Will Big Tech Be the Ones to Step Into the SME Banking Gap? | Interview With IBM

SMEs may wonder if they will ever get the service they deserve from the banking community. It’s notoriously hard for banks to make it work well and tailor their services to suit the myriads of different needs across the world.

When it comes to actually getting funding, this is a challenge for around half (49%) of UK businesses, according to the British Chamber of Commerce.

Around the world that relates to a $5.7 trillion funding gap, between what SMEs need and what they’re able to get. That’s according to Shanker Ramamurthy, Global Managing Partner for Banking & Financial Markets at technology consultancy giant IBM. Given his position he has a pretty good perspective on the global business banking space.

Considering SMEs represent over 90% of all the enterprises around the world and over 60% of the global economy, this gap is a big issue for many people. And it’s not just access that is a problem. Ramamurthy points out SMEs face further challenges in the banking space, including affordability.

“When SMEs get access to monies from banks, they tend to pay anywhere from a 2% to 5% incremental interest rate on what they receive, because banks really have difficulty pricing the risk precisely.”

On top of this is the issue of whether they even understand each other. The misalignment between what SMEs need from their bank and what banks can offer is ever-present. Speaking to 1000s of bankers and C-suite professionals, IBM sought to find out “what banks think SMEs need versus what SMEs say they need?”

The findings indicate SMEs are not quite getting what they’re after. “As banks architect their systems and capabilities, they believe that ease of use is perhaps the most important thing for an SME.”

SMEs, on the other hand, often want a tailored set of offerings that demonstrate an understanding of their needs, something Ramamurthy feels banks are not currently doing. It’s a broad group of course, so “you’ve got to come up with specific offerings for their segment or line of business.”

When it comes to helping SMEs grow, the bankers “talked about access to credit services as a particularly important thing. But the SMEs were saying they also need support with their financial and business plans; someone to hold your hand as you go through the growth phase.”

Again, more disconnect. On the question of efficiency there was more alignment. “Both banks and SMEs highlighted instant payments of operating expenses was important, all in service of better cash flow.”

But there were other desirables from SMEs, largely unmet by banks. In the area of risk and regulatory compliance, “bankers said, quite rightly, that fraud monitoring is the number one thing they focus on, while it did not come up quite as highly from an SME standpoint.”

Businesses also want an application that enables them to address a multitude of needs. A super app, in other words. Such a focus was not high on the list for banks they spoke to.

Not only is the evidence of misalignment with traditional banks stark, but there is also a recognition from Ramamurthy that there are increasing numbers of fintech firms and indeed tech firms, aiming to meet that demand.

The ‘Tech Fins’

For any new bank, having a good business offering is typically a sign of success and the challengers are increasingly meeting this segment.

Revolut Business, who recently surpassed $500 Million in annualised revenue from their business-to-business segment, commissioned a survey in partnership with Dynata, of 500 UK businesses. According to that, 61% of UK businesses surveyed, think fintechs have more to offer than ‘legacy banks’ when it comes to their business banking. Elsewhere Monzo announced 500,000 business customers in October 2024 and the unanimous growth of other banks including OakNorth, Starling and suggests their business offerings are also growing.

The fintech world in general also has a lot to offer SMEs.

Ramamurthy points out that “Square in the US provide more than just a terminal through which they accept card payments. They also provide payroll services and other capabilities that an SME might be interested in. Through that, Square can get a higher discount rate than a typical bank because they can provide a greater set of capabilities to that SME.”

But Ramamurthy points out that it’s not just fintechs that present a threat to established banks. Rather it is large technology firms with the technological sophistication and balance sheet to tackle financial services, that present more of an existential threat.

“Banks in high growth markets, and across APAC have had to deal with even more potent competitors than the fintechs we have in the UK,” he says.

The likes of Alibaba and Tencent offer many services in one super app, meaning customers often don’t need to go anywhere else. According to Ramamurthy, banks in the region have responded by attempting to “create their own super apps, where the bank becomes a destination website.”

We might not be there just yet in western markets, but there are signs it could start to happen. “Given the market cap of Apple, Google or Amazon for example, their pockets are way deeper than almost every financial institution. So when they create super apps providing a broader range of capabilities to SMEs, they are a more potent threat than a fintech.”

The rise of Apple Pay and Google Pay as a preferred method of payment, suggests that more consumers would be happy to transfer more of their financial lives over to their technology provider of choice. In the UK, up to 67% of consumers are using Apple Pay for in-store and online payments.

The release of Apple Money in the US was initially a success with their high yield savings account reaching over $10 billion in deposits in the first 5 months, however, it received a hit to its progress when the relationship with the bank behind it, Goldman Sachs, broke down towards the end of 2023. As it stands tech players wanting to make the leap into financial services still rely on the capabilities, and goodwill, of the traditional banking ecosystem, but that’s not to suggest it will always be that way.

Another thing on their side is that consumer trust is often greater in tech companies than banks. According to Bain and Company, 54% of consumers in 29 countries trust at least one tech company more than banks in general, and 29% trust at least one tech company more than their own primary bank. The suggestion from the World Economic Forum (WEF) is that major technology players are simply biding their time before adding financial services to their arsenal.

What can’t be avoided, is the power they have at their disposal. Ramamurthy uses the example of Amazon and their huge penetration of not just the e-commerce market but also how they support merchants and SMEs. They’re projected to surpass 40% of U.S. e-commerce sales by 2024 but they also have access to a huge amount of data, and many banks use Amazon Web Services for their own architecture.

“Amazon provides a range of capabilities to merchants, including warehousing, merchandising, selling the product on their website and more, and as such have an exquisite understanding of the SME cash flow.”

“Therefore, as and when it chooses, it can get into simple things like payments and cards and then get into more sophisticated things like lending.”

Regarding the financial data of an SME, there is a level of understanding here, he says, that a bank can never expect to master. He believes banks will ultimately master these challenges but that it could be a 5-year journey.

IBM’s study, which was conducted alongside The Banking Industry Architecture Network or BIAN, suggests APIs will help them get there faster, providing the flexibility and variety of services SME customers are looking for. Either way, this alignment gap is a wakeup call and competition is hot for the underserved SME segment.