For many years, small and mid-size enterprises (SMEs) have occupied a gray area for financial services companies: difficult to serve at scale, with lower profitability than their corporate and consumer counterparts.
Consumer banking needs are more traditional, with products and services that are highly commoditized. Corporate organizations have more complex needs, requiring more sophisticated solutions — but the profit return on those solutions is greater.
The breadth of SMEs’ business offerings, on the other hand, demand one-to-one selling and the creation of bespoke solutions, and with little synergy across the segment itself, scaling has been a challenge. The result: a high cost to serve, historically, and little motivation to push into the segment.
But several factors are dramatically shifting that historical reality, according to Sunil Dixit, managing director of BBVA Client Solutions within BBVA New Digital Businesses (NDB). “Today, we have lots of tools and technologies — such as machine learning and artificial intelligence — that streamline the creation of these offerings on their own,” Dixit said. “Offerings are becoming digital end to end. You can create bespoke, multiple offerings to serve this segment without a lot of additional cost.”
And today, SMEs represent about one-fifth of banking revenue worldwide, generating about $850 billion every year for banks, according to a June 2019 McKinsey article. The combination of technology and the overall growth of the SME segment has made it more appealing to banks willing to innovate, he said.
Where the opportunity lies
Similar to the opportunity that exists for banks to create solutions that integrate into consumers’ everyday lives, so too is there an opportunity to create integrated solutions for business owners.
“SMEs spend only 25% to 30% of their time actually thinking about how to grow the market and acquire new customers — and the rest on administrative work: accounts payable and receivable; lending; cash flow; human resources; sourcing; and more,” Dixit said.
The majority of SMEs’ “non-business” needs are actually deeply embedded in their financial needs, he argues: “There’s an opportunity to create a blended offering that offers financial and administrative services — which creates a huge amount of revenue potential for the banks.”
Banks have a choice
In the SME segment, banks can choose one of three roles to play.
Many banks will settle for simply offering traditional banking products or solutions to SMEs, a transactional relationship that won’t generate much profit or create added value, according to Dixit.
At the opposite end of the spectrum, banks might go all out and create an entire ecosystem of their own, organically building accounting software, sourcing software, and more. “That’s a very expensive and proprietary route,” Dixit said, “and won’t necessarily provide the best, one-stop solution for the client.”
In the Integrator model, banks can plug and play different providers’ solutions to create a bespoke ecosystem: With so many specialized offerings already poised to serve the SME segment, banks must only seek out those best-in-class solutions and offer them in one place.
“SMEs don’t want to deal with a thousand different providers — they don’t have the time,” Dixit said. “Banks can curate these players and integrate into the solution to create a fully seamless, end-to-end solution. This is the role banks should be playing.”
Portfolio companies leading the charge
Not all banks will be capable of playing the curator and integrator role, according to Dixit. “Only banks at the forefront of customer centricity and digital transformation can do this,” he said. “And BBVA, with businesses like Holvi and Azlo – that are included in his NDB Portfolio of entirely online companies – is being able to go beyond the traditional role of Banks.”
The New Digital Businesses portfolio companies are setting an example of how banks can play an orchestrating role in the creation of an SME business ecosystem.
Holvi provides SMEs with a range of business services — an online sales platform, invoicing functionality, and cash-flow tracking — as well as traditional banking, through its online platform operating in several countries of Europe.
Azlo also offers a variety of services to US entrepreneurs and small businesses through a 100% online system, including freelancer and vendor payments, digital invoicing, and more. Azlo is also building a digital community designed to connect its customers, who often feel disconnected from the larger working world.
Startups like these are shaping what the financial-services system will look like for SMEs in years to come. “In the future, banks won’t look like they look today,” Dixit said. “Banks will become solution providers leveraging integrated technology, both financial and non-financial. And BBVA has the opportunity to become the epicenter of such an ecosystem.”