SMEs Market: Challengers are switching gears. What about banks?

30 April 2021
6 min read time

Small Medium-size Enterprises (SMEs) represent the backbone of our economies. And yet, this market has been hugely underserved from a financial services point of view. Far from being left untapped, new alliances between challengers are starting to emerge to fill the SMEs’ most urgent, and yet unmet, requirements. Should this be seen as a red flag for traditional banks? And how can they avoid losing revenues and generate new ones?


Stay current on your favourite topicsSubscribe 


How challengers are gaining ground against banks in the SMEs market

Over the last months, we have seen an increasing number of new partnerships being formed to address the needs of small and medium enterprises.

In March this year, Quickbooks, the accounting software for small businesses, joined forces with the payment-as-a-service platform, Modulr, to offer payment accounts to Quickbooks’ customers. Similarly, Tide, the UK leading digital business banking platform, recently announced that they will roll out a payroll suite. Finally, recently Zeller, the business banking start-up for merchants and growing businesses founded by former Square executives, managed to raise $25 million.

Reading these headlines, it seems evident that challengers in the SMEs1 market have shifted gears. By taking a customer-centric approach and adopting adjacency growth strategies, both the platform providers like Tide, Square or Shopify, and the accounting package providers have now started to offer services that compete with traditional banks. But why are their offerings so attractive?

Challengers understand that the SMEs need an integrated and seamless journey that combines all the key business functions – such as financial management, distribution process, and marketing activities – and that easily tackles all the critical business issues, like paying or getting paid. By moving away from the traditional siloed products approach, both platform and accounting packages providers are taking over some functionalities traditionally offered by banks, like account provisioning.


Underserved SMEs are the biggest opportunity for challengers

Even though SMEs are often seen as the backbone of the economy, accounting for 99% of all UK private companies and 60% of the workforce2, the SMEs market has been hugely underserved. This has created a massive gap. Take a look at these statistics:

Unfortunately, the SMEs situation is no different in other parts of the world. For instance, in Asia Pacific, 30 to 50% of SMEs are open to switching their primary banking relationship.4 


Why should this trend raise a red flag for banks?

In 2019, McKinsey reported that ‘SMEs generate around $850 billion of annual revenue for banks- a pool expected to grow by approximately 7 per cent annually over the next seven years.’ Similarly, in the United States, Oliver Wyman estimates that the US small business financial services revenue pool accounts for $110 billion. But 41% of these revenues could be at risk.5

According to Celent, platform providers are already targeting at least 80% of these revenues. Accenture went even further and reported that in the UK there’s an additional £1.6 billion in annual fees that could be captured. And let’s be clear: if banks don’t embrace this opportunity, someone else will. So, what should the incumbent do?


4 steps for banks to remain competitive in the SME segment.

Banks still hold two strong assets to address the SMEs segment: trust, which is crucial in times of crisis, and the ability to deploy high-quality customer service. However, to retain their revenues and truly seize the new opportunities, banks must adjust their operating model. Here are 4 tips on how to achieve it:

1)   Think beyond banking. Banks need to focus on SMEs’ business flows as opposed to banking products. For example, they should think about how they could support SMEs in moving their business online- as DBS does.

2)     Digitalise key processes, such as credit applications, and make sure SMEs requirements are part of the bank’s digital agenda. Usually, the focus is more on the retail market which has different requirements.

3)     Partner with SMEs specialists, like Bankifi, to fully understand the market needs. These partners have the capability to rapidly integrate within the bank ecosystem and deploy new innovative product propositions.

4)     And finally, at the risk of sounding like a broken record, implement agile, modern and open payments infrastructure which will enable a digital-first approach.

To conclude, Covid-19 has put the SMEs market, really seen as the social fabric of society, under the spotlight. This trend along with the digitalisation of the economy brings some major opportunities for banks. Today, these opportunities are untapped, but tomorrow they’ll be gone. So, the time to act is now. Is this going to be easy? No, but that’s why my team and I are here to help!

At RedCompass Labs, we can help you deliver profitable, secure, end-to-end payment solutions and look forward to guiding you on your own successful payment transformation journey. Please feel free to reach out to us if you wish to learn more about this topic or how to maximise your regulatory budget for innovation.

Request more information


1 Small businesses: Annual turnover of $100K–2MM; Medium businesses: Annual turnover of $2–20 M

2 Source: The Future of SME Banking:

3 Source here, page 7, exhibit 3

4 Source: Oliver Wyman, 5 things you need to know about SME banking in Asia-Pacific, page 4

5 Source: Celent, Reinventing small business banking part I, December 2020, page 7

Share this post via:
Julie Guetta

Written by Julie Guetta

Julie is RedCompass Labs' Head of Payments Strategy. She has 10 years’ hands-on experience as a Business Analyst implementing payments platforms. Julie is result-oriented and dedicated to delivering high-quality programmes.

At RedCompass we love hearing from you. Leave your comment below.