Frankenstein’s Bank – How to create the complete SME bank?

Evolution is relentless and inevitable. It’s the same in business, one has to adapt to grow, to change with the times and the demand. However, admitting that there is a problem is the most difficult first step.

Andrew Frost - Customer Success Manager - International@ Form3 @Form3 September 29, 2020 - 10 minutes

Evolution is relentless and inevitable. It’s the same in business, one has to adapt to grow, to change with the times and the demand. However, admitting that there is a problem is the most difficult first step.

“If a bank promises them the world, it won’t make any difference if they’re more expensive than their other options” (3).

It is important to understand the specific products that are required to run, scale and expand an SME business. The problem is the traditional products for SMEs are typically not fit for purpose. They’re clunky, inefficient and simply don’t get the job done. The reason for this is the back-office systems are designed to serve retail and large corporate customers, not SMEs (5).

We have seen a huge surge in companies focussing on specific SME products, showing great expertise in their given area such as TransferWise for cross border payments and Tide focussing on business current accounts. However, in an ideal world, if there was a bank that could meet all of the product specific requirements of an SME, combined with long lasting transparent and fair pricing, surely this would create the complete SME bank?

SME customers are no longer uninformed, they are simply underserved.

The head of finance at an SME will have daily exposure to a fully digitalised experience, all be it in their personal life. Contactless payments, faster payments between accounts, margin free currency conversion, instant cross border settlement, the list goes on. This exposure gives them the same expectation from their business bank account. SME customers are no longer uninformed, they are simply underserved.

They expect multiple products available through one platform that interact and integrate seamlessly, which is made possible through API technology. API’s allow multiple products to work alongside one another and produce state of the art capability without the legacy software or hardware as it is deployed in the cloud.

The concept of a product ecosystem has been explored many times since the introduction of PSD2 (3). Surely though, the outcome of this would be the rise of the perfect SME bank, a Frankenstein style bank creation with dozens of SME focussed products all collated in one bank branded marketplace.

However, we are yet to see a completely holistic SME bank offering, that addresses all of the required customer needs and according to Earnest, 33% of SMEs are interested in other services that banks can offer (1).

A changing banking narrative

Perhaps it is time for the bank to start moving away from the previous banking narrative from a financial service provider to become a true business growth partner, covering a multitude of SME needs. The exciting news for banks is that the tradition of relationship manager driven business still remains integral to how an SME wishes to consume products (4). Combined with a wider range of digitalised solutions across the most important products this would be a winning combination.

Most importantly a bank needs to get their core business services right, namely payments, trade finance and treasury, which should be the bare minimum for a digitalised SME proposition. These services cover a number of key products and can be integrated into a core banking system. So what are they?

Digitalised Current Account with online access

Possibly the most basic requirement and may well sound very simple, however, SMEs have always found it difficult to open a fully regulated business bank account. Things have changed somewhat with the introduction of E-money accounts; however, these have their limitations including approval for 3rd party services due to potential lack of AML monitoring, control and the lack of clarity if these accounts are covered by FSCS.

Credit and Lending

This includes a variety of types of revolving credit and lending facilities - trade & invoice finance-based products, as well as overdraft facilities and credit cards. An SMEs ability to access lending due to lack of creditworthiness is exceptionally documented (2).

We should also see access to more traditional lending products such as mortgages. We have seen a great deal of activity in this space with newcomers such as Oaknorth, Aldermore and Shawbrook, however, they are all laser-foc

used on domestic lending and have not yet expanded their product offering outside of lending to SMEs.

Foreign Exchange

This is one of the most contentious products for SMEs as recent times have seen a huge exodus of SMEs from traditional banks who are unable to downscale legacy technology to manage their SME customer base.

SMEs have moved to external specialists to execute FX business to more agile and product rich companies who can manipulate margins to be more attractive than the 2-4% that SMEs see from banks.

Inevitably as an SME looks to scale and grow internationally their need for cross-currency transactions will also increase and it is important that these tools are available without confusion or complexity. Most importantly the transparency and consistency of pricing here needs to be addressed.  

Risk Management

Once again contributing to the ongoing migration of SMEs to external specialists where they seek a more all-encompassing service to manage their FX risk. The full range of hedging products certainly are not suitable to all SME customers i.e. FX option products, but simple forward products can be relatively easily integrated into business risk management strategy and help to protect margins.

Multi-currency Wallet

The ability to hold currency in the major currencies is not essential for domestic focussed businesses, however with ever eroding borders international business is only a click away. A traditional foreign currency account would carry ongoing maintenance fees. Named currency accounts should be standard for a bank to provide.

In addition, some e-commerce marketplaces insist on customers holding named accounts in domestic locations where business is being executed, this feature is often overlooked and prevents sales across certain platforms. In an ideal world, access to as many currencies as possible will allow the SME the freedom to grow and enter new markets.

Reducing Administration - One bank, one system and one service.

Mckinsey (3) indicate that one of the major problems for SME’s is the amount of administrative duties they have to undertake on a day to day basis. SMEs cannot focus on what they do best, growing their business and servicing their customers.

Therefore, an all in one financial service can help reduce the administrative burden and offer a hub where key products can be bolted on and integrated with ease such as FX management and international payments.

It can even go a step further and include the wider product ecosystem:

·      Cash flow forecasting

·      Advanced data analytics/reporting

·      Expenses Management

·      Payroll

·      Property management

·      HR Software

·      E-commerce platform

·      Accounting/Bookkeeping/Invoicing

·      Insurance

SME Pain Points - McKinsey [3]

One bank, one system and one service.

According to a recent report by Accenture (4) banks could gain access to up to £8.5 billion in new revenue streams in 2020 by delivering value-added products and services to small and medium-sized enterprises (SMEs).

It’s safe to assume that the complete SME bank will be a combination of core services, collaborative API processes, and specialist services provided by third-party technology businesses, drawing on and borrowing expertise built elsewhere and stitching it together under one roof, creating ‘Frankenstein’s bank’.





3.     Mckinsey - Beyond banking: How banks can use ecosystems to win in the SME market

4.     Accenture-Unlocking-Revenue-SME-Banking

5.     Fintechos -

Andrew Frost

Customer Success Manager - International@ Form3 @Form3

Andrew has a background in deliverable FX and working with businesses to improve their FX risk management processes. Previously, Andrew was part of the strategic partnership team at Moneycorp, Currencies Direct and AFEX managing corporate clients and enterprise partnerships.

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