B2B Payments

When Growing SMEs Land In Banking Purgatory

We’ve all heard of the Goldilocks effect: not too big, not too small, but just right. But what happens when SMEs are hit by what might be considered the anti-Goldilocks effect?

That is, when a SME is outgrowing the standard retail banking it’s receiving, but is still too small for in-house treasury and cash flow management systems. At this stage of business growth, SMEs can get frustrated with their banks. It’s a finding reflected in the latest research from financial institution app and software provider Misys, which found a significant gap in the digital services being provided to these mid-market business customers of banks.

But while SMEs may be unhappy with their banks, some banks aren’t too pleased with their SME clients, either.

Tim Tyler, Misys’ Global Product Manager of Commercial Banking, said that many of the large, multinational banks are looking to unload these customers from their books because they’re now seen as unprofitable. It’s leaving a Goldilocks opportunity for other banks – the ones that aren’t very large, but aren’t very small, either – to pick up these SME clients.

"There’s a big opportunity in North America, especially for the regional banks, to go pick up these clients as the banks are trying to get rid of what they perceive to be smaller customers,” he said in a recent interview with PYMNTS. “But those customers, obviously, are still going to have the same demands on the banks."

That, of course, is easier said than done, as these customers will still have complex demands from their banks regardless of where they land, Tyler added.

For these SMEs, Tyler said they are growing and looking to conduct cross-border trade, and that poses a hurdle for some financial institutions.

"The most telling thing is that so many banks look after their smaller clients on their retail, business banking platforms,” he explained. “Once the companies start wanting to do more – I don’t like to call it ‘complex’ – but processes that are outside of the norm, the banks have a challenge. What’s badly siloed anyway in banks in terms of trade finance, cash management and treasury, becomes even worse when you have to keep onboarding the same customer."

Picking Up SMEs

If these Tier 3 and Tier 4 banks want to pick up this segment of customers, they have a bit of work to do. Today, Tyler said, banks are struggling to streamline their back office operations. And in an age where clients demand real-time services and transparency, a lack of institutional organization will stunt success.

"Those smaller banks need to look at how they can be front-and-center with those SME customers, effectively service them, look at how they can do some of this end-to-end automation, and nurture the client relationship,” Tyler said.

[bctt tweet=”Smaller banks need to look at how they can be front-and-center with SME customers”]

He added that part of this strategy will be to “play nice” with the thousands of financial technology service providers popping up to service niche areas of the finance sector and chip away at banks’ dominance.

"What needs to be at the center of the relationship is the bank and the next biggest player is the customer,” Tyler said. “But around that, there are these partnerships that need to be looked at across a range of business areas."

Data Control

These partnerships can touch upon an array of the corporate banking processes for SMEs, he said – cloud-based cash management, treasury, etc. – but the big opportunity is in data aggregation.

For example, while nobody knows how the Internet of Things will truly come into play in the banking world, the banks have an opportunity to partner with innovators that can help banks manage the data surrounding B2B commerce – that is, accessing the data to confirm where a shipment is, whether it’s gone through customers, where it’s landed – to mitigate the risk in trade financing and manage the release of funds to a borrower.

Banks today, however, have yet to get on a level of handling their data for this segment of SMEs.

"There’s an opportunity for banks to become almost a cloud-based treasury platform for these customers because the bank has all of the data, and can then start offering better liquidity management and better cash flow forecasting based on real-time data,” Tyler said. “The problem is that a lot of banks aren’t connected enough internally to be able to bring that data together themselves."

The problem is further complicated by changing banking customer behavior, he explained. “Another message I’m hearing is that a lot of businesses are starting to view the data that the banks have as their’s, not the bank’s, and the banks as just trustees or guardians of that data,” Tyler told PYMNTS. “They want to do more with it, but at the moment the sort of data that people get from banks through a manual platform just doesn’t cut it really for the depth of analysis these SMEs want."

In addition to partnering with FinTech innovators and organizing their bank-office structures to gain effective control of all their data, Tyler said banks that want to pick up the SMEs getting dumped by their existing financial institutions need to have a strategy in place to do so. Unfortunately, Misys research finds that a significant number of banks are “way behind” on executing such a plan, Tyler said.

[bctt tweet=”Banks can’t deal with today’s demands – how on earth will they cope with tomorrow’s?”]

"We don’t know what the future brings. And the problem is that a lot of the banks aren’t set up today to deal with today’s demands,” Tyler said. “How on earth are they doing to be able to cope with tomorrow’s demands?"


Latest Insights: 

Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. The July 2019 AML/KYC Tracker provides an in-depth examination of current efforts to stop money laundering, fight fraud and improve customer identity authentication in the financial services space.


To Top