Banks can use ecosystems to woo SME customers

Banks can win a significant share of small and medium-sized enterprises' revenue pools by implementing innovative ecosystems, according to McKinsey & Company. 

An innovative ecosystem addresses SMEs needs by providing offerings beyond traditional banking products.

SMEs have vast business potential. 

They form the backbone of many economies around the world and generate around one fifth of global banking revenues. That is expected to grow by 7 percent annually over the next seven years, the consulting firm said.

However, due to highly varied credit quality, the profits of SME-focused banks have traditionally lagged behind those of more diverse banks.

As a result, many lenders have not prioritized this customer segment, leaving many small companies feeling that their needs are ignored.

But now, new customer propositions and better service models enabled by technology are creating opportunities for more lucrative returns. 

New players such as financial technology firms are entering the business offering services such as invoicing, payroll, tax preparation and inventory management.

McKinsey believes that such “beyond-banking” ecosystem strategies are not just for tech companies. 

They offer banks a unique and scalable solution, as lenders have great advantages, including rich data and the trust of customers.

The ecosystem concept is to offer a broad range of services, including but not limited to banking, in a single integrated platform, the study noted. 

This provides the convenience smaller firms seek, and reduces the amount of time spent searching for and accessing other products and services.

For example, access to an entrepreneur's transaction data and invoice history will allow banks to make more informed decisions such as the client’s credit limits, recommend more suitable financial solutions and even nudge business owners to act ahead and avoid potential problems such as a lack of funds.

While building service ecosystems for SMEs, McKinsey advises banks to take three different strategic actions - participate, orchestrate and build. Partnerships will be an important component of all these three roles, but it is only the first step.

Orchestrating or building a successful ecosystem platform requires banks to fundamentally rethink their value proposition and develop an operating model that is different from their traditional business, the report added.

Ping An, a Chinese personal financial services firm, has aggressively expanded its business beyond traditional finance. It has bought an online used-car platform to acquire digital users and offered easy-to-use open services such as digital wallets.