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.