Will banks rue dismissing small businesses?

After years of mumbling that there was “no margin” in small business banking, will traditional banks think again about how they serve SMEs?

Traditional banks should heed warnings about the itchy feet of their small business clients. A lack of appetite for risk has left many traditional high street brands with no interest in serving companies with revenues of under the magic £250,000.

But years of being unable to extend credit when needed, underwhelming customer service levels and poor technology has rankled British SMEs. And they’ve been keen to look at what might be available elsewhere. Findings from research published in October suggests that SMEs have been paying close attention to the revolution taking place in the British banking market.

A poll conducted by Unisys Corporation found that British small and medium sized enterprises are among those customer groups with the highest levels of awareness of Open Banking.

The survey of 450 UK SME owners found that 87% considered themselves “familiar” with Open Banking, while 47% percent said they would consider moving to a non-banking brand or a challenger bank for their business banking needs.

Given the limited options that SMEs had historically, it is perhaps unsurprising that they have been particularly observant of emerging choices that are coming on to the market. For challengers seeking to take advantage of the data freedoms under Open Banking, the Unisys survey results are encouraging.

In addition to the high levels of awareness, the research found that SMEs may become more inclined to leave their traditional bank when they begin to better understand what Open Banking could offer.

In a statement accompanying the findings, Simon Healy, industry director for Unisys Financial Services (EMEA) and Open Banking Expo speaker, said banks are going to have to radically change their business models if they want to maintain their market share.

“[Open Banking] will force banks to shift from being one-stop-shops for financial services, to open platforms where customers can start to embrace a more modular approach to banking by giving verified third-parties direct access to this data,” he said.

“In today’s digital and customer-driven world, in which those who share data call the shots, it’s adapt or die – and banks need to respond.”

But some challengers in the market believe that banks have already left it too late to secure the loyalty of small businesses.

Among them is Christoph Rieche, chief executive and co-founder of iwoca, a specialist lender which launched in 2011 after spotting that credit facilities for small businesses had all but dried up following the global financial crisis.

Rieche told Open Banking Expo that the past decade has seen SMEs having to grapple with archaic banking processes and traditional banks’ reduced appetite for small business lending.

“The processes that the banks had were relatively poor,” said Rieche. “They hadn’t invested to improve, and yet, with electronic integration, they could do so much more to digitalise the journey for small businesses seeking to draw down credit.”

Seven years after founding iwoca, the company has funded more than 20,000 small businesses operating in the UK, Germany and Poland.

For Rieche, Open Banking will broaden access to business customer data, meaning businesses across Europe could face a cheaper and broader range of credit facilities, in a world where levels of frustration already high between SMEs and their traditional banking providers.

Additionally, Rieche believes that the opportunity set for challengers may be even larger than some realise. Much of the custom that new entrants in the SME market will have enjoyed to date will have been from businesses that banks had not historically wanted to serve, he says.

“Open Banking means we will be able to access the same information that banks have on their business customers,” he explained. “The majority of the business that we have done today has been serving the businesses that banks are not.

“We have digitised the entire process, so the cost of services on our side is a fraction of that of the bank. We have streamlined our process, so we can do an instant credit decision and we can fund that customer immediately.”