The Rise of Neo/Digital Banks That Cater Only to SMEs

Over the last few months, we have focused on new customer segments that FinTech will possibly cater to. Previously, we had also written about the rise of the gig economy as well as upcoming digital-only bank licenses in Singapore. Based on our ongoing analysis, we believe that SME banks will be important players in the ecosystem in the times to come. In this week’s article, we deep-dive into the rise of neobanks/digital banks that cater only to SMEs.

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We’ve usually observed that people tend to not focus on SMEs, consequently leading it to be considered an underserved segment. Even FinTechs that earlier concentrated on SMEs focused only on specific solutions and did not provide a holistic range of banking solutions required by SMEs. This is unfortunate, considering micro/small businesses are the engines of economies, critical for moving it forward. According to the International Council for Small Business (ICSB), formal and informal MSMEs makeup over 90% of all firms and on average, account for 60–70% of total employment, and 50% of the GDP.

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It’s undeniable that SMEs are usually the lifeline to various industries such as manufacturing, retail, and agriculture, to name a few – they contribute massively to a country’s international trade. SMEs are also the largest contributors to company registrations in any economy and represent a large segment full of opportunities as the best companies from this segment often go on to become pioneers in their areas of operation. The fact is, in spite of all the contributions to the evolution of the next-gen business landscape, SMEs have never received the kind of support they deserved.

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After the 2008 financial crisis, banks tried to reduce risk appetite, which impacted SMEs the most. This resulted in low access to credit, which is vital for their growth. Another important event that occurred during this time was the emergence of FinTech companies that propelled banks to focus massively on the consumer segment with front-end innovation for retail banking such as PFM, instant payments, wallets, recommendations, chatbots, and more.

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What followed was the rise of the gig economy for early-stage startups and freelancers, leading to an increased emphasis on small-scale business transactions and banking requirements – the gap was now clearly visible in the SME banking landscape. FinTech stood poised to leverage this opportunity and address the needs of SMEs when banks could not. Therefore, the solutions presented by FinTechs included cognitive accounting platforms, invoice discounting, e-invoicing, SME credit scoring & lending, API-based bulk payouts, expense management & cash flow solutions, to list a few.

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That said, a highly crucial innovation came from digital-only neobanks/digital banks – they provided holistic banking services via mobile or online, which is reflected in the growth of the number of neobanks/digital banks.

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Neobanks/digital banks have indeed made an impact in the consumer banking space with their great UI/UX and agile approach to banking. When applied to SMEs, neobanks/digital banks seem to be the right fit in addition to being capable of solving most problems. These digital-only banks provide a wide range of services from ground-up capabilities around accounting/tax/payments, etc., to API-driven marketplaces. These kinds of services enable SMEs to integrate plug-and-play solutions of their choice with their banking platform.

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The SME banking landscape is a combination of non-licensed over-the-top banks, digital initiatives of traditional banks, marketplaces, as well as licensed challenger banks. Europe leads the way in the transformation of SME banking through challenger banks, with more than 21 providers enabling SMEs in their banking experience. The Americas follow with 8 SME-focused challenger banks. Asia had more than 6 challenger banks serving SMEs, while the rest of the world had 2 such providers.

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SME-focused digital-only banking has started to make an impact, and in the future, we can expect more startups to begin to provide tailored banking services to SMEs in the years to come.

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