There is a strong need for SMEs to learn and leverage the digital world to enhance their business growth and improvise experience.
Small and medium sized enterprises (SMEs) are more often than not a major driver of the economy, contributing to the GDP as well as creating jobs. SMEs are at the core of every economy, be it employment generation, GDP contribution or enterprise value chain creation. In UAE, 60% of the GDP is contributed by SMEs, and, of the total enterprises, 95% are SME and contribute to 86% of employment.
Despite this, SMEs face several challenges; high capital cost and inability to access market with ease have impacted the cost of funds, both secured and unsecured. These challenges are similar to the ones faced by larger organisations as well, however, they have resources for managing these concerns. Small businesses do not have such resources. Finance management is not their core strength, and most of the time the founder double hat between being a production or a business development head and the CFO. SMEs also lack systems and tools, that can help them in managing their cash flows and receivables and do forecasting.
There are a few commonalities in the requirement of SMEs:
- They require to have an overview of their finances, both personal and business-related, in a single view. In SMEs, more often than not, the owner of the firm prefers to see the accounts, both personal and business, at one place.
- Insightful, contextual and timely information for decision making. This has to be available across channels. Omnichannel experience of mobile app, online, branch and call centre is key; as the entrepreneur may not always have access to systems at the office.
- Ability to have appropriate pricing, tenure and loan structure matching his cash flows, thereby enabling him to scale the business by employing the right financial structuring.
- Foreign exchange and cash management solution at the right price.
Some of the key requirements of SMEs are cash management, foreign exchange and loans. Many a times dealing with banks is a grudge purchase for SMEs, primarily due to their high cost. Banks most often have limited understanding of the SME business and with their conventional risk model calculate a higher risk pricing. This hesitation is further amplified by regulation, such as Basel requirement, which imposes higher capital requirements for riskier businesses, and SMEs are considered more riskier. The brick and mortar structure and relationship management costs of banks also add to the pricing.
Fintech companies are changing the SME landscape by cutting cost, providing access to funds, and implementing payment tools and mechanisms more efficiently.
Fintech companies are exploiting this angst. Changing the landscape by cutting cost, providing access to funds, and implementing payment tools and mechanisms in an efficient manner. The traditional banking model is challenged by digital disruption. Fintech companies do not have a legacy of larger banks and are able to start with no baggage. Their use of digital technology and analytical skills are able to reshape the industry, addressing the sweet spot where large banks have failed in the past. Fintech players are not only providing plain vanilla products, but also structured financial products, such as invoice finance, supply chain finance and trade finance. They also provide access to alternative mechanism of funding such as peer-to-peer lending.
Following are some of the players in the Fintech space addressing the SME market:
This results in a long-term implication for banks which are not just losing revenue, but also customer data and brand erosion. To compete with the Fintech companies, it is essential that the banks resort to digitization for efficient and cost-effective processes.
The changes that happened in the late 1990s due to the rapid ascension of web, is just an example of what could possibly happen again. Companies such as Amazon displaced the traditional brick and mortar stores for digitally native customers. Similar changes happened in the stock broking industry. Those who were late in responding to the changing environment, particularly adoption of internet, faced growth challenges in the long run.
Digitization for banks is not an expense but an investment; it is imperative for banks. The purpose of digitization is not to just acquire and retain more customers. Analytics, one of the benefits of digitization, can be used to provide customised products to each micro-market. With the changing environment of technology and customer service, banks have to respond by using leaner, faster and more analytically-driven service options.
SMEs need to adapt to digital banking to gain operating and possibly financial efficiency. Meanwhile, an SME can leverage digital disruption to chart a personal growth story.