Banks Now Serious on Small and Midsize Enterprise (SME) Sector
For years most banks tried to be everything to everyone in the small and midsize enterprise (SME) sector. Strong economic growth in many countries boosted demand and masked the need for hard choices. This dynamic proved very expensive for many banks after the financial crisis deflated SME profitability, drove huge credit losses and prompted restrictive regulatory responses.
Many banks now have an ambivalent stance toward SMEs. Large US banks, for instance, are making fewer small business loans than a decade ago, forcing small firms to turn to higher-priced alternatives. The UK lending market shrunk by about 5% per year from 2009 through 2013, though it ticked up 2% in 2014. Banks have also been slow to invest in digital platforms for SMEs, focusing instead on their retail and industrial businesses.
In emerging markets in Asia and Latin America, banks face different challenges, given that the SME business can be quite profitable in the context of high interest rates and relatively high fees. Some banks in these markets risk complacency and missed opportunities to grow further; they could develop more efficient business models to serve very small firms and more sophisticated propositions for midsize firms.
Private equity funds, pension funds and insurance companies also are stepping up their lending to midsize companies. At the very small company end of the spectrum, merchant acquirers such as Cielo in Brazil actively provide financing to merchants based on receivables. Most of these alternative lenders have the advantage of competing outside of banking regulations, at least for now.
Unless banks actively defend and seek to grow the business, they stand to lose a sector that’s important both to bank portfolios and to the broader economy. SMEs represent 50% to 60% of corporate revenue for banks in Europe, a huge profit pool. Being a relatively complex business requiring a number of capabilities, it’s less susceptible to commoditization than retail banking and less price-sensitive than credit and ancillary services to large corporates. SMEs’ economic role, moreover, is substantial. In Europe, for instance, they have provided two of every three jobs and accounted for 58% of gross value added in recent years, while in the US, companies with fewer than 500 people on staff employ nearly half of the workforce.
Many banks now have an ambivalent stance toward SMEs. Large US banks, for instance, are making fewer small business loans than a decade ago, forcing small firms to turn to higher-priced alternatives. The UK lending market shrunk by about 5% per year from 2009 through 2013, though it ticked up 2% in 2014. Banks have also been slow to invest in digital platforms for SMEs, focusing instead on their retail and industrial businesses.
In emerging markets in Asia and Latin America, banks face different challenges, given that the SME business can be quite profitable in the context of high interest rates and relatively high fees. Some banks in these markets risk complacency and missed opportunities to grow further; they could develop more efficient business models to serve very small firms and more sophisticated propositions for midsize firms.
Private equity funds, pension funds and insurance companies also are stepping up their lending to midsize companies. At the very small company end of the spectrum, merchant acquirers such as Cielo in Brazil actively provide financing to merchants based on receivables. Most of these alternative lenders have the advantage of competing outside of banking regulations, at least for now.
Unless banks actively defend and seek to grow the business, they stand to lose a sector that’s important both to bank portfolios and to the broader economy. SMEs represent 50% to 60% of corporate revenue for banks in Europe, a huge profit pool. Being a relatively complex business requiring a number of capabilities, it’s less susceptible to commoditization than retail banking and less price-sensitive than credit and ancillary services to large corporates. SMEs’ economic role, moreover, is substantial. In Europe, for instance, they have provided two of every three jobs and accounted for 58% of gross value added in recent years, while in the US, companies with fewer than 500 people on staff employ nearly half of the workforce.