1、Financial Services PracticeA digital approach to SME bankingSmall and medium-size enterprises are a clear growth opportunity for banks in a difficult environment.A digital-first approach with a personal touch can help banks crack the code of this historically overlooked segment.October 2022 Oatawa/G

2、etty Imagesby Mohcine Ouass and Nicolas ReuttnerYears of low interest rates,difficult consumer,corporate,and investment banking business conditions,and a tricky macroeconomic environment have squeezed many core areas of business for banks.In this context,previously overlooked segments are worth revi

3、siting.Small and medium-size enterprises(SMEs)in Europe represent one such opportunity for banks seeking to grow.European Central Bank(ECB)data highlight that for 20 percent of SMEs in Europe,access to financing is their most urgent problem.The same data shows that one in five SMEs is unable to acce

4、ss the credit it was planning to use.Despite the demand,the opportunity remains elusive for banks,which have struggled to serve SMEs successfully.The challenges from a banks perspective are many:smaller business clients demand a higher intensity of bank attention with limited returnsand a higher(per

5、ceived)cost of risk.Even quite small businesses can have complex and rapidly evolving needs,along with an unsteady risk profile;and yet,they often expect premium service.And there is no one-size-fits-all approach banks can apply to these clients,given the variety of needs,business types,and decision

6、 makers.Structurally,SMEs as a group fall between the cracks of retail and corporate banking,so from a banking perspective,there is often no natural organizational“home”for them as clients.SMEs also represent a broad range of business sizes:those at the micro end of the segment share similar dynamic

7、s to a personal or affluent consumer,while those at the larger end have profiles and requirements more aligned with commercial-banking clients.This uncertainty is illustrated by the fluidity of many banks“organigrams,”whereby the SME business is pinned,and re-pinned,to different parts of the busines

8、sfinding a home in neither the retail nor the commercial-banking segments.However,while many of the challenges outlined above will continue to be a factor for banks considering serving the SME segment,banks now have access to tools and capabilities that can alter the equation to a point where SMEs c

9、an be served well and also served profitably.Time for a new look at SME banking The SME sector is the backbone of economic activity and employment in most countries,leading governments,business groups,and regulators to highlight SMEs as an area of opportunity for banks to serve better.Programs such

10、as Small Business Saturday,1 interventions from national business organizations,and increased scrutiny(such as the ECB reporting on SMEs2)are among some of the efforts highlighting the importance of these businesses.For banks,the timing is opportune because many of the historical challenges to servi

11、ng the segment well and profitably can be addressed through digital technology.Banks can also transfer the capabilities and lessons they have gleaned from providing digital services to their retail banking customers over to their SME banking clients.Given that many SME leaders themselves are today m

12、ore fluent in digital engagement for their personal banking,they are now more likely to be comfortable with similar solutions for their business needs.Nobody said this would be easyBanks,of course,are encountering stiff competition for their retail banking customers,and are likely to experience the

13、same challenges in the SME arena.Sophisticated,agile,and well-funded organizationsincluding fintechs and large nonbank digital firmsare seeking to engage SME clients,either through full-service or selective-service models.Other players(for example,accounting software providers)are seeking to disinte

14、rmediate banks by migrating upstream and taking control of SME banking selection;payment platforms are broadening their solutions and locking in their clients with financial and reporting products.1 Small Business Saturday UK is a campaign to highlight small-business success and encourage consumers

15、to support small businesses in their communities.The day itself takes place on the first Saturday in December each year,but the campaign aims to have a lasting impact on small businesses.2 See,for example,“Survey on the access to finance of enterprises,”European Central Bank,2022.2A digital approach

16、 to SME bankingAs alternative banking and financing options multiply for SME business leadersand as their other suppliers offer richer,holistic solutions supported by sophisticated real-time,always-on,digital solutionsthe traditional-banking proposition begins to seem very dated.Compare,for instance

17、,the global real-time tracking offered by a logistics company on delivery status with a 15-day payout period for an agreed loan.From their side,banks carry three legacies from their past engagement with this segment that make it difficult for them to maneuver nimbly.The first is a business model pre

18、dominantly defined by interest income and some reputational challenges to fee charges.The second is a cumbersome legacy IT infrastructure that affects processes including risk,products,and servicing.Third is an obsolescent mindset on how SME clients are to be served,which seems out of step with mode

19、rn competition and client expectations.Despite these challenges,there are banks that are succeeding in the SME segment.What are the winners getting right?A number of banks have been able to achieve a significant uptick in performance with SME clients.McKinsey benchmarking data show that top-performi

20、ng banks in Western Europe generate more than 30 percent higher revenues per SME customer than average banks,driven both by higher lending and cross-sell revenues(Exhibit 1).The combination Exhibit 1Top-performing banks show signifcantly higher revenues per small and medium-size enterprises customer

21、 across lending and nonlending products.Web Exhibit of Small and medium-size enterprises(SMEs)in sample Western European markets with 50m turnoverSource:FinaltaRevenues per active SME customer,Top-performer revenue,%diference over peer averageRevenues per risk-weighted assets,%TopperformerWorstperfo

22、rmerTopperformerWorstperformer3,6301,791Average 2,760Average 7.1+32%+23+38+2.1percentagepoints5.99.2Lending revenues per customerNonlending revenues per customerPeeraveragePeeraverageTopperformerTopperformerTop-performing banks show significantly higher revenues per small and medium-size enterprises

23、 customer across lending and nonlending products.3A digital approach to SME bankingof higher lending margins with more revenues from less capital-intensive cross-sell products yields a significantly higher capital efficiency for these market leaders.They have also found ways of balancing income stre

24、ams more toward fees than interest margins.3At the same time,these leaders have reduced their cost-to-serve by migrating a high share of customer activities to digital channels.Advanced digital banks in small-business banking,for instance,have increased the number of clients they onboard digitally t

25、o roughly 80 percent,while reducing onboarding times by up to 85 percent(Exhibit 2).They also activated all their customers online and almost half do so on mobile platforms(Exhibit 3).Banks seeking to serve SMEs at the level of the leaders described above will need to make purposeful strides forward

26、 in their capabilities,service model,and SME value proposition.Most of these successful banks have achieved this through real transformation rather than by tinkering with and optimizing their existing operations.What SME clients wantUnlike large commercial clients,where decisions are made based on m

27、ore established organizational terms,SME decision makers frequently use their personal experiences to set their professional expectations.So,the challenge for banks is that they are competing with the fully evolved digital experiences offered by online retailers,payments platforms,or logistics compa

28、nies.In general terms,research on SMEs highlights the importance of customer serviceregarding both satisfaction and customer loyalty.For instance,a recent McKinsey survey of German SMEs shows Exhibit 2Best-in-class banks onboard a majority of their customers digitally,with faster onboarding journeys

29、.Web Exhibit of Includes all applications started digitally and completed via other channel(eg,signature required in branch,telephony,or documents submitted via post).Based on small-business segment.Source:FinaltaCustomer onboarding,by segment,%Small business Average time to onboard,business daysTop

30、performerEnd-to-end digitalMixedchannel ornondigitalAverageBestpracticeWithout digitalonboardingMidcorporate TopperformerAverage947 daysfaster81Best-in-class banks onboard a majority of their customers digitally,with faster onboarding journeys.3 For more on the shift to fee-based income,s

31、ee Global Banking Annual Review 2021:The great divergence,McKinsey,December 1,2021.4A digital approach to SME bankingthat good customer service is the number-one reason SMEs choose their main bank(approximately 36percent of respondents)(Exhibit4),followed by convenience of branch location(approximat

32、ely 34percent),and an enhanced online channel(about 26 percent).Moreover,SMEs tend to be loyal to their bank:in the United Kingdom(Exhibit 5),for instance,as few as a quarter of SMEs switched their main bank in the five years leading up to a McKinsey survey.Key drivers for switching are better prici

33、ng(23 percent)and better online service and functionality(23 percent).There are,of course,vast differences in the behaviors and needs of the decision makers at leading SMEs,their organizations,and their industries.Traditionally,banks have addressed this range of preferences and needs with a relation

34、ship-managed service propositionand in some cases this model still makes sense.But for most banks,SME relationship-manager(RM)client portfolios are in the hundreds,and the average RM time in role is fewer than 36 months.In some cases,RMs may only meet a client once or twice before changing roles.In

35、these cases,the concept of“relationship banking”is a somewhat hollow promise,as banks end up relying heavily on standardization,system-supported decisioning,and industrialized process discipline that results in treating all their clients alike even if their needs are different.Digital tools,such as

36、proactive diary management,automated meeting notes,data mining with AI-driven prompts,integrative RM work benches,and digital assistants,can provide parts of a holistic answer to these challenges.Counterintuitively,advances in banking systems,data analytics,and customer relationship management capab

37、ilities mean that a digitally led service proposition can be significantly more personal and engaging than an RM-led approach.Exhibit 3While digital activity varies across banks,leaders have achieved high levels of digital activation.Web Exhibit of Digital activity of small and medium-size enterpris

38、es,by segment and channel,%Small-business onlineMidcorporate onlineSmall-business mobileMidcorporate mobileDevelopeddigital bankEarly-stagedigital bank7957+44 percentage pointsDevelopeddigital bankEarly-stagedigital bank817267+14Developeddigital bankEarly-stagedigital bank5235Average20+32Developeddi

39、gital bankEarly-stagedigital bank33238+253530-day digitally active customers,by channel(online,mobile)/total active customers.Early-stage banks are defined as lower quartile of peers;developed digital banks are defined as upper quartile of peers.Source:FinaltaWhile digital activity varies across ban

40、ks,leaders have achieved high levels of digital activation.5A digital approach to SME bankingSME decision-making dynamics are also important for banks to understand:the larger the organization,the more removed from consumer expectations it becomes.However,for the more than 90 percent of SMEs that ar

41、e closer to the“small”end of the spectrum,there is a strong“consumer”component Exhibit 4Customer service and branch location are key factors for German small and medium-size enterprise businesses when choosing their main bank.Web Exhibit of Reasons for choosing main banking provider in Germany,%of r

42、espondents(n=511)Figures do not sum to 100%,because multiple choices per person are possible.Source:McKinsey European SME Banking SurveyGoodcustomer serviceConvenience of branch locationEnhanced online channelsAlready a personal-banking customerLow price or good promotional ofersEasy/quick to set up

43、 accountOther3634262423212Customer service and branch location are key factors for German small and medium-size enterprise businesses when choosing their main bank.Exhibit 5Less than 25 percent of small and medium-size enterprises in the United Kingdom switched their main bank in the past fve years.

44、Web Exhibit of Question:“When was the last time your company switched its main bank for its business banking needs?”Figures do not sum to 100%,because multiple choices per person are possible.Question:“What was the main reason you switched?”Source:McKinsey European SME Banking Survey10 yearsDontknow

45、Reason for switching bank in past 5 years,%of respondents(n=503)Better online service/functionalityCloser local branchMore products and services that my previous provider didnt oferMore access to a relationship manager23Better rates23212112Less than 25 percent of small and medium-size enterprises in

46、 the United Kingdom switched their main bank in the past five years.6A digital approach to SME bankingto the decision process.In contrast to most larger corporations,where there is a shared organizational set of expectations and norms,expectations at SMEs are often set on a more personal level by on

47、e or two leaders.Importantly,while there are still business decision makers who do not keep pace with the latest consumer trends,even digital laggards are now seeing the benefits of new ways of working,and generational shifts mean that the younger,digitally native generation is taking the lead.Five

48、ways to crack the SME codeThere are five aspects that banks can focus on to develop compelling,successful SME propositions for themselves and their clients.1.A hybrid channel end-state improves the viability of servicing this segment.A recent Finalta survey of 50 SME banks showed that few have yet d

49、eveloped a robust and complete digital proposition for clients.Analogs from other industries suggest this will take some time,and the transition will initially involve duplication across channels,customer journeys,risk models,and service concepts.Building and maintaining these in parallel is complex

50、 and expensive.Ultimately,however,banks should be aiming for a hybrid channel end-state in which the most effective channel for a particular product or service becomes the default.The overall channel approach will run the gamut from digital self-service for simple,low-value-adding activity,to highly

51、 engaged,expensive,human-led engagements for complex and value-creating services and sales.As a simple example,checking a bank balance will be an online activity,whereas restructuring a set of lending products will likely be a remote advisory session with a product specialist.Once quality solutions

52、are in place,clients need to be actively steered there.Only by closing off unnecessary,more expensive omnichannel propositions will banks be able to capture the financial and operational benefits of digitization.2.Double down on frontline cross-selling capabilities.There is a significant value for i

53、ncumbent banks to capture by tapping into their existing customer base.Four levers can improve frontline effectiveness:Leads based on advanced analytics.Advanced data analysis can feed a range of tools to equip relationship managers and enable shared teams and product specialists to ensure they are

54、aware of and focused on client needs.Artificial-intelligence tools can scan information about clients and consistently present insights for the bank to act upon.To ensure continued improvement and effectiveness,banks can set up continuous feedback between the front line and the analytics team.Sales

55、routines and tooling.Setting a“gold standard”by codifying the sales routines of the best relationship managers will help raise the bar for the full sales organization.One European bank achieved a 20 percent increase in the number of prospects after establishing dedicated sales time on a weekly basis

56、.Digital tools such as RM workbenches can bring rigor to processes such as know-your-customer and ensure that access rights to controlled information and leads are always available to everyone working with clients.The right tooling also frees up time that relationship managers typically spend on adm

57、inistrative tasks.Performance management and capability building.Setting the right cadence of performance dialogues is crucial to ensuring progress.These dialogues help ensure clarity on customer and product priorities,alignment on granular input and output KPIs,and clear performance tracking.A well

58、-designed capability-building program 7A digital approach to SME bankingenables the front line to hone commercial skills(such as cold calling,dealing with resistance)and product expertise.Streamlined journeys.Digitization can enable cost-efficient,more regular and persistent engagement with clients.

59、In retail banking,for example,the number of customer engagements has grown by more than 10percent year on year for the past six years,driven almost entirely by digital channels,according to McKinsey Finalta.Overall,shifting the client relationship to the institution and away from the individual can

60、remove the risks and failings of human error such as poor process execution,lost paperwork,return calls forgotten,or suboptimal client focus.3.Build a compelling proposition through make and/or buy.Few banks have the scale and expertise to be best in class in all the capabilities required to excel i

61、n serving SMEs.A more effective approach is to identify the areas of sustainable differentiation,where investment in internal development can pay long-term benefits,such as risk modeling,sector depth,or product expertise or range.In other areas,a bank is better served by sourcing best-in-class produ

62、cts or capabilities to round out a robust,lower-cost,and effective solution for clients.Balance is important.In our experience,we have often observed banks outsourcing either too much or too little.Ideally,the bank owns and controls the sources of value creation and differentiation and brings in com

63、modity services that benefit from scale greater than banks can create individually.A well-balanced mix of in-and outsourcing has the added benefit of bringing in external insight and best practice,and an openness to challenge and flexibility that can rejuvenate existing ways of thinking.4.Adapt to n

64、ew types of talent.Successful SME propositions will be highly dependent on digital and data analytics talentand via“translators”who harness insights to create client dialogue and impact.These emergent talent needs for SME banks will inevitably affect the internal and operating culture of the busines

65、s.Decentralized and remote ways of working create challenges around control,organizational culture,and team dynamic as well as opportunities around reach of product and industry specialists,flexibility of capacity,and reach.We believe that these are all solvable.Frontline client relationship manager

66、s will still be an important and valuable part of the market proposition,but their efforts will be concentrated on those areas that depend on their skills and sophistication,with tasks less driven by such skills to be handled by the back office or through automation.A well-designed capability-buildi

67、ng program enables the front line to hone commercial skills and product expertise.8A digital approach to SME banking5.Rethink process excellence.Superior processes are,of course,a fundamental requirement for success in banking overall.But for banks seeking to gain a foothold in a new segment,the bar

68、 is particularly high:simple payments,account management,or product issues are often the seeds of discontent that germinate into a dissatisfied and ultimately lost customer.(Mobile access in particular is prone to errors,and banks that treat the channel as an extension of web,as opposed to a distinc

69、t experience,do so at their peril.)Writ large,issues of this kind can make the difference between a successful move into the SME market and a failure.To avoid missteps,banks need to pay as much attention to the nuts and bolts of process excellence as they do to the other,more strategic elements of t

70、he effort.With this in mind,banks should challenge themselves to reinvent and reimagine where possible,rather than tinker at the margins.SMEs will continue to be a tricky segment for banks to servebut the capabilities and technology to engage these clients and profitably meet their specific needs ar

71、e broadly available to banks.The opportunity today is in adopting these technologies and new ways of working to serve the segment successfully.This will require banks to make the segment a genuine priority,but the returns can be worth the effort.Scan Download PersonalizeFind more content like this o

72、n the McKinsey Insights AppDesigned by McKinsey Global PublishingCopyright 2022 McKinsey&Company.All rights reserved.Mohcine Ouass is a partner in McKinseys Amsterdam office,and Nicolas Reuttner is a partner in the Frankfurt office.The authors wish to thank Andras Havas and Daniel Pietzker for their contributions to this article.9A digital approach to SME banking