Like all businesses hit by the pandemic, small and medium enterprises (SMEs) in Southeast Asia have had to adapt to survive the unexpected disruption. From retailers to food outlets, many moved to online channels, while others looked to digital technologies to better optimize operations and keep their businesses alive.
Unlike large businesses, these SMEs have traditionally suffered from a cashflow crunch, which has been exacerbated by the pandemic’s unexpected twists and turns. In Southeast Asia, 90+ per cent of SMEs are micro enterprises, which employ just up to 10 employees and are often run by a single owner; the need for quick cash is even more pressing. It doesn’t help cashflow-challenged SMEs when banks often take months to approve a loan, by which time they might have resorted to friends and family to bail them out, gone out of business altogether, or worse still, decided to take loans from unlicensed moneylenders with draconian terms.
Challenges facing SMEs
The irony is that SMEs are the backbone of the Southeast Asia economy, forming 90+ per cent of all enterprises and accounting for almost 69 per cent of the workforce – yet the SME segment is not well served by banks.
There are several reasons for this. For starters, tough competition and relatively small loan amounts have driven down SME lending margins to a very small percentage, which make them unattractive as compared to retail or large corporate customers. At the same time, onboarding SMEs is a time- and labor-intensive process. Assessing credit worthiness for SMEs is often challenging – without the right documentation from SMEs, due diligence becomes a bigger challenge as compared to a bank’s other more established customers.
The lack of sufficient data about their SME customers also means that there is, unsurprisingly, an obvious lack of personalization from banks. Banks that therefore default to one-size-fits-all models end up failing to address what SMEs really need, such as quick cash availability and assistance in related areas, such as accounting and bookkeeping.
As a result, many SMEs have increasingly looked outside traditional bank-owned channels, now that non-banking players and neo-banks are coming into the space with promises to serve their needs better, primarily operating through digital channels. Over 85 per cent of SME customers are already considering alternatives to traditional bank loans, according to research reports.
The opportunity for banks
This means there is a huge opportunity that banks are not tapping into. For example, In Indonesia, Southeast Asia’s largest market, the e-commerce market is worth US$3.16 billion and expected to grow 35 per cent, according to JP Morgan estimates. Looking across the wider Southeast Asia region, SMEs contribute over 40 per cent of regional GDP, yet the current funding gap (globally) for these enterprises can be in the range of US$5.4 trillion annually, according to estimates. These SMEs are already fast adopting online sales and digital payments, activities which banks should be looking to take advantage to support as they too are working through digital transformation of their services offered. How then can banks provide the fuel for this growth and reap the rewards together with their SME customers?
What banks must do
Innovation is the answer to many of the challenges facing banks today when it comes to SME lending. Banks must reimagine their business models to serve SMEs profitably, and at the same time, find new ways to solve the obstacles that prevent them from delivering better services.
Some banks have realized that technologies, such as cloud, artificial intelligence (AI), data analytics and machine learning (ML) can help reduce the operational costs to better predict the needs of an SME customer, and by extension, be better positioned to serve then and therefore boost profit margins. Better analytics can enable banks to transform the traditional credit risk assessment models that they have followed all this while.
Banks also need to look to digital platforms and straight-through processing to improve the processing and servicing of loans. Reimagining the whole process to shorten the lending cycle is critical. Open banking is one approach to consider, where the transparent sharing of data enables banks to better assess loan applications, thus streamlining both the process and incurred costs at the same time.
Technology solutions are one part of enablement. Thought into future relevant propositions is also needed.
Digital solutions can be expanded to go beyond traditional banking, so that a bank offers not just loans but also answers other financial-related needs of the SME such as the ability to efficiently handle payments, payroll, and cash management. A bank can do this with as-a-service providers or a partner who can bring the ecosystem together – accelerating time-to-market. In May, as an example of improved offerings, DBS bank in Singapore announced a deal with Xero, which enables Singapore SMEs to share their transaction data with the bank and gain quicker access to loans and other personalized services.
What would count towards success? Think factors of building trust, greater predictability, process transparency, and increased visibility to the SMEs.
The way forward for Banks
It goes without saying that banks should not only act fast, but also look at working with SMEs for the long run because the SME segment has the potential to be a whole new client base for financial institutions. To that end, as SMEs recover from the uncertainty of the pandemic, banks must position themselves as the trusted partners of the SMEs. They will do well to adopt a two-pronged approach of (a) reimagining the engagement journey with SMEs and (b) transforming their operations to be nimble, transparent, responsive, and at low cost.
Evolving beyond lending, banks should aim to deliver more value-added services, which will also help their margins, and reinforce their relationships with SMEs over time. More importantly, as adoption grows and as the needs of SME segment continues to evolve, so will further avenues to innovate appear to take advantage of.
Banks need to put together the right strategy and work with the right technology partner that can help them implement the innovative solutions needed to deliver these new offerings to customers. By removing much of the friction involved in today’s SME banking relationships, processes will quickly improve, and so will the boost to the bottom line. For the leaders driving the transformation in their financial organizations, these will be early proof points.
Ultimately, however, banks should aim to make use of digital technologies to help build SME banking relationships that mature beyond the transactional, and into one that is trusted, transparent, and long-term. Only then can both banks and their SMEs customers grow, together.