How Fintech Is Changing Banking for SMEs (+Trends for 2020)

Tim Keary Tim Keary  |  January 7, 2020

Is highstreet banking dead?

If you’re a digital native, it just might be. For an increasing number of consumers and businesses, highstreet banking is a thing of the past. Currently, 46% of consumers use only digital channels for banking. Today's companies expect to be able to apply for finance as easy as ordering a pizza, and fintech companies are making that happen.

Fintechs, or financial technology companies, have rapidly redefined banking through innovating disruptive digital services and targeted products. Now many services enable business owners to check their balance, update account information, apply for credit, make payments, and manage expenses through mobile or desktop apps.

In 2017, 88% of incumbent financial institutions feared that they would lose money to the disruptive innovation of fintech companies. In response to the challenges, 82% of traditional banks planned to increase fintech partnerships. As the old saying goes, "if you can't beat em' join em."

Since then, traditional banks have been attempting to play catch-up and partner with Fintechs to regain the confidence of the jaded SME market, who are turning to alternative services for up-to-date financial management solutions. For SMEs, the collaborative and cooperative relationship between banks and fintechs has created an abundance of choice.

Fintech adoption in 2020

Over the past few years, Fintech adoption has reached unprecedented heights. Consumers and SMEs have proved to be open-minded not just to FinTech but also sharing their data.

The Global FinTech Adoption Index 2019 revealed that:

  • Global SME adoption sits at 25%
  • 56% of SMEs use a banking and payments fintech service
  • 46% of SMEs use a financing fintech service.
  • 89% of SME adopters are willing to share data with fintech companies

The data shows that SMEs are moving away from the restrictions of traditional banking into on-demand digital services, even if that means sharing their data. Incumbent banks who have been historically skeptical about data sharing have also been getting in on the act. An Accenture survey found that 90% of bankers believe open banking will boost organic growth by up to 10%.

While the flexibility of fintech solutions is one of the main reasons for the high rate of adoption amongst SMEs, it's critical not to overlook the importance of cost. Many services have cut the costs of traditional banking service, particularly in the realm of international transfers. 

For instance, Transferwise allows customers to transfer money internationally for up to eight times less than banks. With affordable alternative financial services on the rise, it's natural that SMEs are switching to more economical solutions.

How SME banking is changing

Generally speaking, if there's one thing SMEs have gained throughout the rise of fintech, it's choice. The choice to do business and manage financial accounts as they need. They aren't tethered to high street banks but enjoy a truly limitless online experience, led by companies that play a greater role in financial planning. 

For SMEs, the banking experience has changed in the following ways:

  • Digital banking
  • Digital lending
  • Personalization
  • Omni-channel banking
  • The rise of data sharing and APIs

Let’s take a look at the trends within fintech banking in 2020.

1. The growth of digital banking

Perhaps the most noticeable change is the movement of SMEs to digital services. Challenger banks and fintechs have moved away from a stuck-in-the-mud and heavily-regulated approach to a flexible and immersive online experience. Rather than turning to industry norms, fintechs embraced innovation, reinventing services thought to be unalterable.

Medici Research notes a global digital banking presence with 21 providers in Europe, eight in the Americas, and six in Asia. One of the biggest European providers is Monzo, which offers consumers and SMEs with a mobile banking app and financial management features.

For example, there is a feature that divides overheads and tax money into separate sections to help the user to prepare to pay tax. The platform also integrates with accountancy tools like Xero and FreeAgent, helping businesses to manage their books more efficiently.

2. Digital lending

The growth of Digital lending has redefined how SMEs apply for finance. The Digital Lending Platform Market by Solution Global Forecast anticipates that the global digital lending platform market size will grow from $5.1 billion USD in 2018 to $12.1 billion USD by 2023, with a CAGR of 18.7%. A significant reason for the increase is the convenience of digital lending over applying within a bank.

In the past, applicants would fill out a form and complete a credit check before being able to receive finance. Now, not only can applicants fill out applications online, they can go through an alternative digital lending process that is defined by individual providers, not an industry.

For example, OnDeck is an online digital lender who offers loans to small and midsize enterprises. The user can apply for loans from $5,000-$500,000 in just 10 minutes. Services like OnDeck have appealed to SMEs because they remove the limitations and long wait times that come with loans from traditional lenders.

3. Personalization

The open-minded nature of fintech companies has forged countless personalized products targeted toward business owners. Providers dabble in everything from data aggregation and artificial intelligence to tailor solutions for individual users, whether they're solopreneur businesses, midsize limited companies, or large enterprises.

Targeted services help companies to make positive financial decisions, and there is an intense desire amongst SMEs for more guidance. Sixty-four percent of SMEs said they would like "money management" advice (cash flow, invoicing, or financial planning) from their bank. Customers that seek out services with financial management advice generally gravitate towards fintechs rather than traditional banks.

Unfortunately, banks have failed to offer personalized products to customers. The Power of Personalization in Banking 2018 report found that 94% of banking firms can't deliver on "personalization promise." As a consequence, customers looking for financial management gravitate towards fintech banks rather than traditional banks.

4. Omnichannel banking

The digital innovation of fintech companies has slowly built an omnichannel experience for SMEs. SMEs can sign up for a banking experience that combines multiple channels from print to desktop and mobile applications into one unified experience. Users can check accounts and manage their financial health regardless of what device they're offering.

The increase in omnichannel usage and digital natives has made user experience a prominent factor in the purchasing decisions of consumers. In fact, 66% of customers say that experience is a major factor when choosing payment and transfer services. Shifting attitudes have forced financial providers to provide a quality omnichannel experience.

Financial institutions must now offer desktop and mobile applications with a solid UX to stand out in the market. At a minimum, SMEs and modern consumers expect to be able to log into their accounts from any device and access personalized services without a hitch.

5. The rise of data sharing and APIs

APIs have been invaluable in disrupting the segmented banking experience that emphasized secrecy over collaboration. Fintech companies now offer services that embrace cooperation with third parties to deliver relevant products and services. Providers such as Monzo and Transferwise have integrations with accounting software so that users can manage their finances.

In a broader sense, banking has transformed into opening banking, sharing data between service providers to provide the best experience to customers. Businesses have welcomed the variety these services bring to the table. The Open Banking for Business Survey found that 77% of SMEs and large corporations were already participating in Open Banking ecosystem platforms.

The open banking movement has given SMEs choices that they didn't have before. Rather than being restricted to choosing from a handful of providers, businesses can choose services from new providers who aren't bound by the shackles of antiquated banking norms.

What’s next for fintech and SME banking?

As we move in 2020, it's clear that SMEs have a voracious appetite for personalized services and financial management services. Banks need to take immediate action if they are to meet the demands of SMEs and compete with fintech companies in the digital age.

Old school banking and all of its red tape restrictions just don't cut it for modern companies. The unprecedented level of adoption has shown that companies are willing to put their money behind services that push the envelope and offer genuine financial support.

While many banks have recognized the need to adapt and produce new services, it appears that Fintech startups are still leading the real innovation in the sphere. The next decade or so will be an exciting time for business owners as the early innovators pave the way towards a more standardized omnichannel banking experience. 

Get a headstart with fintech by finding the best business finance providers around. See how on G2.

Find the best Business Finance Providers →

Author

Tim Keary

Tim Keary is a freelance technology writer who specializes in writing on enterprise technology trends.

Never miss a post.

Subscribe to keep your fingers on the tech pulse.

By submitting this form, you are agreeing to receive marketing communications from G2.