Small and Medium businesses form the backbone of the global economy, representing 90% of all firms, employing approximately 70% of the world’s workforce, and contributing 50% of the world’s GDP. Despite their significant role in the global economy, they face challenges in banking solutions. Banks and neobanks are responding with new business strategies and tech-led innovation.
In India, the SME lending landscape has significantly transformed over the past decades driven by increased formalization of the economy, digitization of the society and governance resulting in increased availability of data.

The IBM Institute for Business Value invited 10 financial institution executives to discuss their strategic perspectives in their report 2024 The Voice of The Makers to discuss the evolving nature of the SME finance landscape and the approaches adopted by them.

The comprehensive conversation with senior executives shed light on how banking services have evolved and how the number of branches is shrinking particularly in EU economies. This is due to the evolving merger and acquisition activities, which have also been hastened by declining demand and revenue pressures, notably resulting from protracted low interest rates. However, branch networks are growing in emerging markets of the developing countries.

“We don’t want to have branches, but that doesn’t mean not having people in the field,” said Maximiliano Damian Rodrigues, General Manager, of SME Business Nubank.

While higher interest rates are boosting global banking profits, a return to branch network expansion is unlikely. The emerging trend is a blend of branch services, human relationships, and enhanced digital access.

“Digitalization should not be interpreted as digital replacing branches. I think human touch will always be important, especially in this segment, so our main goal is to create a strong harmony between branches and digital.” Gokhan Koca Global Head of SME Banking BBVA.

Small and medium businesses want their banking relationships to grow into a system catalyst. They desire a deeper understanding of the business domain, a platform experience that embeds banking and non-banking experiences. These centralized platforms could provide a wealth of benefits, including enhanced decision-making facilitated by data-driven insights and cash flow forecasts. While liberating the businesses from complexities of daily administrative tasks and focusing on growth creativity and competitiveness.

Jane Prokop Global Head of SMEs Mastercard, “Serving small and medium businesses requires a different approach. It demands customer segmentation, understanding their needs, and potentially customizing benefits or ancillary products to make the relationship sticky. This requires not only analysis but also investment.”

Accurate risk assessment is crucial for expanding SME banking services. Machine learning can integrate new data sources to improve risk management, though privacy concerns must be balanced.

“Machine learning allows us to estimate very specific variables to enrich risk assessment by investigating the ‘economic behaviours’ of SMEs.” Davide Alfonsi, Group Chief Risk Officer at Banca Intesa Sanpaolo said in a statement.

The report offers actionable insights into how banking strategies can embrace innovation and meet the evolving needs of small and medium enterprises.

In a conversation with Paolo Sironi of IBM State Bank of India’s Managing Director of International Banking Challa Sreenivasulu Setty discusses key areas that affect an SME’s capabilities to grow in India.

In the early 1970s SME lending was limited to industrial clusters, in a specialized geographical locality and the loans were secured with collaterals, with the increased formalization of the credit system cluster-based lending became obscure.

The GST network operated by the government of India, provides detailed information about sales and transactions, direct data from the SME about their operations, data from SME’s banking transactions, credit scores and default history. This comprehensive availability of data information about cash flow is helping banks and neo-banks make more informed decisions.

Even though there is a tendency to return to cluster-based financing. However, the focus has shifted to cluster-based financing efforts from mere technology upgradation to credit linkages, application procurement, customer acquisition and guiding SMEs through the on-demand credit process.

To manage the risk associated with market fluctuations and consumption patterns, the government of India initiated the Credit Guarantee Scheme for micro-businesses and SMEs. We have long advocated for the adoption of the small business administration (SBA) model, like the one in the US. The government of India suggested that they provide a similar cash flow-based lending backed by government guarantees.

According to a study by the World Bank SMEs need to do more than merely access finance. They must also acquire the skills necessary to integrate new technologies into operations. In the study, 65% of respondents identified that the journey to the cloud for business is a critical process. However, many banks have yet to fully capitalize on the transformative potential of hybrid cloud, data and AI. There remains a hesitation to transition from integrating AI into making AI foundation of existing business functions.