Small and medium-size enterprises (SMEs) in Bangladesh characterize one such opportunity for banks seeking to grow. Years of low-interest rates, difficult consumer, corporate, and investment banking business conditions and a delicate macroeconomic environment have squeezed many core areas of business for banks. In this context, previously overlooked segments are worth revisiting. Data highlight that for SMEs in Bangladesh, access to financing is their most urgent problem. The same data shows that one in five SMEs is unable to access the credit it was planning to use. Despite the demand, the opportunity remains elusive for banks, which have struggled to serve SMEs successfully.
The challenges from a bank’s perspective are many: smaller business clients demand a higher intensity of bank attention with limited returns and a higher (apparent) cost of risk. Even quite small businesses can have complex and rapidly evolving needs, along with an unsteady risk profile; and yet, they often expect premium service. And there is no one-size-fits-all approach banks can apply to these clients, given the variety of needs, business types, and decision-makers. Construction-wise, SMEs as a group fall between the cracks of retail and corporate banking, so from a banking perspective, there is often no natural organizational home for them as clients.
SMEs also represent a broad range of business sizes: those at the micro end of the segment share similar dynamics to a personal or affluent consumer, while those at the larger end have profiles and requirements more aligned with commercial banking clients. This uncertainty is illustrated by the fluidity of many banks’ organigrams whereby the SME business is pinned, and re-pinned, to different parts of the business finding a home in neither the retail nor the commercial-banking segments. Still, while many of the challenges outlined above will continue to be a factor for banks considering serving the SME segment, banks now have access to tools and capabilities that can alter the equation to a point where SMEs can be served well and also served profitably.
SME banking should have new look: The SME sector is the backbone of economic activity and employment in most countries, leading governments, business groups, and regulators to highlight SMEs as an area of opportunity for banks to serve better. Programs such as Small Business Saturday, interventions from national business organizations, and increased scrutiny are among some of the efforts highlighting the importance of these businesses. For banks, the timing is opportune because many of the historical challenges to serving the segment well and profitably can be addressed through digital technology. Banks can also transfer the capabilities and lessons they have gleaned from providing digital services to their retail banking customers over to their SME banking clients. Given that many SME leaders themselves are today more fluent in digital engagement for their personal banking, they are now more likely to be comfortable with similar solutions for their business needs.
Obvious hardship there: Banks, of course, are encountering stiff competition for their retail banking customers, and are likely to experience the same challenges in the SME arena. Sophisticated, agile, and well-funded organizations including fintech and large digital firms are seeking to engage SME clients, either through full-service or selective-service models. Other players, for example, accounting software providers are seeking to uncover facilitate banks by migrating upstream and taking control of SME banking selection; payment platforms are broadening their solutions and locking in their clients with financial and reporting products.
As alternative banking and financing options multiply for SME business leaders and as their other suppliers offer richer, holistic solutions supported by sophisticated real-time, always-on, digital solutions the traditional-banking proposition begins to seem very dated. From their side, banks carry three legacies from their past engagement with this segment that makes it difficult for them to maneuver nimbly. The first is a business model predominantly defined by interest income and some reputational challenges to fee charges. The second is a cumbersome legacy IT infrastructure that affects processes including risk, products, and servicing. Third is an out-of-date mindset on how SME clients are to be served, which seems out of step with modern competition and client desires. Notwithstanding these challenges, there are banks that are succeeding in the SME segment.
How the winning banks get advancement: So far a number of banks have been able to achieve a significant uptick in performance with SME clients. Top-performing banks can generate more times higher revenues per SME customer than average banks, driven both by higher lending and cross-sell revenues. The combination of higher lending margins with more revenues from less capital-intensive cross-sell products yields significantly higher capital efficiency for these market leaders. They have also found ways of balancing income streams more toward fees than interest margins.
At the same time, the leading banks can able to reduce their cost-to-serve by migrating a high share of customer activities to digital channels. Advanced digital banks in small-business banking, for instance, can increase the number of clients they onboard digitally, while can reduce onboarding by many times. They can also able to activate all their customers online and almost half do so on mobile platforms. Banks should seek to serve SMEs at the level will need to make purposeful strides forward in their capabilities, service model, and SME value proposition. Most successful banks can achieve this through real transformation rather than by tinkering with and optimizing their existing operations.
Concluding thoughts and remarks: SME decision-makers frequently use their personal experiences to set their professional expectations. So, the challenge for banks is that they are competing with the fully evolved digital experiences offered by online retailers, payment platforms, or logistics companies. It is evident that good customer service is the number-one reason SMEs choose their main bank followed by the convenience of branch location and an enhanced online channel. Moreover, SMEs tend to be loyal to their bank: for instance, a few SMEs switched their main bank. Key drivers for switching are better pricing and better online service and functionality. There are, of course, vast differences in the behaviors and needs of the decision-makers at leading SMEs, their organizations, and their industries. Traditionally, banks have addressed this range of preferences and need with a relationship-managed service proposition and in some cases this model still makes sense. But for most banks, SME relationship-manager (RM) client portfolios are in the hundreds, and the average RM time in the role is fewer months. In some cases, RMs may only meet a client once or twice before changing roles.
In these cases, the concept of “relationship banking” is a somewhat hollow promise, as banks end up relying heavily on standardization, system-supported decision, and industrialized process discipline that results in treating all their clients alike even if their needs are different. Digital tools, such as proactive diary management, automated meeting notes, data mining with AI-driven prompts, integrative RM work benches, and digital assistants, can provide parts of a holistic answer to these challenges. Counterintuitively, advances in banking systems, data analytics, and customer relationship management capabilities mean that a digitally-led service proposition can be significantly more personal and engaging than an RM-led approach. Importantly, while there are still business decision-makers who do not keep pace with the latest consumer trends, even digital laggards are now seeing the benefits of new ways of working, and generational shifts mean that the younger, digitally native generation is taking the lead.
Some aspects that banks can focus on to develop compelling, successful SME propositions for themselves and their clients i.e., A hybrid channel end-state improves the viability of servicing this segment, Double down on frontline cross-selling capabilities, Leads based on advanced analytics, Sales routines and tooling, Performance management, and capability building, Streamlined journeys, Build a compelling proposition through make and/or buy, Adapt to new types of talent, Rethink process excellence.
Digitization can enable cost-efficient, more regular, and persistent engagement with clients. Overall, shifting the client relationship to the institution and away from the individual can remove the risks and failings of human error such as poor process execution, lost paperwork, return calls forgotten, or suboptimal client focus. A more effective approach is to identify the areas of sustainable differentiation, where investment in internal development can pay long-term benefits, such as risk modeling, sector depth, or product expertise or range. In other areas, a bank is better served by sourcing best-in-class products or capabilities to round out a robust, lower-cost, and effective solution for clients.
Balance is important. It is observed banks outsource either too much or too little. Ideally, the bank owns and controls the sources of value creation and differentiation and brings in commodity services that benefit from scale greater than banks can create individually. A well-balanced mix of in- and outsourcing has the added benefit of bringing in external insight and best practices, and an openness to challenge and flexibility that can rejuvenate existing ways of thinking. Successful SME propositions will be highly dependent on digital and data analytics talent and via “translators” who harness insights to create client dialogue and impact. These emergent talent needs for SME banks will inevitably affect the internal and operating culture of the business. Decentralized and remote ways of working create challenges around control, organizational culture, and team dynamics as well as opportunities around the reach of product and industry specialists, the flexibility of capacity, and reach.
We believe that these are all solvable. Superior processes are, of course, a fundamental requirement for success in banking overall. But for banks seeking to gain a foothold in a new segment, the bar is particularly high: simple payments, account management, or product issues are often the seeds of discontent that germinate into a dissatisfied and ultimately lost customer. Writ large, issues of this kind can make the difference between a successful move into the SME market and a failure. With this in mind, banks should challenge themselves to reinvent and reimagine where possible, rather than tinker at the margins. Banks need to pay as much attention to the nuts and bolts of process excellence as strategic moves.
