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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