Small and medium-sized enterprises (SMEs) represent one of the most profitable markets for banks, but they have yet to crack the secret to success in serving this sector.

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Traditional banks and neobanks have turned their attention to the potentially lucrative small and medium-sized enterprise (SME) sector. However, they have fundamentally different views of their role in serving the small business market, according to Pollinate International’s report, ‘SME Banking’s Inflection Point: Traditional banks’ opportunity to win customer primacy’.

Global software business Pollinate spoke to 975 decision-makers for business banking investment/budget decisions during January and February 2022. The survey covered four types of lenders: traditional banks, which are built on branch-based, relationship or face-to-face services; traditional banks with a digital arm; challenger banks, which are newer organisations typically digital only or offering digital-first services; and neobanks, which are digital-only banks focussed on experiences underpinned by products.

Neobanks, for example, prioritise engagement and relationship building. According to the research, they are 75% more likely to rank these factors higher than traditional banks as a core purpose in serving SMEs. In contrast, traditional banks are 80% more likely to rank product-focused factors more highly than neobanks.

In addition, neobanks and challengers are aiming more investments specifically at this customer segment. On average, neobanks plan to invest 36% more in the SME sector over the next three years compared to traditional banks, while challenger banks expect to invest more than double what incumbents have budgeted.

According to the report, challenger and neobanks are also prioritising customer experience as the key to future growth; 38% say improving customer experience is vital. “This goes beyond simply meeting customer expectations, to instead delivering experiences that delight customers and build relationships,” says the report.

While traditional banks also talk of improving customer experience, they are also more likely to refer to ‘maintaining parity with competitors’ (13%) or ‘product rationalisation’ (11%) as reasons for investment, “which risks putting disruptors in the driving seat”.

Banks need to invest in their data insights as part of their response to the changing market. Pollinate asked bank leaders to list the areas where data was most likely to have the biggest impact on profitable and sticky SME relationships.

Overall, 60% of traditional banks said it would deliver more personalised customer experiences, 58% identified improved cross and upsell of wider banking products and services, and 57% cited similar benefits for additional third-party payment services. Among neobanks, 83% identified decreased loan risk, 80% quicker onboarding and 75% improved cross and upsell of wider banking products and services.

The different potential benefits of harnessing data are clear to banks as they compete for SME business. The key is turning that recognition into action; according to the survey, 38% of traditional banks have already lost customers because they are unable to offer the required data and insights.

However, there is a traditional bank disconnect between areas of investment and the importance attributed to data and insights. While 82% of neobanks and nearly half of challenger banks intend to invest in services such as ‘providing data-led insights into SME business performance’ this year, only 38% of traditional banks will do the same.

Yet traditional banks rank data-led insights as the most important capability when acquiring SMEs, while value-added services such as loyalty and offers are ranked third. When it comes to retaining SMEs, they again rank value-added services as the most important capability, while easy access to data and information is ranked highest for growing existing relationships.

And while traditional banks recognise the potential impact of experiences on customer acquisition, retention and growth, their investment doesn’t reflect this, as it is primarily product focused. Overall, 81% of traditional bank budgets are allocated to products, with the remaining 19% supporting a variety of value-added services, such as data-led insights and business management tools. Challenger and neobank spending on services as a proportion of their banking budgets is slightly higher, at 20% and 21%, respectively.

According to Pollinate, customer primacy is key to success. “Banks can only succeed through deep engagement with SMEs; data will sit at the heart of any solution, to power insights and value-added services for customers and their end-users,” says the report. “Banks can take the initiative, but they need focused investment. This is an inflection moment, where decisions made today will define future success, if strategy is guided by clarity of vision and a focus on customer needs.”

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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