, connected homes and cars, health
diagnostics, medical advice and financial planning. Global
payments technology companies, such as Visa and Mastercard,
have platform strategies to connect card issuers, acquirers and
other payments service providers to merchants and consumers for
seamless e-payments.
Ideally, these innovative delivery models should embed customers'
financial interactions as part of their daily activities (such as
shopping and entertainment) and help them achieve financial
goals (such as funding business expansion, property ownership or
a trade acquisition).
This is possible due to rich customer data that enables FIs and
their ecosystem partners to better understand customers and
develop personalised or contextual offers that satisfy their current
and perceived future needs.
Where there are regulatory mandates requiring open API policies,
customers also benefit from new third-party collaborations. In
those markets, customers' options for financial solutions will
evolve from the current linear model to one where products and
services are not limited to an individual institution's offerings.
We expect to see financial platforms further evolve to digital FI 'app stores', where customers can select desired services from
multiple providers to build their own bespoke financial experiences.
The future of SME banking
18
4.3 Ecosystem and platform
approach
A platform model is not only a new evolution of the
banking business model; it also involves a major
shift in culture and mindset. It implies building
long-term win-win partnerships with an ecosystem
of external providers to fulfil the holistic needs of
SMEs.
Recognising the elements of a platform enables
providers to decide where to focus.
Simplified description of the platform model
User interfaceData and integrationDigital ecosystemProducts and servicesThe user interface is the backbone of the SME customer
experience, enabling the distribution of proprietary or
third-party products.
The data and integration layer, built as an open
platform, is connected to the digital ecosystem, with its
own data layer and business process management.
The products and the services support the design and
development of components that can be monetized to
serve the needs of SMEs.
Financial institutions could adopt a number of
platform scenarios as part of creating a future-
proof SME bank.
EY has identified five ways financial institutions can reshape their
future. In each of these, the provider takes on a new role, focusing
on different building blocks of a typical bank.
Financial providers could decide to reflect holistically and define a
model that the entire organisation reshapes towards. Alternatively,
they could adopt different models for different parts of the
banking value chain: for example, for a particular market, product
or service line.
As a result, providers may adopt one or several future banking
models. We have provided a high-level view of five scenarios
below.
Scenario 1: Producer
integrated model
The provider will supply integrated financial operations and technology, either as a full end-to-
end banking proposition or for specific products or markets on a white label basis.
Revenue is
generated by the
organisations
buying products
and services from
providers.
Scenario 2: Facilitator
The provider will offer specific components, rather than the full end-to-end proposition, such
as KYC, management information, underwriting processes and data analytics.
Scenario 3: Service
provider
The financial organisation will compete with other providers, operating like an IT outsourcing
provider but with banking ability.
Scenario 4: Marketplace
provider
The marketplace provider will be convenient for customers and attractive to third parties.
This may include the creation of new value propositions, such as extending banking with non-
banking products and services.
Revenue is
generated by the
end customer.
Scenario 5: Experience
provider
The experience provider will need to provide a superior customer experience that can attract
high volumes of new customers and increase the loyalty of existing customers.
The future of SME banking
19
4.4 What questions should be asked
when addressing platform options
for SMEs?
1. Customer
In a platform-based model, the relationship model with SME
customers may change. Banks are at risk of becoming a utility
in the SME value chain, providing SME customer account data to
FinTechs and aggregators.
How will you maintain existing relationships with your SME
customers when third-parties become a key part of the
value chain?
2. Revenue and profitability
The increased transparency enabled by open banking will increase
transparency, choice and competition for SMEs, potentially
reducing brand stickiness and eroding profit margins.
If traditional revenue sources are eroded, how will you ensure
that SME financial products remain profitable? How can you
leverage the platform model to create new sources of revenue
(e.g., enhancement of SME products and services enabled by
new insight provided by FinTechs)?
3. Risk and regulation
A platform-based banking model introduces new types of risk.
These risks are amplified by the growth of open banking and the
prevalence of API technology. Providers must consider the risk
associated with moving to a platform-based business model.
Can the provider protect itself against the regulatory and
conduct risks associated with adding new participants to the
value chain?
What security vulnerabilities does the financial organisation
need to protect itself (and its customers) against in the world
of open APIs and shared data?
4. Technology and scalability
Building or participating in a platform ecosystem requires
significant technological transformation. FinTechs have the
flexibility to build new solutions at pace with changing customer
needs. Banks must possess the fluency to align and integrate with
these FinTechs.
How should the bank upgrade its legacy systems to meet the
demands of a platform-based model?
What processes can be automated to provide friction-free and
streamlined operations, so that the provider's capabilities can
be delivered in real time as a platform-based service?
How should the provider update its development approaches
(e.g., Agile adoption, DevOps)?
The future of SME banking
20
The rise of
technology firms
Mega tech platforms target the SME sector
5
5.1 Tech companies could offer the
full suite of services
Technology firms are recognising the challenges faced by small
businesses in obtaining finance. Technology and e-commerce
firms are using data to reinvent SME lending and disrupt the
traditional business banking model.
These organisations have an abundance of data about merchants'
finances and business operations, and use machine learning to
study trends and predict future creditworthiness. This not only
enables well-informed lending decisions, but also replaces the
more manual services historically provided by traditional banks.
Many of these platform companies rely on e-commerce merchants
for their revenue, so there is a mutually beneficial interest in
providing working capital to SMEs.
The advent of open banking will only increase the availability of
data in the industry, and providers should consider whether they
need to adopt a partner-based model to avoid losing market share
to new technology entrants.
Tech and e-commerce companies are already
disrupting the market
Technology firms are already providing services which mirror
traditional SME banking products provided by high street banks.
Outlined below are a number of example services provided by
technology firms which are disrupting the market.
Traditional banking
Product alternative solution
Overview
Current accounts
Cash solutions
A number of tech firms are providing their customers the ability to shop without a
debit or credit card number on their e-commerce platforms or in stores by using a
personal barcode or mobile number.
This functionality could be extended further across multiple points of sale (POS)
and rival traditional personal and business current accounts.
Business credit cards
Revolving credit line solutions
A major US technology firm has launched a 'revolving credit facility' for SMEs.
Lending
Lending solutions
A US technology firm has partnered with a banking partner to provide loans to its
merchants.
Whilst the current partnership allows the tech firm to better manage its credit risk
exposure, should it build a credit risk capability, it would be able to lend off its own
balance sheet.
Payment solutions
Payment solutions
A number of technology firms have launched their own payment solutions for
e-commerce companies where they can accept online and mobile payments via
their payment facilities.
The future of SME banking
21
Area
Impact
Key consideration for banks
Customer
SMEs' and online merchants' trading and working capital
requirements can now be met in the same place by
technology firms.
Furthermore, the scale and depth of the data used by
these firms is unmatched by traditional banks. If non-
financial services firms are better equipped to understand
SME needs (particularly online merchants), banks will
need to reconsider how they should manage customer
relationships.
On the other hand, banks' established relationship
management models may continue to anchor the customer
to their existing banking relationships.
Is the bank better off refocusing its efforts, and
allowing online SMEs and merchants to be financed by
technology firms?
Would a partnership model be more beneficial?
Should the bank begin to offer any non-banking tools to its
SME customer (e.g., financial management tools)?
Revenue and
profitability
In an era where technology firms are using predictive
analytics to tailor financial products, banks will not be able
to rely on traditional revenue sources, such as interest
income and fees.
Traditional banks' focus on the performance of their
loan portfolios may also need to be reconsidered. Tech
companies' income in the SME space will be generated
by offering more tailored products such as cash flow
management, payments and lending.
Banks must also face the challenge of keeping operating
costs down in the face of digital channels employed by
technology firms.
Does the bank need to re-assess its revenue model and
consider moving away from reliance on traditional sources
of income?
How can the bank keep its operating costs low whilst
serving the interests of its SME customers (e.g., process
automation)?
Risk and
regulation
Technology companies may be able to use data to make
better decisions than traditional banks. As such, they can
sub-segment the SME market by risk profile, targeting
SMEs according to risk appetite.
How can the bank manage credit risk whilst serving the
interest of its smaller merchant customers?
If technology firms are offering unsecured lending options
to SMEs, how can the bank do the same?
5.2 Technology firms are disrupting banking
Whilst a number of areas will be impacted by the entrance of mega tech platforms, we have focused on
three below and outlined some of the key considerations for banks.
The future of SME banking
22
Closing the gap: how do you
create a future-proof SME bank?
Making the transition from bank to business partner
6
6.1 Closing the gap: deciding where
to excel in building an SME offering
Digitisation provides an opportunity for new ways
of working, deciding where to excel and how to
differentiate. The starting point and strategy of the
SME offering will determine the actions that need
to be taken. Detailed below are five areas of focus.
Transformation
required for
SME services
1. Be digital
Challenging existing business models to
industrialise innovation and operational agility,
creating new sources of value based on novel
banking products and services
2. Digitising legacy
Transforming core functions by upgrading
outdated IT systems and processes to provide
a new wave of innovation, such as rapid
elasticity
5. Digital trust
Operating a secure, compliant and protected
environment to serve SMEs across both
physical and detail channels
4. Digital platform thinking
New API-enabled financial marketplace,
accelerating innovation and generating new
commercial opportunities
3. Experience thinking
Providing the blueprint for experience
strategy that enables market growth and
differentiation
1
1
1
2
2
2
2
2
3
3
3
3
3
4
4
4
4
4
5
5
5
5
5
Transform
Reactive and
unplanned
Siloed products
stack
Undifferentiated
experience
Legacy
technology
Innovate
Robust, resilient and
protected
API-enabled
marketplaces
Customer journey
differentiation
Cloud-
enabled
EY's digital enterprise transformation services are delivered by practitioners who are passionate about the contribution of SMEs to
our economy. For more details, please contact one of the authors of this paper.
The future of SME banking
23
SME banking team
Key contacts
Anita Kimber
Digital Lead
anita.kimber@uk.ey.com
+ 44 7775 004 847
Peter Neufeld
Customer Experience Lead
pneufeld@uk.ey.com
+ 44 7467 441 864
Ian Alderton
Technology Advisory
ian.alderton@uk.ey.com
+ 44 7702 777 770
Hamish Thomas
Technology Advisory
hthomas@uk.ey.com
+44 7967 176 593
Adam Vardy
Banking and Capital Markets
avardy@uk.ey.com
+44 7734 863 266
Thomas Bull
UK FinTech Lead
tbull1@uk.ey.com
+44 7775 750 395
Ehsan Ashraf
Banking and Capital Markets
eashraf@uk.ey.com
+44 7557 180 345
Vikram Kotecha
Corporate Finance Strategy
vkotecha@uk.ey.com
+44 20 7951 8147
24
The future of SME banking
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