Banks Resigned To Role Of Utility, Not Collaborator, For SMBs

Thanks to competitive pressure from FinTechs, traditional banks are often pressured to keep pace with innovation and meet evolving needs of their small business (SMB) customers. Research suggests small businesses are urging their financial institutions (FIs) to play a more collaborative role as business advisor, but the latest report from Strands, a U.K.-based FinTech that helps banks identify and meet customer needs, suggests that not only are SMBs not getting that collaborative relationship from their banks, the banks know it, too.

Strands’ SME Banking: Intelligence — Not Applied report, released late last month, found that 69 percent of small businesses consider their FIs as utilities, not as business partners. Pau Velando, general manager, Finance at Strands, recently told PYMNTS that even more surprising is that 83 percent of banks actually agree with that assessment.

“We had a feeling what this survey confirmed,” he said. “Banks, in many cases, have rated themselves as a utility provider, which is a very strong statement. You wouldn’t normally hear a bank say this. Banks don’t like to recognize that they are a utility provider rather than a business partner.”

In terms of how that definition impacts the way FIs service their SMB customers, Velando said acting as a utility means FIs provide straightforward services without much customization or value-add opportunities.

“It’s something that’s very [much about] commodities,” he explained of banks’ small business offerings. “The financial services industry is under a profound transformation, driven by new entrants: FinTechs.”

That includes a rise in challenger banks across the U.K. According to Strands’ survey, growing frustrations with traditional FIs have 43 percent of SMBs considering switching to one of those challengers.

What’s interesting about this threat is that banks acknowledge this, too: 83 percent of FIs told Strands they are aware SMBs are likely to open an account with a challenger bank.

Banks Are Trying — Sort of

The survey suggests that banks aren’t blind to the threat of losing their small business customer base. But when it comes to how these FIs are addressing this issue, it’s clear efforts are falling short. Strands’ research found 83 percent of banks predict it will take four to five years to complete digital transformation and actually meet the more sophisticated needs of their SMB clients.

Velando agreed that five years is an incredibly long time in the world of financial services innovation.

“If you look back five years ago, things in the financial services space have dramatically changed,” he said. “If you start changing things in five years, you’re incredibly late, because the paradigm changes very fast. Technological advancements bring disruptions every six to 12 months that effect the established paradigm.”

The sluggish pace of technological change, coupled with the self-defining nature of banks as “utilities,” means the future of traditional financial services “doesn’t look very exciting,” Velando added.

Missed Opportunity

Here’s the kicker: banks’ inability or unwillingness to evolve from utility to business partner with small business banking customers means lost revenue opportunity.

“SMEs have a high willingness to pay,” the executive noted. “It’s not like the retail business where consumers don’t pay for digital services; they just expect them to be there. SMEs are willing to pay for digital services. In this case, banks’ investments are paid back by SMEs.”

What’s more, according to Strands’ report, banks have the capacity to play the role of partner. The survey found 91 percent of SMEs say their bank understands their needs well or fairly well, meaning they have confidence in their FI’s ability to provide value-added advisory services.

As more small business owners seek digital products and services like financial planning, business growth advice, foreign exchange and global payments services and more, FinTechs and challenger banks are ready to scoop up that revenue left on the table.

The influx of challenger banks and FinTechs, said Velando, “means that SMEs have a wider offer from which they can pick and choose the different serviccs they need.”

“Absolutely banks see this as a threat,” he continued. “Obviously, the banking value chain is highly fragmented. Now, SMEs that need more value-added services have a wider array of options from which they can choose. If you look at services like foreign exchange or transnational money transfers, you have a number of FinTechs there that provide that service for a fraction of the traditional cost than the bank. Why wouldn’t a SME use that?”

It’s unclear whether banks are going to accelerate the pace of technological change within their walls, or whether they’ve settled on the idea that they will continue to act as a utility for small business banking customers. What is clear, though, Velando said, is banks are losing out to innovative market entrants, and the opportunity to retain and regain market share won’t be there forever.

“Banks need to realize that the window of opportunity they have to shift the relationship they have with SMEs is not unlimited,” the executive said. “Opportunities will not last forever. Banks need to be aware that their system of business will be hardly sustainable if they continue to see themselves as a utility provider.”