By Bruce Jennings, Strategic Development Director, FIS (NYSE: FIS)
There’s good and bad news for UK banks in the 2018 FIS PACE study on SMB banking, which surveyed hundreds of small-to-midsized businesses (SMBs) throughout the country. The good: 7 out of 10 SMB clients are satisfied by their banks’ performance. The bad: Of those that are unhappy, nearly all plan to switch banks in the next 12 months, portending a shakeup in the UK’s lucrative business banking sector.
Overall, 22% of SMBs in the survey reported they are actively planning to switch banks and, of those, one-third (33%) have annual revenues of £55.5 million and above, meaning it’s the clients most likely to generate substantial fee income that are eager to leave. But, interestingly, high fees may not be what’s driving them to switch.
Yes, “competitive fees” is a top complaint—as always—of UK SMBs, but equally cited in the study is that their bank “does not have the commercial products or services needed.”
Payments a Pain Point
This latest study seeks to rank nine banking functions in terms of importance to SMB clients and then measure UK banks’ performance in each area. Overall, SMBs view Simplicity (“offers the right products/services for my company that are easy to understand and simple to use”) as most important for a good banking relationship with Digital Payments appearing in the middle of the rankings. However, when looking at what’s most important to UK companies planning to switch banks, the matrix changes significantly, and Digital Payments leapfrog to the top.
This is not surprising given the all-around increase in digital payments in the UK over the past year. On average, 43% of all SMB financial transactions were completed digitally, and 60% of UK SMBs report receiving more online, mobile, and person-to-person (P2P) payments in the prior 12 months. This trails adoption and acceptance in the U.S.—but that may be the problem, as more customers expect businesses to accept their preferred method of payment, whatever that may be.
Overall, just 4% of UK SMBs report using outside services to process their digital payments, but that number more than doubles to 11% for those businesses looking to switch banks.
The Challenger Affect
This highlights what may be an uncomfortable shift for many long-established UK financial institutions.Combined with rapidly advancing technology, the new wave of fintech startups and digital-first “challenger” banks entering the UK market are continually raising the bar for what consumers expect in terms of payments.
Customers of SMB clients are demanding choice, and the businesses that serve them are willing to change banks to find a provider who can help them compete.
Furthermore, thosetraditionally fee-adverse business customers are in fact willing to payto access modern commercial services, which can in-turn generate significant fee income for banks.
Those quick to recognise this trend have begunto create new revenue streams beyond their existing loan portfolios, by offering ancillary merchant services tohelp SMBs better serve their digital-first customersand vendors.Forbanks hesitant to invest in payments processing and other digital-first commercial services due to the upfront costs of deployment, the study suggests there may be demonstrable ROI for such efforts.
Is Open Banking the Answer?
While the study also found that awareness for Open Access Banking is much higher with the UK’s SMB clients than with general consumers, enthusiasm remains tepid. Some 60% of SMBs view the security risks of Open Banking as outweighing the potential benefits of access to a wide product portfolio via a centralized interface or account.
With Open Banking’s continued roll out in the UK, there is certain to be much handwringing and, of course, political lobbying about its long-term impact on financial institutions, which may face even greater disruption from challenger banks and fintechs. However, Open Banking may present financial institutions and banking providers with the perfect opportunity to create a competitive advantage and carve out a leadership position by working with established, trusted technology partners to add the ancillary products and services SMB clients want, such as robust payments processing, while ensuring the highest level of security.
Such partnerships can bring new products and services to market quickly—often in a matter of months—and might be enough to lure unhappy SMB clients away from their current banking providers. Either way, the UK banking sector must now pivot much more quickly to meet changing market demands and to protect their share of the SMB market.