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How banks can use ecosystems to win in the SME market

Profitably serving small and medium-sized enterprises has been a challenge for banks. An ecosystem approach may be the key to tapping this vast market.

Small and medium-sized enterprises (SMEs) form the backbone of many economies around the world. Representing one-fifth of global banking revenues, SMEs generate around $850 billion of annual revenue for banks—a pool expected to grow by approximately 7 percent annually over the next seven years.

As a customer segment, SMEs offer vast potential. However, the profits of SME-focused banks have traditionally lagged behind those that specialize in other customers, often because of highly varied credit quality in the portfolio. Finding the optimal balance between providing a great customer experience and managing the cost to serve has also proven to be difficult. As a result, many banks have not prioritized SMEs—forsaking the vast potential value and leaving many SMEs feeling that their needs are ignored.

But now, new customer propositions and better service models enabled by technology are creating opportunities for much more lucrative returns. Fintechs are entering the business, as are the big tech companies, with innovative service models that reduce costs and increase revenue (Exhibit 1). Their offerings include traditional banking products and many other business services, such as invoice management, payroll support, tax preparation, and inventory management. Such beyond-banking ecosystem offerings target customers’ fundamental needs in a single, easy-to-use service. Even better, they answer the primary challenge of SMEs, as identified by our survey of more than 500 business owners: giving entrepreneurs more time to focus on their core business activities.

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Digital companies are staking a claim on the opportunity. But ecosystems are an attractive play for any service business that can claim ownership of the primary customer relationship. Those that have the strongest relationship with the customer enjoy the highest profit margins in ecosystems and thus the most sustainable and lucrative business model. Participating in an ecosystem, or organizing one, provides the opportunity to boost otherwise shrinking banking returns.

Taking a strategic role in an ecosystem

Banks enjoy competitive advantages compared to other relevant players, such as tech giants and telcos. As banks contemplate an ecosystem play, they should consider three strategic roles they might assume.

1. Participate

Banks can provide financial services to at-scale competitors that are building ecosystems from bases in other industries. This strategy can bring in revenue by reaping spillover benefits as banks add new customers from other business systems. While this role grants the lowest financial opportunity overall, it helps banks monetize their product portfolios with minimal additional investments. A typical example is GoBank in the United States, a company that teamed up with Uber Technologies to offer certain banking services to the entrepreneurs on the ridesharing platform. In this setup, the bank gains access to a vast customer base, while the platform operator earns revenue from connecting the parties.

2. Orchestrate

Banks can also become the primary integrators of partnerships and thus reduce the scale of investment and complexity of execution. In this case, the bank becomes the primary—and ideally the only—provider of financial services. One example is Idea Bank in Poland, a company founded in 2015 that provides end-to-end financial- and business-services support for SMEs and start-ups through a cloud-based platform. Beyond-banking services offered by Idea Bank include concierge support in dealing with the state, accounting services through a subsidiary company, cash-flow analytics tools, and promotion support. As part of this ecosystem, in 2017, the bank launched a bookkeeping application for Uber driver–partners, offering lower costs and higher security than rival services.

3. Build

Finally, banks can build new businesses within and across ecosystems. This role provides the most significant financial and nonfinancial benefits; however, it is also the hardest to pull off. OTP Bank in Central and Eastern Europe launched a state-of-the-art solution called eBIZ, which is essentially an online financial-management tool for SMEs. In Canada, Royal Bank of Canada introduced a cutting-edge, end-to-end online platform called Ownr, which offers a comprehensive set of services that assist in setting up and managing a new business in Canada. Ownr helps with tasks such as registering a business as a sole proprietorship or incorporation, building a logo and brand, and bringing together information from marketing campaigns, website traffic, and sales activity to get a better understanding of the business.

Building an ecosystem platform

Partnerships are an important component of all three roles. But for banks that choose to compete with a beyond-banking ecosystem, partnership is only the first step. Orchestrating or building a successful ecosystem platform requires banks to rethink their value proposition and develop an operating model that is different from their traditional business. In our review of several ecosystem efforts recently tested by global companies, we identified five principles to consider when building an ecosystem platform.

1. Focus on customers’ biggest challenges

Across markets, pain points for entrepreneurs vary from basic lending needs to office and factory space to marketplace access (Exhibit 2). Hence, before embarking on the ecosystem journey, banks must research the pain points specific to the market and assess their ability to offer services to allay those pain points. In some markets, we have found that issuing invoices and tracking incoming invoices can be the most significant way financial institutions create value for SMEs. Addressing any other needs at this stage in the cycle could unnecessarily increase the complexity of building such a platform.

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2. Start with a minimum viable product and scale rapidly

Starting with a minimum viable product (MVP) is straight out of the start-up playbook but not an obvious choice for banks. Most product launches in banks are mass marketed from inception. Further, most new products are variations on current products, rather than totally new products. But an ecosystem offering should start with testing an MVP on a small segment of customers, getting feedback, and then building a full proposition in an agile way. MVPs help in debugging and incorporating feedback, and they accelerate the speed to market.

Once the MVP has been tested with real customers, banks have two main paths to scale the solution. With larger, established SMEs, one feature (such as invoice tracking) can serve as a hook product to establish a relationship. For newer companies, banks should offer a comprehensive beyond-banking solution built around three to four key features.

3. Make key IT-design choices early

In parallel to designing the prototype, banks need to think through IT implications at the outset. The design choices will significantly affect the speed of development and the potential reach of the new solution. A design based on integration with an existing banking app might command a larger audience than a new stand-alone application—yet the latter typically offers more flexibility. The choice of a platform should be wedded to the monetization approach (see the “Think early about monetization” section). If the bank wants to retain the option of spinning off an ecosystem platform in the future, or listing it separately, its IT should not be enmeshed with the bank’s legacy systems. Nor can it be completely divorced: efficient transfer of information between the two systems is needed to maximize value for both banking and nonbanking offerings.

IT is a key driver of costs and of the ecosystem design and business model. For instance, a Western European bank decided to integrate its ecosystem solution with its mobile banking platform. This caused substantial implementation complexity and delayed the launch but opened up the solution immediately to hundreds of thousands of SMEs.

4. Think early about monetization

Organizations considering a beyond-banking ecosystem run the risk of offering additional products and services and increasing complexity without necessarily realizing material benefits. An ecosystem should be viewed as means to add new forms of value and not just a pure customer-acquisition or -retention vehicle. Ecosystems can generate platform revenues in the form of lead generation, recurring fees (such as registration, listing, or subscription fee), and data monetization. If successful, a beyond-banking entity could significantly surpass the valuation of the institution that hatched it, as shown by the likes of Ping An Insurance of China.

While proper monetization of a beyond-banking offering is difficult, pioneer banks have typically succeeded by building the following revenue streams:

  • Subscription fees. SMEs that use the platform pay a monthly fee for the services. Typically, there are two or three bundles with a varying number of transactions included in the fee. Fees are often set in comparison with similar solutions on the market (for instance, one European bank charges between €6 and €15 per month). To attract users, most banks offer a free trial of three months or so.
  • Commissions. If a bank is an orchestrator but not a builder of the ecosystem, the actual services will be provided by third parties. In such cases, the bank is entitled to a share of the fees that the providers receive from clients. As billing is done through the platform, the bank administers all financial flows.
  • Data for better decisions. Banks we have worked with plan to leverage the data and insights they gather about their customers to provide more relevant and tailored offers to recommend products (financial and nonfinancial), optimize pricing, and prevent customer attrition. Yet, it is important to note that few companies build their business case on this lever.
  • Data monetization. Certain ecosystem orchestrators aim to share the customer-data insights with external parties to generate value. Most banks do not quantify the impact of this lever. Any sales of data will need to abide by relevant regulations, such as the European Union’s General Data Protection Regulation.

The key factor behind the revenue streams is the number of customers. Hence, the go-to-market strategy should focus at first on building a critical mass of clients. Banks will need a clear perspective on how the ecosystem progresses versus the business case.

Investment need is also a critical driver of the business case. The ambition level defines the investment need. Some banks have spent between €5 million and €20 million to build their MVP, depending on the breadth of services offered.

5. Build a separate digital organization

One pitfall is to house the ecosystem initiative within the bank, typically by giving additional responsibility to the SME-product team. This unit usually lacks the focus required in a start-up, the right governance structure to ensure top-management attention, and the relevant skills needed to execute.

On these grounds, too, banks need to establish a separate entity with clear governance for interaction with the parent company. Once established, the new digital organization must develop a new talent proposition. Our experience suggests that the bulk of new management will likely be sourced externally. Key industries from which to source platform talent include e-commerce and other technology companies.


Creating an ecosystem offering for SMEs is a high-risk, high-reward bet. Success will not be a simple task. Yet, done right, it offers immense value for business owners and banks. Those who can find the right recipe for their markets will be able to establish a far-reaching competitive edge and solidify their standing with their small-business customers—both in financial services and beyond. Banks that invest early have a strong starting point to unlock the potential.

Download Beyond banking: How banks can use ecosystems to win in the SME market, the full report on which this article is based (PDF–1 MB).

About the author(s)

Chira Barua is a partner in McKinsey’s London office, where Balazs Gati is an associate partner, Tara Lajumoke is a consultant, and Zubin Taraporevala is a senior partner; András Havas is a partner in the Budapest office, where Miklos Radnai is a senior solution leader and associate partner.

The authors wish to thank Miklos Dietz, Reka Hamvai, and Istvan Rab for their contributions to this article.

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