A digital approach to SME banking

Small 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.

Years 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 revisiting. 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 access 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 bank’s perspective are many: smaller business clients demand a higher intensity of bank attention with limited returns—and a higher (perceived) 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 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 dynamics 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 business—finding 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 can 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 as Small Business Saturday, 1 interventions from national business organizations, and increased scrutiny (such as the ECB reporting on SMEs 2 ) 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 serving 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 more 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 easy

Banks, of course, are encountering stiff competition for their retail banking customers, and are likely to experience the same challenges in the SME arena. Sophisticated, agile, and well-funded organizations—including fintechs and large nonbank digital firms—are seeking to engage SME clients, either through full-service or selective-service models. Other players (for example, accounting software providers) are seeking to disintermediate 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.

As alternative banking and financing options multiply for SME business leaders—and as their other suppliers offer richer, holistic solutions supported by sophisticated real-time, always-on, digital solutions—the traditional-banking proposition begins to seem very dated. Compare, for instance, 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 predominantly 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 modern 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-performing 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 of 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 streams more toward fees than interest margins. 3

Top-performing banks show significantly higher revenues per small and medium-size enterprises customer across lending and nonlending products.
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At 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 to 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).

Best-in-class banks onboard a majority of their customers digitally, with faster onboarding journeys.
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While digital activity varies across banks, leaders have achieved high levels of digital activation.
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Banks seeking to serve SMEs at the level of the leaders described above will need to make purposeful strides forward 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 want

Unlike large commercial clients, where decisions are made based on more 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 companies.

In general terms, research on SMEs highlights the importance of customer service—regarding both satisfaction and customer loyalty. For instance, a recent McKinsey survey of German SMEs shows that good customer service is the number-one reason SMEs choose their main bank (approximately 36 percent of respondents) (Exhibit 4), followed by convenience of branch location (approximately 34 percent), 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 pricing (23 percent) and better online service and functionality (23 percent).

Customer service and branch location are key factors for German small and medium-size enterprise businesses when choosing their main bank.
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Less than 25 percent of small and medium-size enterprises in the United Kingdom switched their main bank in the past five years.
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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 relationship-managed service proposition—and 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 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 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 capabilities mean that a digitally led service proposition can be significantly more personal and engaging than an RM-led approach.

SME 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 are closer to the “small” end of the spectrum, there is a strong “consumer” component to 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 one 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 ways to crack the SME code

There 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 developed 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 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 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 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 incumbent 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 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 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. 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 administrative 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-designed capability-building program enables 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. In retail banking, for example, the number of customer engagements has grown by more than 10 percent 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 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 in 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 products 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 commodity 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 new types of talent. Successful SME propositions will be highly dependent on digital and data analytics talent—and 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 business. 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 managers 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.

  5. 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 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 distinct 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 the effort. With this in mind, banks should challenge themselves to reinvent and reimagine where possible, rather than tinker at the margins.

A well-designed capability-building program enables the front line to hone commercial skills and product expertise.


SMEs will continue to be a tricky segment for banks to serve—but the capabilities and technology to engage these clients and profitably meet their specific needs are 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.

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