How Southeast Asian Banks Need To Change Their Approach To SMEs

By EY and Partner, Financial Services Business Consulting, Ernst & Young Advisory Pte Ltd, Chris Lim 

Banks will play an important role in helping SME customers move off the life support of stimulus measures and regain their business health.

In brief

• Banks have an important opportunity to offer a differentiated small and medium enterprise (SME) offering, shifting from supplier to enabler.
• SME banking services will be offered via the same types of digital platforms SMEs are using in their own businesses.
• Leaders will draw on real-time financial and inventory information to make informed decisions about loan disbursements.

Until now, the small and medium enterprise (SME) segment has been a pillar of economic expansion for Southeast Asia. In many countries across the region, SMEs have been responsible for up to 99% of all business establishments, more than 90% of employment and almost 60% of GDP.

No wonder, as the COVID-19 pandemic has devastated Southeast Asia’s SMEs, a large part of the region’s stimulus measures were aimed at keeping the critical SME segment afloat. From government-backed working capital loans, to tax holidays, to repayment deferrals, to employment support, Southeast Asian governments and financial institutions have worked hard to sustain the critical smaller businesses without the capital to withstand the pandemic.

As the region starts to recover, banks will play an important role in helping their existing SME customers move off the life support of stimulus measures and regain their business health. As they do, they need to consider what future SME digital banking services will look like.

Even before the COVID-19 pandemic, SMEs across Southeast Asia were keen for greater and different engagement with their banks. An EY survey found 37% wanted to increase the level of engagement and 16% were open to explore other providers. More than two-thirds were open to non-traditional lenders, hoping to find a much faster loan approval process.

As SMEs struggle to find their feet, banks have an important opportunity to offer a differentiated SME offering. Rather than just a bare bones service, banks need to offer SMEs more meaningful offerings that will transform the way banking will be done in the future.

To prepare for what lies beyond the COVID-19 pandemic recovery, banks targeting SMEs need to:

Embed The Bank In Business Processes

The big challenge for smaller SMEs and micro businesses is to stop living “hand to mouth” and develop the scale to grow. But to get access to the capital needed to drive scale requires convincing a bank the business is sound. Until recently, the only way to do that has been to produce a full set of credit documents that only larger companies have the luxury of producing.

But now banks have a way around this catch-22. Rather than looking at audited statements, banks can embed themselves inside an SME’s systems. Drawing on real-time financial and inventory information, banks can make informed decisions about loan disbursements.

Building on this approach, rather than an SME having to reapply for a loan when a cash-flow injection is needed, a bank will be able to identify this moment ahead of time – before a key input runs out – and provide access to additional capital as it is needed. Using analytics, banks will be able to track past trends, predict spikes in demand and nudge the business to prepare appropriately.

Digital collaboration with an SME’s systems opens potential for further insights on problem statements or opportunities, such as getting timely access to payments across the supply chain. Where micro businesses are part of a bigger chain, they are often four or five layers below the anchor buyer and do not get access to payments until all those above them do. When banks can see the whole chain, they can offer access to credit when an SME needs it – not based on how well the business is doing but based on the anchor buyer.

Proactively Support SMEs To Survive And Thrive

“It’s time for banks to shift their relationship from supplier to enabler. This is a new type of partnership, where a bank seeks to proactively support an SME’s growth – and both parties benefit as a result,” said Chris Lim, EY Financial Services Consulting Partner.

Beyond the COVID-19 pandemic, SME banking comes back to basics on building relationship – helping the business to grow and transform. The faster an SME succeeds and grows, the better for both them and their bank. 

Digital will be at the heart of the next wave of SME banking services, which will be offered via the same types of digital platforms SMEs are using in their own businesses. This will be even more important against the backdrop of the COVID-19 pandemic where touchpoints must be minimised. Institutions will need to make sure they can combine innovative digital and data offerings, alongside human advice.

To support this new approach, transformation will be required. Banks will need to offer SMEs digital, paperless onboarding, branchless banking, conversational banking, video chats and easy access to relationship managers.

In this new world of digital banking, the SME segment is being seen as a pipeline of future medium and large customers. Banks that nurture SMEs and help them succeed are hoping they will find themselves with valuable customers for life.

Expanding The SME Segment To Include Micro Businesses

Digital banks that make these changes will not only shore up the fortunes of their existing SME customers, but also target the enormous underserved segment of small SMEs and micro businesses. The great opportunity in transforming banking services for SMEs is that these digital offerings will scale and be easily adaptable for the bottom of the pyramid market. 

If SMEs are to remain the backbone of Southeast Asian economies, banks must start to transform their services to sustain and grow this critical market segment. This will be a winning strategy leading to more successful SMEs, better outcomes for banks and a strong and robust economy across the region.