A lot of ink has been spilt in recent times about the rise of neobanks like Revolut, N26, and Monzo that serve consumers. Here at Youtap, we believe that the rise of these neobanks will benefit the critical Micro, Small and Medium Enterprise ( MSME ) segment and will play a significant role in the times to comes. MSMEs form the backbone of many economies around the world. In this blog, we take a dive into the consumerisation of business services and digital banking will benefit a traditionally underserved segment.
According to Mckinsey, MSMEs represent one-fifth of global banking revenues, generating around $850 billion of annual revenue for banks. MSMEs also act as the engine for economies, by accounting for a large proportion of total employment and GDP. Which begs the question, why oh why have they been left behind by traditional banks?
In the past banks that have focused on MSMEs due to a number of reasons such as the variance of the credit quality, the costs involved and maintaining a great customer experience. As a result, many banks have not prioritised MSMEs, leaving them underserved.
Change is coming
Three changes are now making MSMEs a more attractive segment.
First, customers – including business owners – are becoming used to convenient and tailored services in their personal lives. This is shaping expectations about how they interact with financial services. Many customers are increasingly demanding real-time personalised and convenient service – including the kind immediate availability provided by the likes of Grab, GoJek, Google, and Alibaba.
Secondly, more cost-efficient models for serving MSMEs are emerging and helping to lift profit margins. Digitisation makes processing cheaper and the growth of APIS are making it easier than ever to serve MSMEs. Access to more data and advanced analytics as well as improvements in risk selection at a lower cost. An abundance of new data from previously unavailable sources (such as mobile phones, and online shopping) is improving the predictive power of credit models. So too is the advent of robust technologies (including machine learning and location verification) which help prevent fraud. As a result, financial services can be offered cost-effectively to currently underpenetrated segments, like you guessed it, MSMEs.
Finally, P&L and regulatory pressures are encouraging banks to explore new revenue streams. Low margins and tighter capital requirements pose significant challenges for the banking sector, whose valuations remain below those of other industries. Regulatory shifts including open banking and PSD2 are pushing banks to fundamentally rethink business models. And in turn, more open regulation is enabling a wave of new entrants into the market. A recent McKinsey Open Banking survey found that several types of SME, especially tech-savvy firms, are interested in and likely to use offerings from non-banks that rely on open-banking regulations.
Making MSME Banking consumer-friendly.
This isn’t a solution in search of a problem when applied to MSMEs, digital/neo banks can solve fundamental problems which have prevented financial services firms from serving the MSME segment.
Currently, the MSME banking landscape is a combination of non-licenced over-the-top (OTT) banks, digital initiatives of traditional banks, and the new challenger banks. We are only at the beginning of MSME-focused digital-only banking, and this is the beginning of a wave which will empower entrepreneurs around the world from the singular warung owner in Jakarta to the family-run restaurant in Accra and everywhere in between to enjoy the benefits of formal financial services.
While on the other side of the ledger, for the banks, financial services firms, mobile network operators, and other players interested in tapping into this underserved segment, this presents one of the greatest technology-enabled opportunities for years to come.
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