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SME Segment Forcing Banks to Launch Non-Banking Services

Andrey Gidulyan

SME Segment Forcing Banks to Launch Non-Banking Services

The FINANCIAL — Crediting and opening a deposit are no longer the only services that SME customers demand from banks. Consultations, training, office space, ‘ATM car’ and even translation services are what modern banks offer their clients in response to growing demands. Another challenge for the banking sector is coming from Generation Z. Having grown up with electronic devices, this segment requires a special approach based on modern technologies. If banks do not manage to respond to these demands rapidly, they may be left outside of the market as 72% of customers globally are willing to bank with a non-bank.

“There is a new generation coming and because of the digital channels and digital technologies, there is a huge impact on the needs and demands from customers. These needs and expectations from customers are influenced from another sector. It is not the banking sector that is influencing the needs but it is tech giants, like Google, Samsung and Apple. Based on the products and services that they are receiving from them, people would like to have the same approach from the banking sector. The second issue is that we are talking quite a lot about a Generation Connected, or Generation Z, which is these days approaching the market. These are people over 18 years old. They have not had the chance to experience the same life as we had, like having a childhood without technology, mobiles and other technological devices. They cannot imagine life without these technologies. So, it is a totally different approach. For them coming to the bank and for example, signing a contract, using paper is something old-fashioned. So, they would like to have an approach that is directly for them. Generation Z would like to have a similar approach in SME banking,” Lukas Dzuroska, Regional Manager at Efma, told The FINANCIAL.

According to Dzuroska, these days it is very popular with a lot of young people to not aspire to be employed, but rather to start their own business, which means that they expect their bank to have a similar approach to meet their needs. “There are already some examples globally that can very easily replace all the institutions, including banking services. That is why it is very important for banks to be there and to retain those customers. If not, they could easily be disrupted.”

Last week SME Banking Club arranged the SME Banking Conference in Georgia. Representatives of world leading banks and financial institutions attended the Conference, discussing the modern trends of SME banking.

“We have been holding the SME Banking Conference annually in Kiev, Ukraine. It attracts lots of participants from Ukraine, Belarus and Russia. Due to the ongoing political situation in the region, participants from Belarus and Russia refrained from attending the conference last year.  The format of the Conference held in Kiev is a little bit different. It lasts two days. The first day is attended by representatives of the banking sector, and on the second day we invite business entities. It is kind of a discussion between businesses and banks. There is a kind of misunderstanding between businesses and banks in Ukraine so such events are very useful and important,” said Alexey Sayapin, Business Development Director at SME Banking Club.

As Sayapin said, this year we decided to hold the Conference in Tbilisi, as it is a destination which the representatives of any country are always eager to visit.

“Traditionally SME business has been associated with micro lending. Meanwhile the practice of world leading players shows that SMEs are not only about crediting. They involve passives, deposits, accounts, card products and non-financial services. Currently consumers no longer solely expect lending from their banks. They require their banks to be their consultant, IT service deliverer and financial partner. It is something similar to the Public Service Hall of Tbilisi, where consumers can receive all kinds of services under one roof,” he said.

“Many banks have a dedicated retail banking arm, and/or a department focused on large corporates, but do often overlook smaller and medium sized enterprises. SME programmes have been implemented at banks in many emerging markets, and some banks do it better than others. A more stable macro-economic environment means easier implementation. In a country that has a crisis every five years, banks forget these ideas and focus on survival. They are simply not focused on completing the task of building their SME client portfolio – and understandably so,” said Ferdinand Tuinstra, Senior Banking Expert at International Finance Corporation (IFC).

“In many countries, banks aiming to increase their SME customer base face a handful of challenges, including poor understanding of customers, limited credit data, shortage of collateral and capital, and a volatile business environment. The SMEs themselves face hurdles such as minimal managerial experience, financial literacy, and business skills. For banks, SMEs are then often low on profitability and as a result, bringing the two together to encourage SME growth is not easy,” said Tuinstra.

As Tuinstra said, banks are increasingly encouraged to redefine SME banking, by creating a “total wallet” to identify and tag SME customers across all lines of business, and centrally manage SME customers across the bank.

“Going forward, banks will not only need to invest in their SME programmes, but also devise innovative products and take a different approach in order to win over the SME segment. This shift toward embracing entrepreneurs and small business growth will lead to job creation, greater access to financial services, and, ultimately, economic growth,” said Tuinstra.

Efma offers the retail financial service community exclusive access to a wide array of resources, databases, studies, articles, news feeds and publications. The FINANCIAL asked Dzuroska to talk about the current trends and challenges of the banking sector in greater detail.

Banks Losing Control of Financing Start-ups

There are new trends in the market. New start-ups, fintechs, are approaching the banking sector in different areas, for payments, financing, and crowd funding sources for SMEs. Here banks are losing their control. It means that they could easily be replaced. In one way the world has big giants, like Google Wallet and Apple Pay, that could very easily replace banks. Consumers do not need to have a bank account to transfer money via Google Wallet or Paypal. It is the same for lending. When people have a business idea, they often present it to crowd funding sources. That way they can receive money from sources other than a bank; they do not need a bank anymore.

Efma carried out research according to which 72% of customers are willing to bank with a non-bank. “So, customers do not care if it is a bank or something else. If they trust that institution then they can transfer money and make other transactions anywhere. As Bill Gates already said back in 1994, banking is essential, banks are not. So, anybody can replace banks these days, by doing banking. The trends these days are digitization, the impact of digitization in many remote ways, and relationship management. It means that you don’t need anymore to have a person that is responsible for you, relationship managers. All relations can be managed outside through digital channels. Most young people very much prefer to have access to their banks through their mobiles.”

Value Added Services

It means that banks need to offer more to SMEs, not just a basic product. It means a combination of a physical and digital approach. While entering a branch customers should have an opportunity to somehow connect with their mobile phones. Customers can very easily schedule a meeting with their adviser in the branch through the application. It does not make any sense to come to a branch, ask when they can have a meeting and later come back again. It needs to work as physical and digital services supporting each other.

Creating an SME Community within the Bank

Long-term partnerships mean that banks need to create communities among the SMEs. There can be an SME client offering IT services who needs an accounting service, for example. So, banks have an opportunity to create communities where SMEs can exchange products and services between each other. By this, banks can create a huge community of SMEs who can support each other and save costs. Apart from that, banks need to offer a source of information. It is quite important when you are starting out as an SME, when you are introducing a new product, or expanding to other countries, for you to have information on how to do it. One can get lots of sources from the internet. In addition, there might be a great place in the bank that can provide this information as an extra service, an extra approach. That is additional value. The next is some co-working spaces. Many SMEs are looking for office space. If banks can provide these offices free of charge, or additional payment, it is a great source one can offer for them. The same goes for business advice, discounts on goods and services, having some training to be delivered. If anyone is missing some skills, they can easily apply for training. So, banks can offer it as a non-financial service. Otherwise those people from SMEs need to find other sources. When banks provide such services it raises the loyalty of the client to the bank. They will not be looking for an opportunity to replace the bank. They will see the value of that institution that is providing them with help for the entirety of their business. Currently more than 50% of banks are providing business advice as non-financial services. Over 42% of banks are providing discounts on goods and services to their customers. What is a bit surprising is that only 6% of banks are providing office space.

Non-Financial Service of Banks, from the Example of Turkish TEB Bank

TEB offers non-financial services in four areas. The first area is information or research. They have an SME hotline. Consumers can call and ask for advice any time. The second area is SME TV, providing any advice they may need. They have some translation services, there might be lots of people knowing just one language. Secondly, they have training and capacity development called SME Academy. They have consulting and mentoring. The last panel is networking. They created the SME Club, where members can trade and exchange services with each other. They also offer work spaces.

Banking Sector Wasting their Exclusive Data of Consumers’ Habits

Banks have data about consumers which nobody else in the market knows. Banks need to capitalize on it. Banks have data about consumers’ habits, like what we are buying, how often, how much we pay, in which country, in which precise location, etc. Banks do not know how to use this information. Were some of the banks to find a way to use it, then there would be a way to replace even the IT giants, as nobody else has access to this information. For example, banks can send a message to their customers that are at the trading centre and offer some discount in the case of a purchase at a concrete shop. So, it gives benefit to the client, to the merchant and to the bank by providing extra revenues.

Looking Outside of the Banking Industry

Banks should look to Google, Amazon and other giants, to be inspired, which customers are expecting. There is already one such bank in Poland, called Idea Bank. Last year they introduced the Idea Cloud. By this application they won the BAI innovation award in the USA. Idea Cloud was developed with the goal to provide Idea Bank’s clients with a multi-functional banking platform based on cloud solutions. It is the first platform in Europe that combines both accounts and banking functionalities that offer different services and tools to enable the users, mostly small-scale entrepreneurs, to simplify and accelerate all processes associated with complex business management. Then they created Idea Hub. It is a branch where all start-ups have their own space, to work directly. The latest thing they introduced was the ATM car. This means that if for example a restaurant owner has cash that needs to be turned into a deposit, but they have no time to go to the bank branch, they can order a car to come to them via their mobile application.

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