Ernst & Young LLP (EY UK) and cloud banking platform Mambu have identified five crucial success elements that financial institutions need to consider to ensure their small and medium enterprise (SME) lending offerings are accessible to SMEs.

The availability of finance is key to the success of all SMEs, and this new report explores the advantages for banks that address the specific challenges SMEs face. Banks have a unique opportunity to meet the needs of their SME customers by developing tailored, customer-centric offerings similar to those of fintech challengers.

The ‘Unlocking big growth in small businesses: How to drive SME lending transformation through product innovation’ report identifies five core building blocks for banks to capture lucrative growth offered by the underserved SME segment.

1. Build deep customer relationships and understanding – SMEs are very different to one another and cannot easily be categorised as retail customers. A deeper understanding of SMEs and their circumstances enables better risk management and unlocks opportunities that other lenders may miss.

2. Have a clear proposition or choose a specific niche – SMEs’ needs vary across their lifecycle, so propositions at each stage must reflect this. Deciding on which customers to serve will drive the propositions created.

3. Address SME needs holistically – SMEs are looking for partners, not just finance. Offering advice and an ecosystem of services will create deeper, more successful customer relationships.

4. Create a market-leading and modern digital customer experience – Customer expectations are rising. The minimum requirement for success is an easy and fast digital offering without long, cumbersome form filing or waiting times.

5. Next-generation core platforms – Building lending services around a cloud-native and composable platform will allow the easy combination of best-in-market components providing flexibility and longevity.

A recent EY survey shows that banks remain the most trusted financial institution for SMEs compared with technology companies. 

SME lending has decreased significantly and accounts for just 2% of overall bank balance sheets in the UK. According to the report, lack of understanding and limited data history make it harder for banks to understand how best to serve SMEs. This leads to high-risk profiling and is one of the main challenges SMEs face.

It is clear that SME pain points need to be properly acknowledged by banks, as success rates for SME loan applications are 20% lower than for large enterprises. Returns on finance for SMEs are typically lower than retail or corporate consumers, putting pressure on revenue and costs.

Ben Snowman, VP Partnerships & Advisory at Mambu, said: “Our report with EY highlights the importance of understanding the unmet challenges faced by SMEs to be able to develop products and offerings that will allow them to thrive. Since SMEs form the economy's backbone, financial institutions need to build viable SME lending propositions that optimise or reduce costs to serve this segment. Studies show that SMEs still trust banks more than fintechs or big-techs, so it’s not too late for banks to turn things around, and we hope this guide will empower financial institutions to do so.”

Alexandru Maruta, Senior Manager Technology Consulting at Ernst & Young AG, added: “Achieving commercial success within the SME segment is something that many banks find challenging. I often get asked by clients how to address this opportunity, and my response is that SME lending is complicated if you only apply traditional approaches. Banks can now build their relationship with this client segment by leveraging the SME ecosystem enabled by new platform models like Mambu. Banks should consider a more holistic approach to financing SMEs and implement value-added banking services that help SMEs to grow. Financial institutions need to review their business operations, technology and operating models to identify opportunities for SME product innovation.”

To download the full report, please visit: https://mambu.com/insights/reports/seize-the-sme-opportunity-through-lending-transformation