Next generation SME banking

How banks can apply innovation to seize the SME revenue growth opportunity


It is generally held that the SME segment is underserved, reflecting the risks associated with the sector. Despite the number of UK small businesses remaining stable at around 4.5 million, the sector is highly dynamic. However, for UK banks the SME market still represents a huge and underexploited growth opportunity. The SME market employs nearly 60% of private sector workers and generates a sector turn-over that is virtually identical to the UK’s 6,000 large businesses. SME’s attractiveness is further underlined by their tendency to be fiercely loyal and historically unpredisposed to multi-banking.

A powerful combination of new regulation, evolving customer needs and the emergence of new players and technologies is driving an unbundling of SME banking. This has created a clear but short-lived window of opportunity for banks to seize the initiative and grow SME market share and revenues. However, getting SME banking right presents challenges and risks in a period of intense economic uncertainty. According to recent data from the Bank of England, the value of outstanding SME lending fell by almost one-fifth after the financial crisis, moving back to 2006 levels. Whether SMEs are less reliant on credit, or are merely tapping alternative funding sources, the traditionally strong credit relationship between bank and business customer is eroding.


To harness the SME opportunity, banks must innovative across the supply chain, within origination, fulfilment as well as service and portfolio management. Origination is where most high profile innovation is occurring. Some banks are implementing new value-based and needs-based segmentation models, offering SMEs variable pricing and service options across products, and support through multiple channels. Innovation must be harnessed to address a real customer need or to alleviate internal challenges.

Banks must respond to the tipping point or risk being left behind as the SME customer increasingly multi-sources products and services from alternative providers. The combined force of four emerging trends means that the future landscape for commercial and business banks in the UK will soon look very different:

  • Changing customer needs and behaviours mean existing banking propositions are losing relevance for SMEs.

  • Erosion of the traditional credit relationship between SMEs and banks is loosening the historical ‘sticky’ banking relationship.

  • Regulation will act as a powerful catalyst for new entrants, driving higher rates of switching.

  • New technologies will continue to support the emergence of new entrants and business models.