OPPORTUNITIES THROUGH 'PLATFORM PLAYS' IN EUROPEAN SME BANKING

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1 OPPORTUNITIES THROUGH 'PLATFORM PLAYS' IN EUROPEAN SME BANKING 2

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3 CURRENT STATE OF SME BANKING TODAY SME BANKING Small-to-Medium Enterprises or SMEs (see definition below) are the backbone of the EU economy. They make up approximately 99.8 percent of all businesses in the Europe-28 region and employ almost 93 million people1. SMEs generate 57% of value-added income and are responsible for over two-thirds of the total EU employment. It is therefore not surprising that SMEs remain a priority for European banks, generating 12% of their revenues and accounting for up to 10% of their customer base. And with a compounded annual growth rate (CAGR) forecast to grow 5% per year2, it is easy to see why 80% of banks across Europe see the SME market as a growth area3. SME s defined Although countries use varying definitions, they are usually based upon three factors: staff headcount, revenue and/or balance sheet total. In this point of view, we will use the European Commission definition that distinguishes three categories: Micro, Small and Medium-sized. COMPANY CATEGORY STAFF HEADCOUNT TURNOVER BALANCE SHEET TOTAL Medium-sized < m 43 m Small < m 10 m Micro < 10 2m 2m Micro businesses have a headcount of less than 10 people, sales of E 2 million or less and/or a balance sheet total of E 2 million or less, while Small businesses have a headcount of less than 50 people, sales of E 10 million or less, and/or a balance sheet total of E 10 million or less. Medium-sized businesses have headcount of less than 250 people, sales of E 50 million or less and/or a balance sheet total of E 50 million or less. 1 Annual report on European SME s Accenture Research 3 Next Generation SME Banking EFMA Report PLATFORM- PLAYS FOR SME BANKING

4 AN UNDERSERVED MARKET While SMEs have been served by banks for decades, current macro-economic factors and traditional approaches to banking have made it difficult for banks to address all SME client needs. European banks have struggled to serve the needs of SME customers while generating acceptable profits. Changing customer expectations, a high cost to serve, low bank margins and ever-increasing regulations are just some of the factors contributing to this trend. As a result, a relatively high percentage of SME clients (roughly one-third in a recent Accenture survey) expressed dissatisfaction or, at best, a neutral attitude towards their bank4. SMEs, for example, feel the need for integrated or bundled financial services, while incumbent banks are currently seen as offering only standardized, separate products. Incumbent banks are trailing in product innovation, offering their clients non-differentiated offerings to keep costs low5, causing them to struggle to maintain market share and achieve profitability. 4 5 We have identified three main reasons why incumbent banks currently do not have the capabilities to service SMEs in accordance with their preferences. First, they struggle to create a unified customer view. The silo-based product approach does not allow banks to unify data points and obtain a single view of their customer. Second, incumbent banks use collateral-based risk assessment models, causing them to bypass profitable clients not deemed as bankable. Fintechs and GAFAA (Google, Amazon, Facebook, Apple, Alibaba) type players have rushed in to fill this gap, using live transaction data to undertake risk decision-making and obtain a very accurate picture of their risk appetite. Banks need to modernize their methodologies and technologies to keep up. Third, banks today struggle to on-board SME customers easily, due to the paper-driven traditional means of on-boarding. Their competition, in contrast, provides frictionless onboarding and a much shorter time to market, with rapid Know Your Customer (KYC) processing and the use of transaction data to gather insights into the client s business model. SME Banking 2020: Changing the conversation (and capturing the rewards) Accenture 2016 Don t Bank on Long Term Survival Accenture

5 CASE FOR CHANGE There is, however, a large potential in SME banking. An Accenture survey6 found that there is 8.5 billion pounds in new revenue7 to be unlocked in select European markets. The survey revealed that over 20% of SMEs would be happy to pay an additional monthly fee for value-added services and that 60% of SMEs are open to deeper engagement with their bank. The problem is that it is not only banks that are chasing after these revenues. New players from outside of the banking industry are finding ways to take away revenue by providing that integrated solutions that banks are lacking nowadays. UNBUNDLING OF BANKING SERVICES New non-banking entities are successfully unbundling banking services. Traditional banking services which once were bundled have now been turned into viable products, with each service treated uniquely as part of a group of differentiated value-added services. 1 Address certain areas of the SME value chain through specialized services Marketing & Offers Front-office Merchant Sales & Boarding Checkout & Receipt Inventory & Order Mgmt Payment Front-end Integration & Capture Gateway Fulfillment & Delivery Customer Service Back-end Processing Scheme Acquiring Analytics Back-office Aggregating Servicing VAS Value chain areas addressed by Shopify Fintech third parties have been particularly effective in wooing customers away from traditional banks. They do so through two main strategies. First, they address specific client needs through differentiated services, often in the context of a group of value-added services. This is the path followed by payment service providers (PSPs), accounting software firms and fintechs who also specialize in areas underserved by banks. SMEs see these players as offering value-added services on top of traditional banking products due to their agility in product innovation. The second strategy is for these parties to partner with other organizations (sometimes even outside the financial services industry) to combine products and offer these through an integrated value proposition. Many of these third parties create an API-integrated network of partners in what might be termed a platform play. (see Xero example in box). 6 7 SME Banking 2020: Changing the conversation (and capturing the rewards) Accenture 2016 Global revenues, for UK banks, over a five-year period 5

6 2 Most players rely on an API-integrated neywork of partners to create a network effect (platform play) Marketing & Offers Front-office Merchant Sales & Boarding Checkout & Receipt Inventory & Order Mgmt Payment Gateway Processing API API Customer Service Back-end Front-end Integration & Capture Fulfillment & Delivery Scheme Acquiring Analytics Back-office Aggregating Servicing VAS API API Value chain areas addressed by Xero Platform plays allow businesses, partners and customers to digitally connect in intelligent ways to create new business models and deliver the power of network effects. In SME banking, this could mean an institution creating a single marketplace to provide SMEs with easy access to a distribution network for payments, accounting, lending and value-added services. PLATFORM PLAYS Worthwhile mentioning that the bigger trend behind such market tactics revolves around platform economics. Driven by certain regulatory guidelines (for example, EBA s PSD2 open access and Open banking) and the development of API s, value creation is happening through platform plays. Platform plays allow businesses, partners and customers to digitally connect in intelligent ways to create new business models and deliver the power of network effects. In SME banking, this could mean an institution creating a single marketplace to provide SMEs easy access to a distribution network for payments, accounting, lending and value-added services. XERO How do platform plays work in practice? An example can be found with Xero, the accounting software and online bookkeeping provider. Via their (api-) integrated network of partners, they create offerings covering the entire SME value chain. Their partnerships with Practice Ignition, Vend, Square, Transfermate and Tallie enable Xero to support everything from merchant sales and onboarding to inventory and order management to payments, customer service and analytics. This allows SMEs to address the full range of services via one platform; the partners have a much broader audience to serve, and Xero benefits from owning the client relationship. 6

7 RISK AND OPPORTUNITIES In our view, up to five percent of European SME banking revenues are at risk if SMEs move to such alternative service providers. According to our estimates, disruption from these providers can cause banks to lose as much as 15 billion Euro in revenue by 2022 if no action is taken. There are, however, opportunities for incumbent banks to seize as much as a four percent gain in revenues through protective short-term strategies, platform plays, open banking APIs and additional value-added services in SME banking products. Though the choice of strategy would depend on a bank s current positioning and impact on profit pools, we have developed recommended initiatives that can drive incumbent banks to sustained growth: DISRUPTION OPPORTUNITY Banks risk to lose the benefits of the organic growth due to the competition from digital disruptors Potential upside from new revenue sources ($ Billion) -5% % EU SME banking revenues after disruption 2022 EU SME banking revenues EU SME Banking revenues 2016 Organic growth ( ) EU SME banking revenues 2022 Disruption by fintechs Disruption by neo-banks Source: Accenture Research Upside from new banking revenues Net EU SME banking revenues 2022 Keeping in mind the opportunities we see, we have chalked out a number of short term and long-term strategies that incumbent banks can implement. Though the choice of the strategy would depend on a bank s current positioning and impact on profit pools, we present an overarching set of recommendations that will drive incumbent banks to sustained growth: SHORT TERM (0-12 months) MID LONG TERM (12-24 months) Strategic play: Protect and retain Strategic play: "Diversify'' Defend where threat is high* Maintain dominance where strong today Identify and discontinue when underperforming or non-startegic Explore diversifying into newer areas** Developing strategic partnerships Adapt operating and business model to embrace platform ecosystems Strategic play: Invest and grow Explore strategic patnerships in ares under threat Be an ecosystem partner of choice with third parties in lead in these areas under threat Determine a platform ecosystem strategy and develop key capabilities required Start evangelizing new business models and future sources of value * Payments, treasury services, lending, (as per our Analysis of select European SME banks) ** Financial leasing, pensions, payroll, invoicing, payment acceptance (per Accenture Research across leading EU SME banks) 7

8 CONCLUSION ABOUT ACCENTURE Integrated and bundled financial services can help banks potential of the changing SME market environment, helping incumbent banks satisfy client needs and explore new revenue streams. Over the past few years, the lack of integrated bank services offerings has provided opportunities for highly specialized firms particularly fintechs to address specific client needs, leading to a decrease in incumbent banking customers and revenues. However, open banking and platform plays can serve as key catalysts for growth, allowing businesses, partners and customers to digitally connect in intelligent ways, creating new business models and delivering benefits from the power of network effects. Accenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions underpinned by the world s largest delivery network Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With more than 435,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Visit us at CONTACT JOEL VAN ARSDALE Managing Director, Accenture joel.van.arsdale@accenture.com AUTHOR ANUPAM MAJUMDAR Manager, Accenture anupam.majumdar@accenture.com Copyright 2018 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. TIMO KOENEN Managing Director, Accenture timo.koenen@accenture.com