Insight: Neobanks – why aren’t SMEs making the switch?

Mark Hartley,
05 Jul 2023

Despite significant effort, there is very little evidence to suggest that neobanks have captured the business of small-to-medium sized enterprises (SMEs) away from legacy financial institutions.

In fact, it’s believed the ‘Big Four’ UK banks still hold well over 50% of customer deposits. The same organisations were also trusted to provide more than 80% of the government-backed loans designed to help SMEs through the pandemic, according to the Financial Conduct Authority’s Strategic Review of Retail Banking Business Models.

Nuanced growth

Where challenger banks and fintech solutions are used by SMEs, they are often utilised as supplementary services to those already provided by larger companies. Ultimately, the staying power of the banks was much greater than many people expected.

Despite some ups and downs, traditional banks remain strong and where SMEs feel most comfortable and trusting when it comes to depositing, sending, and saving money.

This is not to say that SMEs are too risk-averse to trying neobanking experiences. However, for business owners to make the switch there needs to be a real motivation.

As the failures of switching schemes indicate, this incentive often needs to extend beyond a simple monetary offer. Instead, SME owners are interested in receiving services that are truly tailored to their demands, and that address the everyday pain points they face – primarily helping them to pay and get paid.

Providing real value

For the most part, SMEs are only offered a narrow range of financial products when assessing business banking partners in the neobanking community. Unfortunately, this is often the case with traditional financial institutions as well, but they are at least able to provide additional functionality relating to loans and credit provisions.

Mark Hartley

BankiFi CEO Mark Hartley

Ultimately, neither side is fully meeting the needs of SMEs during moments of difficulty, such as dealing with late payments and helping SMEs get paid.

With that said, banks are far better placed to make up the gap. Simply put, banks have the history, regulatory frameworks, and institutional heft to deliver real value for SME customers.

However, to make good on this potential, businesses across the sector must align themselves more closely with the challenges affecting this type of customer and build services that respond directly to the issues they face.

Identifying the issue

As someone who works closely with SMEs on a day-to-day basis, it’s clear to see what these issues are.

Let me begin with late payments, an issue that continues to hamper the development of SMEs across most parts of the world. For instance, despite elevated awareness, the average SME in the UK is owed around £250,000 in late payments, according to Time Finance’s Invoice Finance team.

Similarly, QuickBooks found that mid-sized businesses in the US are owed $304,066 in late payments, on average. When you pair that with research from JPMorgan Chase Institute, which shows that 50% of small businesses are operating with fewer than 15 cash buffer days, then you begin to see the scale of the problem.

More than ever, SMEs need solutions that help them to pay and get paid.

Going further to help

Likewise, SME owners are interested in solutions that deliver much-needed time and cost efficiencies related to business and financial management.

A great example is automatic invoice reconciliation. Clearly, people don’t start businesses to spend their entire day generating invoices, or chasing late payments, they start them to solve problems, or to add value to peoples’ lives, so that’s what we should allow them to do.

Sadly, in the UK, it is estimated that SME owners are chasing up to five overdue invoices at any one time, according to a study by business platform Tide.

In fact, research commissioned by Intuit QuickBooks found that 56.4 million hours a year were used by SMEs to look for overdue and late payments. Worse still, 56% of these business owners admitted to chasing payments outside of their regular work hours, eating into their personal and family time.

Providing a solution

In the simplest terms, SMEs feel like they have a cashflow problem, both in Europe and in the States.

One of the best ways to address this concern is to give people access to tools that help them to get paid more quickly.

Moving forward, banks who want to connect with more SME customers must look to make this their main priority.

Mark Hartley is chief executive officer of BankiFi