Banks need to change their approach to SME lending

A recent EY survey showed that banks remain the most trusted financial institution for SMEs compared with technology companies.

But SME lending has decreased significantly and accounts for just 2 per cent of overall balance sheets in the UK. According to the report, lack of understanding and limited data history make it harder for banks to understand how best to serve SMEs and this leads to high-risk profiling and is one of the main challenges SMEs face.

The availability of finance is key to the success of all SMEs and this new report explored the advantages for banks that address the specific challenges SMEs face.

The report noted that banks have a unique opportunity to meet the needs of their SME customers by developing tailored, customer-centric offerings similar to those of fintech challengers.

The ‘Unlocking big growth in small businesses: How to drive SME lending transformation through product innovation’ report identifies five core building blocks for banks to capture lucrative growth offered by the underserved SME segment.

The first is for them to build deep customer relationships and understanding and recognise that SMEs are very different to one another and cannot easily be categorised as retail customers.

The report said that a deeper understanding of SMEs and their circumstances enables better risk management and unlocks opportunities that other lenders may miss.

Secondly, it is important that financial institutions have a clear proposition or choose a specific niche as SMEs’ needs vary across their life cycle, so propositions at each stage must reflect this.

They also need to address the needs of SMEs holistically as the report indicated that small businesses are looking for partners, not just finance. Offering advice and an ecosystem of services will create deeper, more successful customer relationships.

The report stated that banks and financial institutions also need to create a market-leading and modern digital customer experience as customer expectations are rising. The minimum requirement for success is an easy and fast digital offering without long, cumbersome form filing or waiting times.

Finally, they also need to offer next-generation core platforms by building lending services around a cloud-native and composable platform that will allow the easy combination of best-in-market components providing flexibility and longevity.