In our last post SME Banking: An Untapped Growth Lever, we highlighted the opportunities and potential of the SME segment, especially in the gig economy space. Some big tech companies, FinTechs and neobanks have already discovered it and are leveraging their digital-native capabilities to create a new frame of competition in this lucrative segment.
However, most traditional players have not detected this huge potential yet. Cracking the code for SME financial management, and being able to use data and machine learning to proactively help enterprises make better financial and business decisions, will be on the agenda for brick and mortar banks for the next few years.
So, how can banks step up their SME banking game?
The following are the key elements that brick and mortar banks should pay attention to in order to make a difference in this market:
- Digital Account Opening: Obtaining a current account in their name is one of the primary challenges faced by freelancers. While most traditional banks deny such requests outright, there are a few, such a BBVA Spain, who do provide an online onboarding service. However, most traditional banks require you to fill out a never-ending list of KYC documents in order to open a current account. When it comes to neobanks, one can apply for a current account in minutes, and while the verification is under process, one can still avail their services (i.e. collect payments, link existing bank accounts or view balances).
- Payments: Payments were the first financial service big techs offered, mainly to help overcome the lack of trust between buyers and sellers on e-commerce platforms. With traditional banks, SMEs and gig economy workers may have to wait for days to receive their payments, especially when dealing with international transfers. Neobanks, on the other hand, provide instant payments and card payouts solutions to their users. On top of that, instead of relying on old methods like checks, they can get paid fast and easily through direct transfers via mobile (the new cash). This works great for cross-border payments as well. For instance, Revolut offers no-fee, cross-border payments and transfers, in more than 25 currencies, driving its growth in this segment.
- Lending: In recent years, banks’ SME lending business have been segregated across the globe. Consequently, the historically strong relationship between banks and their SME customers has gradually begun eroding. Big techs' access to - and use of - big data for screening and monitoring borrowers' activities, reduces such costs, which can improve efficiency and broaden access to financing. On the other hand, some neobanks have started to develop alternative means for assessing the creditworthiness of this alternative customer base. For instance, there are players in the neobanking space that have started to base decisions on lending, on future earnings which have been scheduled but not earned yet, utilizing invoicing data.
- External Account (Data) Aggregation: With most standard banks, one needs to use multiple dashboards and interfaces for invoices, bookkeeping, online payments, and more importantly, external bank account aggregation. With most neobanks, however, workers can link all their bank accounts and conveniently track them all in one place, and in doing so, maintain proper accounting reports.
- Business Financial Management Features: Banks such as HSBC just launched Kinetic, a spin-off app for small and medium enterprises seamlessly integrated with BFM features and Insights. OCBC in Singapore also launched a Financial Management platform for SMEs, becoming a reference in the APAC region, integrating QR payments with invoicing capabilities. Issuing and capturing receipts electronically will eliminate a lot of the time spent and anxiety felt when submitting tax returns, and will mean people can manage their own and their teams’ expenses on the go. Tide, another financial technology company, is introducing optical character recognition technology that will give customers the ability to auto-match receipts to transactions and perform bulk uploads to accounting software. Furthermore, some neobanks also provide a smart invoice that is integrated with a payment gateway, which is extremely useful for tax filing and accounting purposes.
As a consequence of the complex needs of small business owners, SMEs are increasingly turning to challenger banks such as Monzo, Qonto, Revolut for Business, as well as FinTechs or non-financial institutions, to serve their specific needs.
Neobanks: Made For The Gig Economy
Today’s independent professionals and SMEs are looking for solutions that support their flexible work patterns. Thus, neobanks are leveraging this knowledge to provide solutions that can serve this segment by integrating all of these components seamlessly.
These digital and mobile-first banks offer customers the chance for self-service, financial education and advice, as well as transactionality (invoicing, transactions, payments, etc.) - all through a simple app.
Most of the neobanks started by offering banking services to personal and SME segments. However, they have not been marketing some of their services that are geared to the gig economy. Nonetheless, it is clear that they are now moving towards providing better value propositions for SME and gig economy customers.
Here is a list of some neobanks that are considered under this category:
- Azlo: The US-based fintech Azlo focuses on the new economy that includes millennials, underrepresented entrepreneurs, and the gig economy. The business account offers features like unlimited domestic & international payments, payment of bills, mobile check deposits, and digital invoicing. Recently, it partnered with Kabbage to offer lending products for the gig economy and added integrations with Stripe, Square, and Paypal.
- Coconut: Coconut is a banking app aimed at the gig economy in the UK. Apart from providing a bank account and a Mastercard for payments, the mobile app automatically keeps track of invoices and payments and creates a tax estimate based on the user’s account activity. Coconut also offers current accounts and credit cards to users from 20 different banks, such as Barclays, Lloyds, and Starling.
- N26: The German neobank offers a free bank account for freelancers and the self-employed, apart from their business accounts for SMEs. It provides its customers with a Mastercard as well as a cashback program. This enables its users to conduct free card payments across the globe, and earn 0.1% cashback on purchases made.
- Revolut for Business: Revolut offers an alternative digital banking platform that encompasses both personal and business accounts. Within its business account offerings, it also offers solutions exclusively for freelancers like: free local and international transfers (28 currencies), local accounts in GBP & EUR, international IBAN, prepaid debit cards, virtual cards, integration with accounting and productivity tools. They also offer some business financial management features such as balance and cash flow projection and spending analysis.
- Holvi: A Finland-based banking service provider for the SME segment, Holvi offers products targeting the gig economy and providing them access to financial services. It offers an integrated current account package that includes bookkeeping, invoicing, and auto expensing tools. The platform is currently present in Germany, Austria, Finland, Ireland, Italy, Belgium, France, and the Netherlands. Holvi was acquired by BBVA in 2016.
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