José Vicente and Daniel Szmukler from the Euro Banking Association go in depth about the financial needs and pain points for SMEs and how Open Banking strategies and tools can help them thrive.
Small and medium-sized enterprises (SMEs) make up 99.8% of enterprises in the non-financial business sector in the European Union. Highly diverse in their size, maturity, and type of activity, SMEs have diverging financial needs. Because this customer segment is so complex, not only in their financial needs but also in their business models and risk profiles, financial service providers have found it difficult to serve SMEs with tailored offerings. But as the provider system is evolving, it is diversifying and complementing offerings for SMEs. Specifically, Open Banking initiatives that leverage a broad range of application programming interfaces (APIs) can increase the quality of services by allowing different financial service providers to partner up for the development of richer offerings for SMEs.
To decide which Open Banking strategy to pursue to best serve their SME customers, financial service providers need to understand SMEs’ financial needs and pain points. Despite the heterogeneity of the sector, SMEs have three general financial needs: first, they need access to funding to cover operating expenses and investments. Second, they need financial services to support their day-to-day business operations effectively and efficiently. This includes payment collections, international transfers, foreign exchange, cards, and more. And third, they want added value from their financial services, for example, advanced cash forecasting for better decision-making.
And of course, convenience is key with any services that could address SMEs’ financial needs. A recent study revealed that SMEs spend three-quarters of their time on non-core activities such as banking or accounting, a pain point that banks and other financial providers could alleviate by reducing complexity in onboarding processing, reducing lead times for credit decisions, or providing services via channels most adapted to the customers’ business requirements.
Over the last few years, accelerated by PSD2 and Open Banking, a vibrant ecosystem of financial and technological service providers has developed offerings that cater to the specific needs of SMEs. The offerings include lending services, banking platforms, invoicing and payments, business finance management, and more. Some of those providers tackle the SME lending challenge through end-to-end lending process innovation, by embedding an innovative loan offering based on real-time merchant data within shop management or account information services. New banking platforms provide a banking experience fully dedicated to SMEs while leveraging Banking-as-a-Service offerings from licenced banks.
At the core of these developments, the evolution of Open Banking has been driving players on the field to rethink their approach to the SME segment. At the same time, Open Banking has the potential to create win-win-win situations in the collaborative space for banks, third-party providers, and SME customers alike. The adoption of Open Banking-based services not only generates benefits for all players involved but addresses the most relevant SME pain points in particular.
This is mainly due to emerging propositions that rely on data being shared between all three types of participants – SMEs, banks, and other financial service providers, such as fintechs –via standardised APIs. As a result, SMEs benefit from real-time, multi-bank account views, instant decision-making concerning loan applications, significant time and cost savings due to automated processing and integrated tools for accounting, invoicing, and payments, as well as additional value-added insights and services. Open Banking allows different financial service providers to engage with each other in strategies that involve either providing or using data, products, and services, depending on the chosen strategy and positioning.
Based on the series of instruments that Open Banking enables around Banking-as-a-Platform, Banking-as-a-Service, and embedded finance, financial service providers are in a position to implement a more tailored, and thus more effective, SME strategy and leverage in various ways the rich and growing SME provider ecosystem. Engaging with and making use of ecosystem partnerships is an essential element, as is the principle that a ‘one size fits all’ approach needs to be abandoned in the SME segment – Open Banking can support micro-SMEs in different ways than large-cap SMEs whose needs resemble much more those of corporates.
SMEs themselves stand to gain from this development. Larger businesses with dedicated IT and finance capabilities can leverage premium APIs made available by banks to gain access to real-time data and on-demand functionality to improve processes and decision-making in their finance function, while smaller entities can access a wide array of services, individually or as one-stop platforms to simplify their handling of financial non-core activities.
While providers are continuing to find more innovative ways to alleviate SMEs’ most pressing issue, namely financing, by process innovation and leveraging additional data, the sector also needs to look at collaborative ways to address this issue. Several initiatives across Europe are being implemented or discussed to push standardised SME data sharing to create more transparency and a level playing field for SME credit decisions. It should be in the interest of all ecosystem players and stakeholders to closely follow and support such cross-sector initiatives going forward.
The present article is based on the recent report ‘Open Banking for SMEs – enhancing financial services for the backbone of Europe’s economy’ by the Euro Banking Association (EBA) (accessible at www.abe-eba.eu/publications/ for EBA Members only). As a next step, the EBA Open Banking Working Group will explore Open Banking for large corporates.
This article has first been published in the Open Banking and Open Finance Report 2022. Click here to download the report.
José Vicente is the Deputy Chairman of the EBA Board and the Chair of the EBA Open Banking Working Group.
Daniel Szmukler, Director at the Euro Banking Association, runs the EBA’s thought leadership, events, and education streams.
The EBA is a practitioners’ body for banks and other service providers. We foster dialogue and experience exchange amongst payments industry practitioners towards a pan-European vision for payments. The EBA has over 160 members from the European Union and across the world. Follow us on LinkedIn, Twitter, and YouTube.
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