Banking in the Digital-First World – A New Reality for SME Banking Courtesy Challenger Banks

September 2, 2021

SMEs have always been the most vital cog of global economic growth. SMEs contributed to more than two-thirds of net new private-sector jobs in the US over the past few decades. Also, SMEs account for 97% of the total identified imports and exports in the US.

Apart from being the lifeline of manufacturing, retail, agriculture, and other vital industries, SMEs contribute massively to a country’s international trade. SMEs are also the largest contributors to company registrations in any economy and represent a massive pool of opportunities as the creamiest layer of companies from this segment, more often than not, go on to become pioneers in their areas. But, in fact, despite all these contributions to the evolution of the next-gen business landscape, SMEs have never got what they deserved.

After the global financial crisis, SMEs bore the brunt of reducing banks’ risk appetite, resulting in complexities in access to credit essential for their growth. Then, the emergence of the mobile-first economy, the emergence of FinTech business models, and the intermittent threat of disintermediation pushed banks to focus massively on the consumer segment with their front-end innovations. The emergence of various business models designed around making the retail banking experience seamless – talk about PFM, instant payments, wallets, recommendations, chatbots, and so on – substantiates this fact.

Traditionally, SMEs have already faced challenges in availing banking services, with the bank innovations being inclined towards large corporates due to their high profitability and large loan books. SMEs always had to make do with inefficient, limited capabilities of banking, which never really addressed some of the key pain points that they faced (e.g., accounting challenges, longer onboarding times, etc.).

Then came the gig economy era, early-stage startups, and freelancers, where the emphasis on small-scale business transactions and banking needs exposed the gap areas in the SME banking landscape. FinTechs, as always, were on their feet, ready with their innovative solutions to tap into this opportunity and solve the problems of SMEs, outpacing banks. The solutions ranged from cognitive accounting platforms, invoice discounting, e-invoicing, SME credit scoring & lending, API-based bulk payouts, expense management & cash flow solutions, etc.

However, one of the most crucial innovations came from the digital-only challenger banks providing end-to-end banking services on mobile/online channels.



Challenger banks have made a mark on the consumer banking space with their great UI/UX and nimble, agile approach to banking. When applied in the SME context, the idea seemed to tick most of the boxes for SMEs, solving many of their burning problems. These digital-only banks provided a range of services – from ground-up capabilities around accounting/tax/payments, etc., to API-driven marketplaces enabling SMEs to plug-and-play solutions of their choice on their banking platform.

While challenger banks such as Open provide an inbuilt accounting capability with a payment request and invoicing feature, Starling Bank enables SMEs to plug in services of their choice – e.g., Xero for receivables, TransferWise for cross-border payments, Kabbage for lending, Sage for tax, etc., Some banks, (e.g., Kontist) are focused purely on freelancers.

The challenger banking landscape is an amalgamation of non-licensed over-the-top banks, digital initiatives of traditional banks, marketplaces, and licensed challenger banks. Europe leads the way in the transformation of SME banking through challenger banks, with more than 34 providers enabling SMEs in their banking experience. The US follows up with 17+ SME-focused challenger banks. Asia had more than 7 challenger banks serving SMEs, while the rest of the world had more than 4 such providers.

While SME-focused digital-only banking has begun to spread its wings, we can expect more and more startups to begin to operate in this space in the coming years.

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