Big banks at risk of losing SME customers - research

Difficulty accessing credit turns small businesses to alternative funding

Big banks at risk of losing SME customers - research

Banks run the risk of losing SME customers to non-traditional lenders, amid frustrations small-to-medium sized businesses encountered during the COVID-19 pandemic. 

In a white paper on what SMEs need from their banking providers post-pandemic, data analytics and technology solutions company FICO said the pandemic put a sudden, massive burden on SMEs.

Findings from RFI Global, which analysed two years of polls by the SME Banking Council taken before and after the COVID-19 pandemic (2019 and 2021), showed 70% of SMEs in the Asia-Pacific  were less than satisfied with access to credit provided by their main bank (30% were “very satisfied”, the remainder indicating there was room for improvement).

Capturing the thoughts and feelings of over 4,700 SME owners and operators across Asia and Oceania, the findings showed 34% of SMES had to invest more money into their business to ensure they could stay afloat.

Looking forward, 43% of Australia-based SMEs expect to take up new or alternative borrowing products in 2022.

In what FICO said was a worrying trend for traditional banks, as many as 44% of respondents (15% in Australia), were now considering shifting to alternative or non-traditional options for their funding requirements.

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FICO senior director of decision management solutions for Asia Pacific Aashish Sharma (pictured below), said following challenges endured during the COVID-19 pandemic, SMEs felt less supported by banks, indicating they would be receptive to alternative funding sources.

“The pandemic put a sudden, massive burden on SMEs globally and they didn’t think banks did enough to help them,” Sharma said.

“Australian SMEs have made it clear that should they require financial support in 2022, they’re less optimistic about getting it from their main banks. This is potentially a worrying trend for traditional banks, considering that SMEs account for more than 97% of all businesses in Australia, and contribute around $418 billion to GDP, equivalent to over 32% of Australia’s total economy.”

Aside from access to credit, respondents also found traditional banks lacking in their COVID-19 response when it came to proactivity in contacting the business (30% were satisfied), financial assistance (31% were satisfied), transparency in decisions made and processes; information and guidance (32% were satisfied), and speed of response (36% were satisfied).

When choosing a loan provider or financial institution, the top three drivers cited by Australian respondents were competitive interest rates (45%), speed of access to funds (35%) and flexibility in repayment options (32%).

Based on the challenges highlighted by the research, combined with FICO’s market observations, Sharma said alternative lenders had the potential to gain ground.

By understanding those key decision-making criteria, and the funding support sentiments of SMEs, he said banks had the opportunity to retain borrowers.

“If traditional banks are to experience continued and sustainable business growth from the SME segment in the APAC region, they must simplify the application process and improve transparency, as well as customer experience,” Sharma said.

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“From the banks’ risk management perspective, they can support these efforts with scalable, well-informed decisioning tools that can both speed up the process for all and minimise risk.”

Having invested in the FICO platform and analytic services to create an automated, machine learning-powered digital lending solution that utilised transaction data, Sharma said the risk model performance of a top four bank in Australia improved by 10%. The bank’s projections showed a $6.5bn increase in annual lending to existing SME customers, and an $800m increase in incremental lending to new SME customers.

Commenting on the reasons why SMEs may look beyond traditional banks for their financing needs, Beau Bertoli (pictured top), chief revenue officer at small business lender Prospa, said access to funds had historically been an “enormous challenge” for many hard-working small business owners.

Prospa studies found last year the sum of lending declined by traditional lenders Australia-wide to small businesses amounted to $23.9bn.

“After long-term restrictions from COVID, we witnessed a high demand for funds from SMEs preparing to take a hold of opportunities that arose from an economic uplift,” Bertoli said. “Those that turned to traditional lenders were faced with extensive application processes, slow customer service and a strict lending criteria that make it difficult to access funds fast.”

“As a result, many small businesses have started exploring alternative lenders (like Prospa), with simple application processes and funding possible within 24 hours.”

Many SMEs encountered challenges during COVID-19 restrictions, and as a small business lending specialist providing fast application and decision-making, Bertoli said it was important to support businesses requiring access to funds for recovery and growth.

“It is clear that there are three primary drivers that continue to resonate for small businesses looking for an alternative lender: simple applications, fast access to funds and flexible repayment options,” Bertoli said.

“After two years of uncertainty, SMEs have expressed the importance of access to funds to take a hold of opportunities and flexibility to manage any possible future disruptions. At Prospa, we have been committed to delivering these three themes with exceptional customer service, to ensure we are providing the right solutions that service the needs of each individual small business.”